Capitalizing On Bear Market Rallies / The Daily Reckoning

verfasst von - ELLI -, 01.12.2002, 18:24

-->(Nachlieferung von Freitag)
------------------------------

Capitalizing On Bear Market Rallies

The Daily Reckoning

Paris, France

Friday, 29 November 2002

--------------------

*** Markets closed...fools and their money stay together...

*** Recklessness and imprudence...is prudence expensive?
Investors'"speculative juices" flowing again...

*** Crumbs from Chinese tables...detention...the return of
the indomitable small-cap...and more!

--------------------

Yesterday was a holiday on Wall Street, as in the rest of the
nation. Fools and their money stayed together, like married
couples when the divorce courts are closed. Not necessarily
because they liked each other any better - but what else was
there to do?

What has been curious lately has not been the separations,
but the reconciliations. We understand why the fools and
their money parted company; they had no business getting
together in the first place. So, it was not surprising to see
them split up when the market headed down a couple years ago.

But now they're getting back together. Tech investors,
especially, are watching their money come back like prodigal
sons or runaway wives. And yesterday, they got out their
fatted calves and Butterball turkeys and celebrated.

This reunion probably won't last forever, but it is fun now.

When you reduce S&P stocks to their 'core" - that is, real
earnings, with options and other legerdemain properly
accounted for - stocks are very expensive, trading at an
average P/E greater than 45.

You would only pay that much for a stock if you thought its
profits were going to rise quickly enough to justify the
price. That is, if earnings were to go up by 200% in the next
12 months, a stock could be bought at 45 times earnings and
be reasonably priced next year.

In the last quarter, GDP rose at a 4.63% annual rate.
Productivity has been rising at 4.8% annually. Wow. The top
end rising nicely....and businesses squeezing more
productivity out of every dollar they spend...this has got to
be a great time for profits, right?

Hey, what's this? Profits actually fell at a 6.6% annual rate
in the last quarter.

What businessman is going to want to hire new employees when
his profits are falling? Who is going to build new factories
or buy new equipment? How are companies going to grow if they
can't make any money? Finally, why would anyone in his right
mind want to buy these stocks at 45 times earnings? (One
possible answer, if not the best, is offered by our guest
essayist, below...)

But the fools and their money have at least gotten back
together for the holidays, and we're not going to complain
about it. Still, we can't help but wonder how long it will be
before they get fed up with other and one of them walks out.

But let's hear from our own Ann Landers on Wall Street, Eric
Fry.

-----------

Mr. Fry, fresh from the feast...

- The U.S. financial market shut down for the Thanksgiving
holiday, and no group of investors had more to be thankful
for yesterday than short-sellers - thankful that the stock
market was closed for business. Skepticism toward the stock
market has become an increasingly expensive - or at least
embarrassing - attitude to hold.

- One stockbroker I know, who happens to share our skepticism
that a new bull market began on October 9th, says that some of
his clients are starting to grumble a bit. Early in October,
my friend's caution had served his clients well. Their
accounts were only down a little bit for the year, while most
of his colleagues' clients had lost a lot of money. The S&P
500 itself had tumbled more than 30% year-to-date,
immediately before the latest rally began.

- But now that stocks have been climbing non-stop for two
months, his caution is not playing as well in Peoria. Instead
of joy over losses avoided, some of his clients are beginning
to feel a bit resentful about profits foregone.

- It's always this way; once the market starts rallying, the
speculative juices start flowing. Most investors quickly
forget how painful it was to lose hard-earned money, and they
begin to feel pain only about profits foregone. With every
day that this manic market moves higher, caution and prudence
seem - to many investors - like recklessness and imprudence.

- If we had to guess, prudence is still prudence, even if,
for a while, it doesn't pay as well as imprudence.

- While investors giddily try to recreate a new bubble on
Wall Street, the folks out on Main Street are trying to
grapple with the bursting of the old bubble."Nearly every
state is in fiscal crisis," the National Governors
Association reported this week.

