Grizzly's Growlings 080601

Monday Morning Market Musings 08/06/2001

There Ain�t No Cure for the Summertime Bulls

The markets went a net nowhere in July, and indeed they�ve gone a net nowhere over the past four months.

The most life the markets have shown in some time came on July 12, when the DJIA surged 237 points and the Nasdaq rallied 103 points. So what was the "cause" of that brief rally? (i.e. how desperate are the bulls?) It's hard to believe that a day of euphoria was ignited by Motorola and Yahoo announcing they will exceed (by a solitary penny per share a piece) the already lowered expectations for the most recent quarter.

The markets have become so accustomed to dreadful earnings reports that merely meeting the already lowered expectations is a rare and (short-term) catalyst for the brave bulls. Yet surpassing anal-ysts' guestimates by a solitary penny per share is nothing to boast about, nothing but a bean-counter's rounding difference.

The next day, July 13, the Associated Press ran a story headlined �Stocks ride high on hope.� That�s about all the bulls have going for them.

Despite six interest rate cuts by Sir Alan of Greenspan and The Fed since the first of the year (including three cuts since April), the markets really have not responded to the upside as the bulls have been expecting.

As our friend James Stack of Investech Research has noted, "This is now the most aggressive monetary easing in the Federal Reserve's 88-year history! Never before - with interest rates already at single-digit levels - has the Fed cut the Discount Rate by a full 2.75 percentage points in less than six months...this is true panic."

So what good has all this rate cutting done? Not much so far, at least for the bulls. The DJIA and the NASDAQ have both declined since the Fed started easing on January 2nd. The Nasdaq is down 16% YTD. The DJIA has held up better, down only 2% YTD. The Nasdaq is still down over 60% from its highs, which is only topped by the 89.2% loss in the Dow from 1929-1932.

Nor is the bond market benefiting from Fed policy. As Bianco Research has calculated, "Despite the Fed easing this year, the 30-year bond lost 2.41% in the first half of 2001. The 30-year's return is so dismal that it even underperformed the DJIA, which lost 1.85% over the same time period."

Income-minded investors have little to write home about. Dividend payouts on the S&P 500 companies have dropped 6.6% so far this year, after a decline of 2.5% in 2000, the steepest drop since 1942.

On a valuation basis, the markets remain near record high levels. The total market value of U.S. equities as a percentage of GDP stands at 140%. That�s down from 197% at the bubble peak in March 2000, but still more than twice as high as the 75-year historical average of 61%. In other words, in order to return the to the historical average valuation, the markets would have to fall another 56% from current levels.

Dr. Al Larson of MoneyTide.com offers an interesting historical perspective on where the U.S. markets stand:

There�s little change in our outlook for the Nasdaq. The Elliott Wave patterns remain at one of those critical junctures, where the action will go either way, and a long way, starting soon.

As shown on the chart below, we think the highest probability is that wave 5 to the downside is underway.

So how far down will the Nasdaq go? At this point, we can�t put a high-confidence number on it, but the 1,000 area seems like a likely suspect.

The alternate scenario that must be given consideration is for a short-term bullish move to complete the wave 4 counter-trend rebound that began in April.

Under this scenario, the 2,700 area is a solid target for completion of wave C of 4.

Make no mistake about it though, we firmly believe that Nasdaq 5,000 will remain unapproachable for many years to come as the Great Bear Market of 2000-200[?] runs its course.

For much more detailed information on Elliott Wave technical analysis, please see Putting Elliott Wave to Work in the Markets.

The Economy Watch
As we said last month, �For the last nine months, mainstream economists and anal-ysts have been predicting a �second half recovery.� Yet, the second half is here - with virtually no sign of a recovery. In fact, the news just seems to get worse. You can lead a horse to water, but you can�t make him drink.� The old nag didn�t get any thirstier in July.

Last Friday the gub'ment reported that the U.S. economy grew by only 0.7% in the second quarter, the slowest rate in more than eight years. The Street anal-ysts are "wishing and hoping" that the worst has passed and the bottom is in. We don't buy it for a second.

Despite the Fed�s interest rate easings, the U.S. dollar has not fallen, as conventional wisdom would have it, but the buck has actually surged to a 16-year high against the yen, and to record levels against the Euro. The strong U.S. dollar of course makes U.S. exports relatively more expensive for the rest of the world. The strong dollar is but one of many serious problems leading to the severe slump in U.S. manufacturing earnings and employment.

Back in January, The Street anal-ysts were wishing and hoping for �a second half recovery.� One month into the second half of 2001, there�s virtually no sign of recovery. The New York Times reports that at the start of 2001, anal-ysts were expecting corporate profits to rise by 9% for the full year. Now, they�re projecting an 8% drop for the year.

