"Hurrah" For The Market, It's Back To Pre-Attack levels!

Sunday 10-14-01, 11:15am PST

 Much has been made in the media this past week over the fact that the popular indexes have made it back to where they were before the attack on the WTC. The implication of this accomplishment -according to the "experts"- is that everything is fine and well, and we are just witnessing the dawn of a brand new bull market!

First of all let's examine the real implication of the market's spirited accomplishment, shall we? On 9-10-01, the market was trying to cope with a worsening economic, worsening corporate profits, and high valuations by any historical standards. Industrial production had fallen for 11 consecutive months, unemployment was on the rise, hours worked had fallen, foreclosures and bankruptcies were up, consumer confidence had been falling, housing had started to roll over, with R.E. agents reporting rising inventory, but no buyers. Then on 9-11-01  additional elements were introduced: "event risk" due to the war on terrorism, and the impact of such war, to the economy's long-term rate of growth. It is no secret that "war" does a pretty good darn job in re-allocating capital from productive investments to non-productive investments, and thus depressing the long-term rate of economic growth. Such a "macro" event impacts the returns of financial assets. Since, Wall Street is more concerned about where the market is going in the next hour, rather than in the next five years, it is understandable that it is probably way too early to expect the Street to adjust its "macro" view of the market, until it is too late. However, something that anyone can grasp is the following: The decline following the attack on the WTC, reflected -partly- the premium investors demanded from the market due to "event-risk"  by rallying back up to pre-attack levels, the market is essentially saying that it no longer sees a reason to for an additional risk premium on stocks, due to "event-risk" The only logical conclusion is that the market sees no "event-risk" ahead, and thus no need to demand a risk premium. According to the President, and the FBI, there is still plenty of risk around! Moreover, according to the U.S. government "this is a multi-year effort" Meaning there is risk for years to come! There is not one person on the face of the Earth -except Wall Street experts, who believes that we have already eradicated the problem, and we have nothing to be concerned with going forward. In other words, there is still plenty of risk around, yet the market sees no reason to demand a risk premium, that's the implication of the market's latest accomplishment. Hurrah for idiocy!

Second, the way markets behave, bears certain characteristics that constitute what we call the "signature" of the behavior. Price action, when seen in a vacuum, provides little information with regards to the true state of the market. However, by examining the "signature" left behind by the price action, we can draw a much better, and accurate conclusion. In our weekly market analysis for week ending 10-12-01 you will find not one, or two, or three, but eighteen (18) of our proprietary indicators which are designed to illustrate the "signature" of the price action. Fifteen out of the eighteen, show that the "signature" of the current rally, is  the exact, same, identical "signature" that was left by  the past eight bear market rallies of the last eighteen months.

Third, some will say: "How about all the stimulus, and the liquidity coming into the economy, isn't that going to help?" We do not dispute that in the end, the U.S. economy will recover. However, we have no evidence yet, that such recovery is indeed taking place. When we have solid evidence, we will act upon it. The  notion advocated by financial  charlatans in the media that "if you wait for evidence it will be too late, the train will have left the station" is silly and intellectually bankrupt!  The same charlatans, have urged investors to jump into the market during every one of the past eight bear market rallies for the same reason. The market has rallied eight times in the past 18 months because it anticipated a recovery that never materialized! If investors had listened to the advise of the charlatans, and had gone long, during any of those rallies, if they are still holding their positions, they are sitting on huge losses. The best advise we can give is this: you will miss nothing by  waiting for some real evidence, except perhaps portfolio losses, which we are sure you can live without. Buying on hope, and neglecting reality is stupid. Below are the eight rallies that were based on "hope" they have all resulted to lower prices, and despair to those who bought them!

Fourth, investors need to recognize that 20 some years of the greatest bull market in our nation's history has produced an army of Wall Street "experts" with a very large ego, and very little, or no, actual talent and market knowledge at all! In our April newsletter we took issue with one of the Street's best, brightest, most  celebrated , and of course highest paid semiconductor analysts, Mr. Jonathan Joseph, of Smith Barney. The omnipotent Mr. Joseph had just upgraded the entire semiconductor sector, and his upgrade had partially fueled the rally in semiconductor stocks in the April-May period. In that newsletter we wrote:

Let's take a look how the same semiconductor stocks fared following Mr. Joseph's "upgrade" on the entire sector. (Mr. Joseph did not actually upgrade these stocks, he upgraded the entire sector, we just used them for the purpose of illustration)

On average, they lost 27.29%,  the SOX Index lost 22.00%, Hurrah for Mr. Jonathan Joseph, and his high paid brethren!

The purpose of revisiting the subject, is neither to congratulate ourselves, nor, to "thrash" Mr. Joseph further, it is to demonstrate to investors "beyond reasonable doubt" why buying on "hope" instead of "evidence" can be hazardous to their financial health. 

Keep the above example in mind, while the market is rallying again on "hope" and the same familiar charlatans are urging you to buy "before the train leaves the station!"