-"Plunging tax collections and soaring medical costs have
created the worst fiscal problems for states since World War
II," says the New York Times. It's not a pretty picture.
"In its 'Fiscal Survey of States,' the governors association
found that the amount of money states had on hand at the end
of the most recent fiscal year had fallen to $14.5 billion,
from a peak of $48.8 billion in 2000," the Times continues.
"Total state tax collections fell by 6% last year and
declined in every quarter, even as spending grew by 1.3%."

- Falling revenues and rising expenses is not exactly a great
combination, and the biggest states in the Union have dug
some very big holes for themselves. Here in New York, the
state will face a budget shortfall of $5 billion to $10
billion next year. Out in California, the deficit in the
coming year could exceed $21 billion...Tax hikes are all but
certain.

- The new taxes that will surely be coming down the pike -
whether they are sales taxes, property taxes or some other
sort of tariff - will likely take a big bite out of consumer
spending.

- Whatever else the massive state deficits might be, we doubt
they are bullish for either the economy or the stock market.
"As long as America's post-bubble headwinds continue to
blow," remarks Morgan Stanley's Stephen Roach,"it will be
exceedingly difficult for the U.S. economy to mount a self-
sustaining, vigorous cyclical recovery...The U.S. economy
remains stuck in a sub-par growth channel, at
best...Restrained by the headwinds of excess debt, sub-par
saving, excess capacity, a massive current-account deficit,
and the lack of pent-up demand."

- Sounds about right...are these the reasons why the stock
market is going up?

------------

Back in Paris...

***"We are in a process which doesn't happen every 50
years," explained Kenneth Courtis, Goldman's #2 man in Asia.
"It is only every 3 or 4 hundred years when something this
big, this all-embracing happens."

What has Mr. Courtis thinking in such epochal terms is the
rise of China, about which we hear so much we're becoming
suspicious.

It was not long after the 20th century began that America
became the leading economic power in the world. A century
later, China is widely advertised to be taking America's
place - if not as the largest economic power, at least as the
dominant one.

Recently, Premier Zhu Rongji said he hoped China would
quadruple the size of its economy over the next 20 years. At
current growth rates, anything seems possible, for China's
GDP is increasing at 8% annually.

Visitors to China come back astonished by the pace of
development. Chinese workers hump, buss, and schlep around
the clock 7 days a week. There are few holidays, rigid
workforce discipline, no labor unions, and a supply of
willing workers that is nearly inexhaustible.

China has hundreds of thousands of U.S.-trained engineers, as
well as abundant capital and know-how resources from millions
of overseas Chinese. It also has access to a globalized
market that seems ready to provide anything China lacks and
buy everything it makes.

As a consequence, U.S. manufacturing is in a slump that might
be both permanent and fatal. Companies can't make any money
because the Chinese undercut their prices. And low-skill U.S.
workers - who compete with the Chinese for factory jobs -
have watched their incomes go down for the last 30 years. In
1999 dollars, a man working on a U.S. assembly line in 1979
would have earned $677 a week. Twenty years later, he would
have earned only $646.

How could he maintain his standard of living? His wife went
to work, he worked more hours...and he borrowed money. Does
this sound to you, dear reader, like the road to riches? It
doesn't to us, either...rather, we think it is the road to
ruin.

But this little note is about China, not America. Will China
come to dominate the world economy in the 21st century the
way the U.S. economy dominated the last...putting much of
America and Europe out of business? Will Americans eventually
travel to China, not as tourists, but as waiters and busboys,
hoping to catch a few crumbs as they fall from Chinese
tables? Or will China blow itself up first? We will see...

***"These GDP numbers you talk about," commented my friend
Michel at Wednesday's lunch,"you know they're all nonsense,
I hope? I don't know how they do it in America, but here in
France they include the salaries of government employees. I
mean, how can you measure the output of government employees?
You can't, because there isn't any. So they put in the cost
of government rather than the result of it. Government is
such a big part of the economy that the resulting GDP number
is preposterous.

