After recent action, I'm convinced it is only a matter of time before Ralph Nader begins to protest that all investors should be mandated to wear seatbelts while playing the stock market. The whipsawing and whiplash were okay to live with going into the weekend - a knotty neck is a small price to pay for 560-points in two days. The excessive volatility highlights the uncertainly over the markets and at the same time it indicates that there is demand for stocks. Like a pyramid, the initial buyers will be few, but as the market continues to tack on gains and the risk flattens out then the buyers will multiply. For now, the ideal is to be nimble and to take off the blinders. There is a chance that the economy could still slip into another recession and that the stock market could stumble again. That said, investors would have to shed their disappointments and mentally write off the losses. I say this because the market will rebound sooner or later (Not to sound like the typical guest on the financial shows). The market should pause on Monday, but after that it will feel like a Bumper car ride powered by rocket fuel.
This report, "Death to the Mega Bear market", is something I think every investor should read and try to understand.
Everyday, I meet someone that tells me that he/she has gotten out of the market and will never return. Their reasoning for this is a direct reflection of the dramatic losses they suffered since the market peaked in the first quarter of 2000. Losing money can be hurtful, but losing a lot of money can be a life-altering experience. (Sociologists say that money, or the lack thereof, is the greatest cause of divorce in the United States. Recently, I spoke to an accountant that serves over 2000 investment professionals in New York, and by his estimation 70% have gotten divorced since the bear market began.) That said, it is easy to see why people are saying the things they are saying, but I don't believe them. If 95% of folks that lose weight, regain it later, I think anecdotally, more will come back to the stock market. After all, a Snickers candy bar tastes great, but what is sweeter than making money? That is a rhetorical question. My point is that the market is a withered flower now, but at some time in the future it will be a bird of Paradise. And for anyone that is thinking the market was more like a Venus flytrap in the late 1990s, look in the mirror first. Sure the nectar was alluring but everyone elected to succumb to the sweet smell instead of using his/her brains and eyes as a warning device.
I'm not writing this piece as a primer for picking the bottom. In fact, I find it humorous when anyone, pundit or novice, says they're going to wait for the bottom - as if they called the top. I'm not pounding the table for investors to be the first to buy at the turn; however, I am saying that by the time the average investor feels comfortable, stocks will be substantially higher. In fact folks there really isn't anything wrong with being a little early. I make stock recommendations several times each trading day, and I never try to sound like I'm touting a long or short idea. Unfortunately, investors are used to the hype, they like being sold. The sad irony of this is that those that had the worst advice, the flimsiest reasoning and the hidden agendas didn't mind getting on soapboxes and doing their best P.T. Barnum impression. (It took me almost a year to get investors to use stops, and then we spent the better part of 2001 trying to get investors to do shorts. If I made grandiose promises it wouldn't have been so hard, instead I only used common sense and fundamental analysis to present these actions.) People like to be sold, so this is my attempt to sell you. This is my attempt to get you to stop crying in your beer and wipe the slate clean. The future is now and the Bull market isn't far behind that.
In the recovery cycle, it is well established that the last niche to recover is employment. Yet there is no doubt that in order to get the market moving beyond an occasional oversold bounce, would-be investors have to have stable employment. Recently there has been a major disparity in the accounting of employment that has many baffled and most writing off any of the latest data until further information is released and revised. According to the Bureau of Labor Statistics (BLS) the employment households and industries saw the picture in September 2002 totally different.
Household Survey:
Let's call this report "Rose-colored glasses"
Put the unemployed number at 8.1 million and a rate of 5.6% versus the estimate coming into the report that the new rate would edge higher to 5.9%. Households saw total employment higher by 711,000 to 135.2 million (a large percentage coming from teenage employment). The only negative note from this survey was the total increase on "discouraged workers", those simply not looking climbed to 387,000 from 280,00 in the year-ago period.
Industry Survey (The Establishment):
Let's call this report "Sunglasses at Night"
The establishment said that on a net basis 43,000 jobs were lost in September. They say the total employment number is 130.9 million and that the largest losses came from manufacturing at 35,000 (this number has accelerated in the last two months) and transportation, which lost 26,000 jobs. There were bright sides to this survey though. The revised increase in employment for August swelled to 107,000 from 34,000 and the four-month total coming into September saw an increase of 217,000 jobs.
I found it interesting that at the time the stock market took its cue from the industry survey and the market sold off. After all, the service economy created 28,000 new jobs and the jobs provided by small businesses (read: non-establishment) were surely not counted and could result in a late revision to rival which was seen in August. The health services economy created 21,000 jobs during the month and 282,000 over the last 12-months. It is so ironic that this is going to be a major business for the nation because of demographics of the population, but last week the biggest losers were Beverly Enterprises and Kinder Care, two nursing home providers. In the beginning of the year I had the pleasure of interviewing the labor Secretary Elaine Chao and she hinted that the unemployment rate could reach as high as 6.5%. In a more recent interview she told me that she would "never" have said such a thing. Be that as it may, many pundits saw the unemployment for the year creeping around 6.5% and that doesn't look like it will happen. It would take a double dip recession not caused by a skirmish in Iraq to propel unemployment to those levels.
Let's Talk History and The Charts
Before we get to the charts, let's discuss the Price to Earnings ratio and its implications for the stock market. The PE ratio is at once the most complicated and simplistic of metrics for evaluating the fair value of a stock or index. There are many investment pros that rely first and foremost on the PE ratio of the stock market. They are bearish and will remain so for the foreseeable future.
The death of the bear market is at hand. I'm not sure if it has begun, but I'm sure that it will occur over the next few months baring any extraordinary event. Note: if we go to war in January I'm still inclined to say the Bear market dies in the first quarter of 2003.
Charles Payne’s Wall Street Strategies provides timely and effective equity advice to institutional money managers, retail brokers and individual investors of all types, and has thousands of subscribers from hundreds of brokerage firms.
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