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Monday
Morning Market Musings 09/28/98
Too Many
Bears?
For the first time since we called the market top on July 20th, I am concerned about our Great Bear Market outlook. Here’s why:
In anticipation of the month of historic crashes, the bears have come out of the woods and the woodwork. All of the above magazines provide excellent arguments for our Great Bear Market. But, that’s the problem. Are there just may be too many bears?
The most successful investors are contrarians. They get nervous when the crowd is with them.
The stock market is seductive, deceptive, and manipulative. It tries to extract the most money and humility it can from as many participants as it can, as often as it can. (Sounds an awful lot like a casino.) When too many artists paint the same picture, it’s not worth very much. When too many investors hold the same outlook, it is unlikely to occur.
Still, the market remains ripe for a crash. The bullish "too many bears" case has had one notable exception: 1929. Then, following the first cracks in the market in September 1929, a majority of money managers indeed did become bearish. That fact was widely publicized in the press just before the Big One.
The financial markets in 1998 continue to collapse all around us. In what read like pages out of a Paul Erdmann novel, the Federal Reserve Board last week firmly twisted more than a few arms to orchestrate a $3.5 billion bailout of former high-flying hedge fund Long-Term Capital Management. Read the gory details here:
http://www.msnbc.com/news/199241.asp (link expired)
http://www.nypost.com/business/6122.htm (link expired)
As we’ve pointed out over the past few weeks, the bottom line is that the entire system is being sucked into an abyss. The Fed simply couldn’t allow the LTCM fund to go under. As Kathryn Welling puts it in this week’s Barron’s "... the banks are basically trying to save themselves – and, not coincidentally, the financial system." We would make it the entire international geo-political-financial system.
Perhaps even more significant than the collapse of Long-Term Capital Management is the collapse of the Japan Leasing Corporation. This 2.2 trillion Yen ($16 billion) bankruptcy is Japan’s largest since World War II. This is NOT good news, even for us bears.
As with the prior week, the DJIA managed to eke out about a 100-point gain last week. Monday’s release of the Clinton tapes proved to be a net non-event. As we said in last week’s Musings, continued overall choppiness without a definitive breakout (in either direction) is a consolidative calm before the storm. It almost always concludes with a quick resumption of the major trend: DOWN! Indeed, the pattern has evolved into a very bearish contracting diagonal triangle. Cyclical forces, the Elliott Wave patterns, and of course the fear of the dreaded month of October all point to a sharp down week.
Investors have already bet heavily that the Fed will announce a rate cut at Tuesday’s FOMC meeting. Perhaps a disappointing statement out of the Fed on Tuesday could be enough to trigger a downdraft midweek.
US stocks remain on FULL CRASH ALERT!
The markets are firm going into Monday morning trading on Wall Street. At press time at 1:00am, the Asian markets are firm, led by a 2.75% gain in the Nikkei 225, pushing it back over 14,000. The S&P 500 futures trading on Globex are up 6 points.
Meanwhile, a Great Bull Market phenomenon, the Beanie Baby, is souring away into the history books and into the skunk Cabbage (Baby) patch. The venerable Wall Street Journal ran a front-page story last Friday on the collapse of the Beanie Baby market. As Clif Droke of Leading Indicators puts it in this week’s commentary:
"While the Beanie Baby craze may seem unrelated to stock market trends, it is actually an important reflection of the psychology that drives all speculative "bubbles." ...[A]ll trends must come to an end, and the trend toward ever-higher prices—in the stock market and the Beanie Baby market—is coming to an end."