"GDP tells you nothing about what really matters anyway. It
doesn't make women any more attractive or my chicken any
tastier..."

*** Poor Henry. Henry, 12, does well at everything. He is a
model child and a model student. But yesterday he got into
trouble.

"I didn't think they would be dumb enough to leave the switch
right there where kids could play with it," he said,
explaining why he had two hours of detention on Saturday
morning."I thought it must be an old switch that wasn't
working any more."

Horsing around with other kids, Henry pulled the switch.
Lights went out all over the school.

--- Advertisement ---

Take Back Every Penny You Lost on Wall Street in the Next 9
to 12 Months

Sound like a bold claim?

It is. But I can back it up. On Oct. 15, I recommended my
readers buy 2,000 shares of a fast-moving drug development
company selling for 69 cents a share. Less than a month
later, the stock is trading for $2.18. That's a gain of
215.9%. And that's just the beginning.

I have winners in my portfolio that are currently up 35.2%,
59.6% and 165.1%.

Find out how these stocks can go to work for you. Take back
what Wall Street stole from you.

Click here:
http://www.agora-inc.com/reports/VPI/TodaysFortune

-----------------------

The Daily Reckoning PRESENTS: What should you do when the
market rallies in spite of itself? James Boric offers one
possible answer...with a sound pedigree.


CAPTALIZING ON BEAR MARKET RALLIES
By James Boric

The year was 1939.

After several attempts at a come-back, the Dow Jones was
still down 66% from its high in 1929. Most investors had
given up the idea of making any money on the stock market.
Trading volume was light - only spiking between 16 million
and 17 million shares for an entire week of trading. Ten
years prior, volume was consistently averaging over 20
million. And spikes were around 40 million to 45 million.

More than simply scared, investors were apathetic. But not
John Templeton. In a decision that was fated for investment
history - the veritable hall of fame - Templeton borrowed
$10,000 from his boss with one goal in mind: to buy 100
shares of EVERY single small-cap stock on the major
exchanges selling for under $1.

It was a risky plan. He didn't care if a few of the
companies he bought were on the verge of bankruptcy. He
didn't care if the fundamentals were poor. He bought
following a hunch that when the markets rally, small-cap
stocks will lead the way. And as history reveals, he was
right. In four years, during some of the toughest market
conditions of the 20Th century, Templeton turned $10,000
into over $40,000.

Of course, times have changed since John Templeton
quadrupled his money in the early 1940s, but the
fundamentals behind that growth have remained the same. [As
Jim Davidson maintained yesterday], the fastest way to grow
your money - during and after a bear market - is still to
own small-cap stocks. The proof is in the statistics.
Templeton quadrupled his money in the recovery period
following the Great Depression. Following the recession of
1973-4, small-cap stocks rose 349.2%. After the market
collapse in 1982, small-cap stocks rallied a quick 37%. And
when the brief recession of 1990-'91 ended, small-cap
stocks soared over 51%.

Why are small-cap stocks so quick to rise?

It doesn't take much for a $2 stock to hit $4. A positive
earnings announcement, a new product launch or even a
strong analyst recommendation can do it. Couple that with a
recovering market and you have yourself the perfect
situation to quickly multiply your money. But the great
part of being a small-cap investor is you don't have to
wait for the market to fully recover to make significant
profits.

For the last three years, we have been in a bear market.
The Dow is down over 26% since January 2000 and the once-
mighty Nasdaq has shed over 70% of its value since March of
that year. The primary market trend is down. But that's not
to say every single week is a bad one. There have been many
opportunities in the last few years to make double- and
triple-digit profits going long on small-cap stocks. And
despite what anyone may tell you, those opportunities
aren't hard to find.

Take the last five weeks, for example. The Dow is up over
19% since Oct. 9. And the Nasdaq is up more than 25%. Does
this mean the bear run is over?

Probably not.

