On April 23rd 1998, The Observer published an article in which I suggested the stock market at the turn of the century would be between 10,000 and 20,000. “My View” was set forth for several reasons which made sense at that time. We were in a rising economy with favorable interest rates. The outlook for corporate earnings was up, almost across the board, industry by industry, with very specific earnings forecasts.
On September 30th 1999, The Longboat Observer published another article in which I questioned how America Online, Amazon.com, Ebay and Yahoo could be valued in the stock market equally with giants GM, Dupont, Philip Morris and P&G? The thrust of the article was that the valuation of a handful of unproven stocks at a price equal to a handful of the largest corporations in the world was:
• Ridiculous
• Bound to be corrected
All reasons were supported in that article, and they made sense then.
We are now in a “no call” zone, at the end of the year 2000. Let’s take a look. What are the rote economic facts?
One year later, America Online, Amazon.com, Ebay and Yahoo are worth just about one half of the total market value of GM, Dupont, Philip Morris and Proctor and Gamble. The American Online “group” still is overvalued, as they make no money, while the GM “group” still makes billions and billions every year and pay out billions and billions in dividends to stock holders every year. The American Online group has never issued a dividend.
The United States trade gap is $400,000,000,000 a year which is unsustainable. Sooner or later the demand for dollars will decrease as foreigners realize that their accumulation of dollars decreases the value of their own currency and creates inflation in their own countries.
The “daily new highs” on the New York Stock Exchange reached its zenith of 631 highs on October 3rd 1997.
The advance decline ratio for New York Stock Exchange stocks reached its zenith on April 3rd 1998.
The Dow Jones Transportation Average reached its zenith on May 12th 1999, and it is currently off of that high by 25%.
The Dow Jones Industrial Average topped out on January 14th 2000 at 11,723 points. It is currently 8% off of its high.
The NASDAQ composite topped out on March 10th 2000 at 5,049. The NASDAQ is almost 50% off of that high – it has been pounded.
Standard and Poor Index of 500 stocks (generally the 500 largest corporations in America) is down 12% from its closing high of 1,527 on March 24th 2000.
Since March of this year 2.9 trillion dollars of value in the stock market has been wiped out – more than one half of the U.S. national debt of 5.7 trillion dollars. Wow! That’s real money.
The above comprise most of the highly accepted indicators pointing towards how the stock market (therefore economy) is doing. And the stock market is still way over valued. The Dow Jones Industrials are currently selling at a price to yield 1.7%. Remember, in a DOWN market, investors look for yield. The problem is that the Dow Jones historical average yield of 4.4% would mean a market selling at 4,000 rather than the more than 10,000 we are enjoying today. Let’s hope our stocks do not hit the “historical average”. A historically depressed market produces a yield of 6%, or better, on the Dow Jones Industrials, which would mean a stock market right around 3000. In late 1974, after years of being over valued, the Dow lost 50% of its high. Imagine 50% of the current Dow Jones Averages. And, what about the day traders we heard so much about several months ago? They are now all dead and buried!
What is the above set of facts telling us? There is no clear set of criteria to use as a basis for judgment as there has been in the last few years except for the fact we are in a bear market. Obviously the U.S. cannot continue to import goods and export dollars to the tune of $400,000,000,000 a year more than we export and collect other country’s currencies. When we analyze the facts (without regard to what the media, the stock houses and CNBC tell you), the bear has gotten ahold of the markets, but nobody knows when or where the bear will stop.
Adding confusion to the mix, the media, and the democrats, have moved the country’s entire adgenda towards a more liberal expenditure of our funds on welfare items. The media’s broadcasting of “the obvious Gore victory” to the whole country right after the close of the polls in the East at 7:00pm eastern time on November 7th, gave Gore a shot in the arm and Bush a kick in the pants. The resulting stand off in the senate, and “almost standoff” in the house, insures years of bickering and uncertain economic policy from our great leaders. The only thing that looks safe in a scenario like this is cash or short and intermediate term bonds.
Smart money bet
Since smart money is already beginning to sit on the sidelines in cash and short-term bonds, a good guess is that accumulation of cash will continue. Smart money will be content with collecting 5-7% interest while they are waiting for everything to shake out.
The 50-day moving averages on all the major indices are below the 200-day moving averages. Bear sign. Party’s over. Get liquid and enjoy 5% to 7% returns. It’s better than your neighbors are doing!
George W. Rauch III
November 30, 2000