In the second quarter, telecom equipment orders plunged an amazing 75% and PC orders fell 45%. Intel�s profits for the 2nd quarter dropped 94%. On average, second quarter profits at US computer-related companies dropped 66%, reports Bloomberg.com.

JDS UniPhase posted a staggering and unprecedented $50.6 billion loss (that's billion with a "b") for its fiscal year just ended. Furthermore, JDSU said it "does not see any positive signs of a reversal in the downward trend of the industry and expects first quarter revenue to be below earlier guidance." The company also said it would cut another 7,000 jobs in the current quarter. The formerly high-flying JDSU traded at $150 at last year's bubble peak and is now in the $8.00 a share area.

Lucent Technology announced it will lay off another 20,000 jobs, on top of the 19,000 in cuts previously announced. The company reported a loss of 35 cents a share, "beating" Street anal-ysts' estimates of "only" a 21 cent a share loss. They will also take a massive $7-9 billion restructuring write-off. Lucent is becoming opaque.

Fiber-optics giant Corning said it will take a $5 billion write-off of goodwill and excess inventory. What's most troubling for the bulls who are looking for a second half economic recovery is the company expects the downturn in capital spending by its customers "could last another 12 to 18 months."

Compaq's profits fell 81% in the second quarter. Sony announced a loss of $242 million through June. The giant French telecom Alcatel weighed in with $2.73 billion in losses. British telecom registered a 70% drop in first quarter profits. Alphabet soupers AMD, BMC, EMC� all reported dramatically lower results. The list goes on and on and on.

And let�s keep in mind that many of the earnings and revenue disappoints are coming against already lowered expectations. As JDSU's president said in June: "The business downturn has been rapid, steep and unprecedented..."

But the weakness certainly isn�t confined to high tech. Industrial equipment orders tanked 17% in the second quarter. GM�s latest earnings were down 74%.Over one million jobs have been lost since the first of this year. Amazingly, manufacturing employment has now fallen all the way back to where it stood in 1965.

Yet The Street heroine and guru-ette Abby Joseph Cohen has stated, "The worst is over." Moreover, in the Wall Street Journal�s semiannual economic forecasting survey, the consensus calls for a quick rebound to 2.7% growth in the 4^th quarter of this year followed by 3.0% in the first quarter of next year.

The WSJ�s survey has had a terrible track record over the years. We�ll stick to our contrarian guns and go with the mere six of 54 economists expecting a negative third quarter and just one brave soul, A. Gary Shilling, who is calling for negative growth in the first quarter of 2002.

The New York Times reported recently that the net worth of Americans fell in 2000 for the first time since the government began keeping statistics in 1945. Moreover, net worth fell an additional 4% in the first quarter of 2001.

For all you hard-core economics junkies out there, check this detailed analysis of the economy by Jerome Levy Economics Institute: http://www.levy.org/docs/sreport/implos.html Well worth the time and effort to decipher their conclusions.

Our favorite source for economic updates is The Daily Reckoning, a daily dose of witty and enlightening economic analysis. Click here for your free signup to The Daily Reckoning.

In the tech-heavy northwest Denver-Boulder,CO corridor, the office vacancy rate exploded to 32% at the end of June, up from just 3.8% only six months prior. Moreover, Fuller & Co, an area commercial real estate broker, estimated the vacancy rate could hit 50% before it begins to stabilize. Last year at this time, the Denver Post help wanted classified ads carried over two pages of jobs under �Computers.� This past weekend, there were barely two columns� worth. The number of unsold homes in the Denver market stands at an 11-year high, and apartment vacancies are at a ten-year high.

Over in Silicon Valley, the Marin Independent Journal reports that May's median home price in Marin County was 11.3% below the April median home price, "the largest single month-to-month decline in several years." The median home price in the Mill Valley plunged 35% in June from May levels.

So how are Americans coping? They�re refinancing and taking out second mortgages on their homes. According to the WSJ, half of GDP growth in the first quarter of 2001 came from home refinancing. The typical homeowner took $20,000 to $40,000 out of his equity...a total of nearly half a billion dollars in the first half of the year. "U.S. households are more indebted than they had ever been, and total debt is greater than total disposable income," Bridgewater Associates reports.

Over in Japan, it�s been 12 years since their bubble burst, and they�re still stuck in the mud. The Nikkei 225 has fallen 20% since May 7^th of this year and it hit a 16-year low a few days ago. The financial assets of Japanese households fell in 2000 for the first time since 1964, the first year the statistics were recorded. Unemployment stands at a record 4.9%.

Japan�s continuing problems continue to extend to the rest of Asia. Over in Singapore, the economy is imploding, down 10% in the 2nd quarter.

"People for the most part stood their ground, but the ground itself gave way beneath them." � Economist Joseph Schumpeter, describing the beginning of the Great Depression.

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