The Barnard Observer
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Home Picks Figures Great Investors Vault Contact c2003-04 Thomas Barnard
I’m Getting a Lot of Faxes
There are all kinds of warning signs that the stock market is careening towards some kind of interim speculative top. If 2000 was Everest, then 2004-05 may end up being K-2.
I am getting faxes everyday now touting this penny stock or that. Last summer I would get one of these once a week or less. That’s a big change. I’m also getting emails touting penny stocks just about every day. This has to be some kind of sign.
Cause for concern. Investors Intelligence, which tracks investor adviser sentiment, has bullish sentiment up to 62.9%, which is a multi-year high. Higher than the 2000 high. Mark Hulbert affirms in one of his recent columns that investment advisers are quite a bit more positive today than they were 5 years ago before the big decline. I take that to be a sign that there is no more wall of worry to climb. We’re here. In the promised land. And where do you go from there?
Insiders have been selling for the past two or three years. They always sell more than they buy, but the selling has been intense the past few years. But the relation is not always so clear. There was intense selling 6 months before the 1987 debacle, but this selling has been going on for years now. But the selling can occur as much as two years before the market decline.
In November insiders sold $6.6 billion of their stock, which is the highest level since August 2000, while only $144 million was bought. The sell/buy ratio stands at 45.84, which is very high indeed.
The VIX is an index which represents the premium paid for options on the S&P 500. It is a reverse indicator, if it works at all. When the premiums are high, everyone is worried, and the wall of worry carries the stock market higher. When the premiums are low, no one cares too much, and stock prices fall. The premium is low. No one is much concerned.
I take Sirius to be a proxy for crazy momentum buying. I owned this dog (star), back at 60¢ a share, and got kind of nervous when it fell to 40¢. From there it went to $9 recently. I was out at $2, and not unhappy. Remember, no earnings for the foreseeable future. But then I missed out on the announcements. The Howard Stern announcement, and the CEO announcement, and the various factory installed announcements. But it’s all vapor. Eventually the vapor will turn into meaningful metrics. The number of subscribers has hit a million. Later, the stock goes cash flow positive. And then finally, at last, at last, it makes money. But for now the stock is still losing money hand over fist, and the momentum players may well bring this back under a buck by the time it reaches it’s nadir. This is probably the quintessential speculative stock indicator.
There are other signs of speculative craziness. Google is selling at nearly 200 times earnings, and Taser is at a PE of 100. They may have great prospects, but so did Cisco when it was at a PE of 160, and had nearly the largest market cap in the world. Cisco is still the great networking company, but last time I checked it sold at $19 and had a PE of only 25. If Google falls to a PE of 40, which is still double the norm, the stock falls by 80%. Of course, we know all the arguments. If earnings increase by 100%, then the PE falls in half. But remember Google is not without competition, both Microsoft and Yahoo have taken aim, and AOL may join in also. There is no proprietary lock on counting links, which is the basis of Google’s listings. Google has brand power by now, which is why I’m granting the PE of 40. Yahoo also has a high PE of 100, and if advertising revenue falls off, look out below on the stock. So just be careful out there.
I happened to spy the head of research at Value Line on CNBC sometime in the last couple of weeks. He said, sure, there will be a year end rally, possibly extending into January, but probably not beyond. He thought that at current prices the market was fully valued. He’s putting a ceiling on the enthusiasm.
The savings rate hit a low of .2% in the recent period. We think this may also have hit a multi-year low. But if people start to become cautious, and do not spend, then the economy starts to slow, with all kinds of consequences. Corporations have billions in cash, but have not been spending. Why? Well, perhaps in part because of the “fully valued” stock market that Value Line is talking about. But perhaps it is also because CEOs have just become cautious. Insiders, which include the CEOs, have been selling stock like crazy for the last year or two. What do they know that we don’t know? We recently were reminded that the government couldn’t get businesses with money to spend in the 1930s. It’s a matter of mindset.
The market has been jazzed up by low interest rates and tax rebates. Both will be absent in 2005. The rebates ended 6 months ago, and Greenspan has set his sights on higher interest rates.
And the lack of policies that will turn around the Trade Deficit have led Warren Buffett to increase his stake in foreign currencies from $12 billion to $20 billion this year.
The Presidential cycle calls for the first two years to be lousy, with house cleaning, tax increases, spending cuts. Year three is the big year where they do all the stimulative stuff for the election in year four. Market lows in 1998 and 2002 suggest that 2006 will be the next market low. If the market did not finish its rally in December, it will probably be over by March, from which point we would it expect it to drift lower into 2006.
At the outset I have to say I have been a Wrong Way Peachfuzz for the past year and a half. Dead wrong. And I’ll give up 15%-20% this year on that account, and I also gave up 200% profit, the opportunity cost loss by not holding my satellite radio stocks. Will I give up the ghost and finally fall in with the optimists? Kind of. I bought a couple of the most interesting junk stocks that I follow, but I still hold gold stocks and a small short position. Definitely, I would stay away from the high PE stocks, and put stops on the speculative stocks that I owned.
It has been a generation since the price of an ounce of gold equaled the Dow Jones Industrials. But think about it. A war and tax cuts? A budget deficit the like of which has no parallel? Gold and gold stocks, while volatile, will probably continue to do well in a cautious investment climate. It could very well be that the gold advisers may turn out to be right when they predict another overlap of gold and DJIA. Whether that will be a $3,000 for an ounce of gold and a DJIA of 3000, or whether it happens at 5,000 or 6,000 is anybody’s guess. And this could still be years out. The last overlap occurred 4-6 years after the end of Vietnam.
I think it’s going to be a grind. I had hoped that we would get a severe correction, and then bounce back. But that would have interfered with Bush’s re-election plans, and now it looks like we may end up doing a Japan Redux. Their market peaked in 1989 at around 40,000. It finally fell back under 10,000, but it took 12 years to do it (if indeed that’s the end of the downside). That’s the kind of grind I am thinking of. A severe correction is, of course, still possible, but the world will suffer for it.
There could be trouble in the financial sector. If house values wobble, the institutions making those loans may have a lot of non-performing loans. Bankruptcies will increase, mortgage foreclosures will increase. I would expect this to be the price for fast and easy credit policies. But understand, BKs and foreclosures are already at very high levels!
I like Suncor, which we think is probably the only true growth stock in the oil business, with reserves of a Middle Eastern nation right next door in Canada, and production increasing each year. If the price of oil is stable or increasing, growth is a lock. But nothing is that certain, and if the China and the US suffer recessions, so goes the world, and that might spell lower oil prices.
Buy a little, maybe short a little, keep some cash. Sorry, it’s the best advice I have.
January 6, 2005