As Of: November 13, 2001
MINI-BUBBLE?
A new bull market, or a sucker's rally?
A bounce is one thing, but a 60% increase? What do you call that? The Semiconductor Holders Trust has moved from 27 to 44 since September 27th. The NASDAQ composite has moved up 35% since September 21st. There is a strong sentiment that the train is leaving the station; and if you miss it, you will be missing one of the great market moves that will mark the recovery from this recession.
Wait a minute, what recession? Aren't we just starting into a recession? How can the recession be over? The media mouths and Wall Street analysts have a simple explanation. They say the recession has happened, but we won't be told about it until after the fact. They say that by the first quarter of 2002, the economy will be recovering and we will see real strength by the second and third quarter. The stock market anticipates the future, so the stock market is already reflecting the good times ahead.
I tend to believe that if you missed a 60% move, the train has already left the station and you should say good-bye! If there was one major lesson to be learned over the past two years, it was that it doesn't pay to chase over-valued markets. Yet greed seems to be running rampant again. The stock market is by no means cheap, yet the commentators on CNBC are whipping investors into a frenzy again.
Right here on these pages, we suggested that the time to buy was the first week of April, and again in early September. We have been a seller in each subsequent rally. The most recent rally has extended so far that we are now starting to build short positions. If the market has already anticipated a recovery, what additional good news is left to push it higher? People who are buying now are buying on optimism that doesn't have any fundamental support yet. Could the economy turn around in the next couple of months? Yes, but then the stock market has already discounted a large part of the good news. Buying now is buying into the highest possible risk. What if the economy doesn't turn around for quite a while longer?
Stocks do not have high dividend payouts to support prices. Stocks do not have low price-earnings ratios to support prices. Stocks do not have low price to book value ratios to support prices. There isn't much of anything to support prices except optimism which could quickly crumble. The prudent thing to do right now is to not chase after stocks that have already had a significant bounce. I recommend conserving cash, parking in defensive positions such as high quality, high dividend paying utilities, and waiting for a future opportunity to buy at better prices with better information in hand.
As detailed in the next article, the cost of war is high. Uncertainty also has a cost, and the course of our future is still highly uncertain. I believe the odds of a successful recovery being near at hand are low. While it is true that the government is trying hard to stimulate the economy, we need to venture further into the depths of the recession before a turnaround can take place.