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In
last month's newsletter , we pointed out that
our forecasting model was predicting a level of 5250 +/-
100 pts for Nasdaq. Nasdaq came within 15 points from
the lower prediction band (5135) and since then it has
gone on a wild roller coaster ride. Has it formed a
dreaded double top?. Many so called
"professionals" have tried to pick the top
over the past four years, and they have been wrong every
time! The reason -in our opinion- is
simple. Professionals no longer control the market. The
retail investors have taken over and they move the
market according to their set of beliefs and criteria.
Retail investors, no longer follow the lead of the
"big guys." Instead, it is the other way
around. Almost every professional money mgr. we
know, has confessed to us that although they believe
valuations are outside their parameters, they can not
afford to stay out, they must invest! Is the general
public right? Well, this is besides the point. The real
point is, the people who have control of the market are
using different set of criteria -time will show if they
were right or wrong- than the ones who
profess to know where the market is going. The market
will top only when the retail investor
throws the towel. One then should ask what would cause
the retail investor to throw the towel? From all the
discussions we have -with retail investors- the answer
seems to be the same: if after a decline, retail
investors became convinced -for whatever reasons- that
the market is not going back up again, thus money in
stocks will be "dead money" for quite some
time, then they won't buy the dip, and the market will
stay down! Are retail investors about to entertain
such thoughts? Consider this: on 3-22 the most
"recommended" stock to buy in message boards
and chat rooms was RMBS, on 3-23 it was MSTR, on 3-30 it
was EMLX and HAUP. All these stocks had the same thing
in common, they had just experienced a breath-taking
decline, and people were rushing to buy convinced this
was just another one of those "dips" on the
way to heaven!
Were they right? only time will show. The point is
investors haven't changed their beliefs, so why would
the market change? at this point we would like to draw
an analogy between today's stock market and the real
estate market in Southern California between 1987-1990.
During those years, prices appreciated almost 25% per
year. The editor of this newsletter bought a home in
Dec. of 1986 for $115K, the same home appraised in
June of 1990 at $178K! Anybody who lived in So. Cal. in
those years remembers well how the topic of conversation
in every social gathering was real estate. Everybody was
getting rich from real estate. If you lived in So. Cal.
you had to be in real-estate, otherwise there was
something wrong with you! Every local newspaper, every
radio or TV station were over saturated with
advertisements and commercials on how to buy real estate
with no money down (sounds a lot like "open an
account with $500.00 and in in a few months you'll own
an island," doesn't?) Moreover, bidding wars
were common as soon as homes in "hot areas"
came on the market. The zenith was in 1989 when a
developer in Tustin, was going to auction on a Sunday
morning homes that have yet to be built and the only
thing prospective buyers had to go with was the empty
lots and the architect's drawings for the homes! People
begun to camp out since early Saturday morning! When the
auction started on Sunday the demand was such that a
riot broke out and the Tustion P.D. had to respond in
riot gear to calm down frenzied buyers! (sounds like a
hot IPO doesn't?) Everybody had become an expert. The
common person thought that some how it was their
"smarts" that made their home appreciate as
much as it had, and thus they absolutely knew what they
were doing. All that came to an abrupt end after the
invasion of Kuwait and the subsequent events. However,
people were convinced that it was only a temporary dip,
and in the spring of 1992 they were expecting a
"hot summer rally" in real estate prices. It
did not happen. Instead prices kept plummeting.
The massive lay-offs in the aerospace industry,
not only created lot's of unemployed people, but also it
created a glut of inventory, not to mention the
inventory that the RTC was trying to unload from failed
Thrifts. The hardest hit was the high end market. Homes
that had sold for 1.5m in 1990 were selling for 750K by
early 1993! By the way, the thinking before the
disaster was that "the high end market will
be immune in a down turn because rich people will always
buy!" sounds a lot like the argument about high
tech, doesn't? The unthinkable had happened,
the titanic real estate market of So. Cal.. had sunk!
People not only did not want anything to do with it, but
even those who wanted to do something, couldn't because
they were underwater with their homes (their loan
exceeded the value of their home) What is the point for
this analogy? The point is not so much to point out the
similarities in the excess between today's stock market
and the real estate market in So. Cal. The real point
is, it took a war in Middle East, a recession, a
massive Thrift failure, and the end of the cold war which
decimated So. Cal.'s aerospace and defense industry for
the white-hot real estate market to finally die! What
we're trying to say is that if there ia any similarity
between the two, then it will take some dramatic
fundamental events for the retail investor to
throw the towel and walk away from the stock market.
Investing in the market has become a way of life for the
average person. What kinds of events? maybe a recession,
a mass failure of high flying internet companies,
disappointing earnings etc. We'll know after the fact.
In the mean time, although we might be heading for
another one of those dips, we think that people will
come in to buy, unless a recession, a war, or a massive
industry wide failure happens!
Our
Market Positions:
Dow: NEUTRAL, SP500:NEUTRAL
NASDAQ: NEUTRAL |
AEGEANCAPITAL
GROUP INC.