These last few weeks have exhibited the classic
characteristics of what, I believe, is fierce bear market
rally. Among other superficial economic news, investors
have been temporarily bullish thanks to a slew of positive
earnings announcements. As a result, they have dumped
millions of dollars back into the stock market. That
doesn't mean the overriding problems in the economy have
been worked out...but it does mean, if history is any guide
to performance, small-cap stock investors have an
opportunity to profit.

During a bear market rally, there are two types of
companies you want to own. The first are the beaten-down
giants of yesteryear. These are your AT&Ts, Sprints,
Nortels, Sun Microsystems, Cienas and JDS Uniphases. Just a
few years ago, these companies were trading for between $60
and $130 a share. A few weeks ago, you could pick up shares
of Nortel for 46 cents, shares of Ciena for $2.46 and
shares of AT&T for $8.68.

Are they fundamentally sound companies? Not in the least.
And you don't won't to own any of these stocks for the long
term.

But like it or not, these are some of the best-performing
stocks in a bear market rally. People tend to buy what they
know. And all of these companies have big-name...well...
names. When investors think the market might be turning a
corner, they gravitate to the companies they think will
recover the quickest.

Let me give you a few examples. Had you bought shares of
Sun Microsystems, Nortel and Ciena Corp. on Oct. 22, as
short-term plays to capitalize on the recent bear market
rally, and had you sold them no more than four weeks later,
you would have pocketed a 30%, 37% and 54.5% profit.

Contrary to what many investors believe, you don't have to
own fundamentally sound companies to make a profit. And you
don't have to buy and hold for 10 years to realize a
significant return. You just have to understand which asset
class performs well in different market situations. And
during a recovery period or a bear market rally, beaten-
down giants selling for pennies on the dollar, generally,
perform very well. [Editor's note: as we've mentioned in
these pages before, no bull market recovery has ever been
led by the past market's leaders...that's another reason
you don't want to hold the has-beens for long.]

Again, this is not your long-term retirement strategy. This
is making money by attempting to time the market. But when
the fundamentals are this out of whack - careful timing of
well-known sectors may be your only shot at doing so.

There is another class of small-cap stocks to look for
during a bear market rally: fundamentally sound growth
companies with impeccable balance sheets, heavy insider
buying, rising net incomes and revenues and enough cash to
sustain growth during down times. These companies are
likely not only to stomach the current bear market, but
also to emerge as the new market leaders when the next bull
run hits.

Let's look at a famous example: Microsoft. In 1985,
Microsoft's first year of operation, the company brought in
$24 million in net income. In 1986, it brought in $39
million. That's a 62.5% growth rate. Couple that with the
fact that it grew its sales from $140 million in 1985 to
$198 million in 1986, and it's no wonder Microsoft led the
way through the 1990s. These are sound growth numbers.

But guess what? No one knew what Microsoft was back in 1986
or 1987. It wasn't making headlines in The Wall Street
Journal. It was a small-cap penny stock. And the great
thing about fundamentally sound penny stocks, like
Microsoft was in the mid-'80s, is that they grow even when
the rest of the market doesn't.

Sounds counter-intuitive, I know. But the facts tell a
different story. In 1987, when Microsoft was just getting
off the ground, the Dow opened the year at 1,927. By the
end of the year it had tacked on a whopping 11 points...
closing at 1,938 on Dec. 31. For the entire year, investors
made 0.57% on the big blue chips of the day. But the all-
but-unknown Microsoft grew from 33 cents to 75 cents
(split-adjusted). Investors more than doubled their money.
The rest, of course, is history.

You may never find a Microsoft to invest in. Chances are,
you won't. But you can find plenty of fundamentally sound
penny stocks that will double or triple in the coming
months.

The bottom line is this: there are plenty of ways to make
money in any market. But you have to be willing to take
chances when others are afraid. John Templeton did it in
1939 and showed how successful you can be. You have the
chance to do it now. And who knows, in four years you may
quadruple your money.


Sincerely,

James Boric,
for The Daily Reckoning

Thread gesperrt

 

gesamter Thread:

• Capitalizing On Bear Market Rallies / The Daily Reckoning - - ELLI -, 01.12.2002, 18:24