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No Bell Rings at the Bottom, June 24th, 2001 :: Ben Turner's Soapbox

 

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archived soapbox: June 24th, 2001
"No Bell Rings at the Bottom" [permalink]
    keywords: stock market, daytrading, investing, financial, bear market, technology, psychology, economy, interest rates
    soapbox #: 299
    written: June 24th, 2001
    words: 1678

"No Bell Rings at the Bottom", an Essay

The Fed started cutting interest rates on January 3, and almost 7 months later, and many cuts later, there is still talk of Greenspan hoping one more cut will finally stimulate the economy.

Meanwhile, the Dow is STILL stuck between its levels of the last two years. The bank index (BKX) is up 6% from the January 3rd low to the Friday June 22 close. Ironically, the S&P's and NASDAQ's latest rallies stalled out and rolled over in the same area that was the January 3rd low. In other words, the NASDAQ and S&P have been below where they were before Greenspan started cutting, for half a year.

[ chart of Dow Jones industrials ]

[ chart of banks index ]

[ chart of NASDAQ composite daily ]

[ chart of NASDAQ composite monthly ]

[ chart of S and P 500 index ]

What's less known about the Fed's activity is the liquidity it's been pumping into the market. Money supplies have continued to increase all through the bear market in tech and inactivity in the broader market. M1 has spiked up since the beginning of the year, while M2 and M3 have continued their uptrends from the 90's.

The US dollar index (below) meanwhile is rallying hard at the expense of the rest of the world. To put things in perspective, the supply of money has grown while the dollar has gotten stronger, and other countries seem to be slipping closer and closer into recession. I'm not too good with my economics yet, but weakening foreign currencies perhaps might help them stave off worse recessions. But the US, towering with credit and investor confidence, gains strength, and with what seems to be stagnating growth of earnings, also seems to be succombing to the strangulation of inflation.

[ chart of US dollar index ]

The only thing that's really keeping us going fundamentally is the strength of consumer confidence. The consumer is still out there spending gobs and gobs of money. Companies aren't. Heck, lots of tech are still on employment freezes. So when does the consumer finally give in? When unemployment goes up more from layoffs? Can you see any signs of weakness yet? What about the destruction in the movie theater biz?

The media is spinning things as usual. It has made the public think about the market solely in terms of tech, which you can see when they talk about tough times for investors, when really the only severe downturn has occurred in tech. I know I keep saying that.

What the media is saying, and the companies now as well as they're beginning to give up on their theories of a recovery in the second half, is that the "intelligent investor" buys before the fundamentals improve. Stocks, they argue, lead actual fundamental news, and that undervalued stock you were looking at suddenly starts getting good news which bounces it higher while people are still in belief.

Yes, this is all true in my opinion. But people have been saying the fundamentals can't get worse, for a quarter or two now. They're saying the rate of order cancellations has gone down. Well, yes! When your industry collapses, it's hard to followthrough on devastating numbers over and over, when you're left with fewer and fewer existing contracts. Hard to cancel when there's not much left.

The point is that there is still an inventory glut in tech. All the money that was spent by companies seeking to expand as fast as possible and turned from investment into long-term debt is now coming back to bite these companies that are left with lots of fish to compete with in a small fishbowl. Many companies have to die during this process, and the companies that will eventually survive will need time to work off their inventory and debts and slowly turn their businesses into more aggressive ones. It's not the sort of thing where you can just shrug off tons of inventory or employee excess in a day.

And that's the point. It takes a lot of time. It doesn't come fast. The best case scenario is that growth in tech is not over yet, but needs to reconcile itself with the debt it gave birth to. Stocks won't be invested in heavily during this long period but perhaps the companies will work through their problems eventually.

That's the best scenario. I read an article at thestreet.com by Helene Meisler and she speculated that we're only perhaps half way, give or take, through the bear market. At least in semiconductors. This seems reasonable to me. Demand dropped off a cliff and companies started cutting prices to try to stimulate that demand again. Eventually orders get so low that the company can minimize its business and try to handle things from there. Prices continue to drop though. Memory and CPU prices still get slashed pretty hard these days even though they're all dirt cheap. But no one is buying yet. Companies are still working to reduce their debts. It takes time.

The worst case scenario is that things continue to get even worse than we could have imagined. Companies default on their debts, biznesses don't get paid, more people get laid off, it snowballs. Prices continue to collapse. Production slows to combat inventory buildup that came from lack of demand. More and more and more bad news.

One of the things I see is that semiconductors are burned out. I mean, all that money spent building fabrication plants is now wasted and there is overcapacity. But current techniques of making things smaller and faster are merely refining the process, not huge vaults of efficiency. People no longer see much of an improvement from the newest chips and miniaturizations. Cellphones are cellphones, CPUs are CPUs, we're still the same people who use the Internet in simplistic ways. See, the most useful things to people now would be really good, proactive software. Software that could take care of things without you watching over it. Agents. Software that points out its own inefficiences. Software that handles lots of data and makes sense of it. Software that's malleable. There is such a lull in software right now that there's no reason for anyone to upgrade to faster computers, and realistically there's little use for the fastest machines right now anyway. Until this changes, these sectors will be weak. But software is the thing to watch.

The rest of the market is weak. I think it will die in good time, not so much because of an infection by the dotcoms (although I'm sure they'll be blamed) but because it may have built in future growth completely and is now preparing for a less optimistic period.

The traders are disappearing a bit, the ones I know more for pleasure and travel, others because they lose their money or realize they can't continue to grind daily. I think the good things will happen when no one is looking. We're on the way there, but it could be a long road.

Earnings are contracting, which means the P/E ratio continues to get worse for a lot of companies even if their share prices drop. This fact is not talked about much. Shares can go lower and still retain the same P/E of previous quarters, and that's why. I've been looking to short more than go long. My favorite stocks to trade have refused to show much strength. So I might be biased. I just think their P's need to be slashed to fit their brand new slashed E numbers.

I am a little more optimistic because reality is sinking in a bit more. People are losing faith in the stock market little by little. There's still plenty of long-term enthusiasm though. Instead of boldly expecting the market to rally hard, people are perhaps becoming more sensible about it all. And that would be good.

In terms of the future, I've mentioned a 3-D Internet, but I also read in Red Herring magazine about nanotechnology, which is picking up steam. Nanotech has lots of applications, including health care, equipment, production, virtually every segment of our economy once it begins to be applied. I think the next boom will come out of this area, but alas it doesn't seem like much of that stuff will be ready for a few years or more yet. I still think tech gets fucked up some more.

Until then? Well, I don't know if the US economy is in REALLY bad shape, but I just don't know about the next year or so. Perhaps things can hover around until nanotech begins to hit its stride. And I still have faith in the Internet to give us more surprises. Just not in a monetarily successful sense, like Wall Street thought a couple years ago.

Then again, I could be wrong about all of this and the market could boom, and I'd be left looking like a fool. But hey, this is what interested me in my task to find something to write about. If I'm wrong, then so be it. I'm just trying to give it my best attempt.

And I'm rambling now, so I better stop writing. Just remember...if you're hearing about it on CNBC, it's because it's news, and so has already happened...and therefore already completed. Which leaves you wanting to buy at the end of a rally and sell at the end of a selloff.


 
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