SUMMARY - "PIG":
The Contrarian's View is published 11 times per year on a mostly-irregular schedule, and the views expressed are those of the author and editor, Nick Chase. Because nobody can predict the future, results of past suggestions or recommendations are no guarantee of future results. Material in this publication may be freely quoted provided proper attribution is given to its source. Subscription rate: Free on the Internet through the World-Wide Web service at Assumption College. Using your favorite Web-browsing program, Open URL http://nick.assumption.edu. Mailed paper subscriptions, one year for $39 to The Contrarian's View, 132 Moreland Street, Worcester, Massachusetts 01609. There is a limit of 50 paid subscribers at one time; please check for availability before sending any money. Sorry, Visa and Mastercard are not available. Overseas subscription rate, U.S. $54. Unsolicited material sent to us by UPS or by courier other than the postal service is refused and returned to sender! Phone: (508) 757-2881
March 22, 2003 - As the time of my retirement draws near, my wife and I are faced with preparing for it. One decision to be made is whether she will retire at the same time I do (she will be fully vested in her retirement plan by then), or whether she will continue to teach for a few more years. After all, I have so much to do.... devote more time to The Contrarian's View, write up the results of my research into hybridizing with triploid daylilies, put up a large web site of photos on the Internet, spend more time as a radio DJ.... that I will have no trouble keeping active. But she will sorely miss working with teenagers unless she makes alternate plans to keep involved, so continuing to teach (even if it means getting up at 6AM every school day!) may be her best choice for a while longer.
At any rate, I have already been to several retirement planning sessions offered by TIAA/CREF (at which, I swear, I knew more than the presenter) and am facing some tough choices. One thing I had hoped for was that there would be a mega-bear market in the late 1990s, so that I could switch back into stocks near the bottom and double, or maybe triple, my retirement funds before retiring. But the stock market was not so accommodating. It's not that I did all that badly; my highly-conservative position in money-market funds had earned, on average, about 6% per year compared to the 9% or 10% per year total return from stock index funds (such as CREF). It's just that I had not expected to spend ten-plus long years in money-markets without any opportunity to play big swings in the stock market. Instead, the index funds had just crept steadily upward year after year... would you believe thirteen years without a 10% correction in the blue chips?.... apparently validating the "new era" mentality.
The Dow now stands at 12,930 and yields a minuscule 1.17% in dividends. Nobody is claiming that dividends are meaningful any more; rather, stocks are bought and held for their annual capital appreciation. To be sure, not all stocks have shared the good fortune of the blue chips; the majority of stocks, those not in the weighted indexes, sold off about 40% in 1997 and 1998 and have pretty much stagnated afterward. Not even the 1998 capital-gains tax cut sparked them from their doldrums. (After allowing for inflation, you were losing money if you owned any of this stuff.) But if your only retirement-plan options are cash, bond funds or one of several index-type mutual funds, if you were not in stocks, as I was not, then you lost out (relatively speaking).
Back in the spring of 1997, I had felt that a market meltdown could not be more than a few months away, at most. And this was after describing, way back in the spring of 1995, what such a meltdown would look like. What is it they say about early war nings.... if it's way too early, it's more useless than no warning at all?
Where did I go wrong? Well, clearly, I had grossly underestimated the ability of the government, specifically the Federal Reserve, to keep the stock market propped up. Such efforts had always failed in the past, and I did not see why this time should be any different. When I first suggested, back in 1996 and 1997, that the Fed might be propping up stocks, my suggestion was greeted with disbelief and scorn (and cries of "Prove it! Prove it!", which I could not do). But now it is obvious to everybody that the Fed, through its open-market operations and reliance on derivatives to "transmit" the effect to stocks, or perhaps sometimes by direct intervention through purchases of futures or options, is able to keep blue-chip stocks propped up indefinitely. In fact, people rely on it; if the government virtually guarantees that the stock market will rise forever and forever, even through recessions such as the mild one we had in 1998, and through economic slowdowns such as last year's, why would anybody think of putting money anywhere else?
All the "new" money flowing into stocks, with the exception of occasional bursts of enthusiasm in the new-issues market, is going into index funds. In 2001, the Federal government permitted several state governments to opt out of the Social Security system and set up stock-based retirement systems for their employees and contractors. Also, large state retire-ment systems already in existence (California, New Jersey, New York, etc.) have shunned virtually all other forms of investment for stocks. This constant influx of "new" money (actually, shifted money) has allowed the "bubble" (from my point of view) to keep on growing a little bit every year, with absolutely no risk apparent at all.
Back in the fall of 1997, when the stock market still had not melted down, I told my subscribers, the hell with it, this sucker is going to keep on inflating for awhile. Use "Timer's Trend" to play it, if you like; you probably won't do any worse than a money-market fund and, more likely, you will track the upward trend of the market with virtually no risk of being trapped by the bear.... as long as you stay in index funds, which the Fed has the clout to keep propped up. But for myself, I remain a "value" investor; I cannot, in good conscience commit my retirement funds to a momentum-chasing game when stocks remain hideously overvalued on a historical basis.
That turned out to be good advice for my subscribers, who outperformed the indexes by about 20% over five and a half years, and less successful for me. And now, with retirement drawing closer, I face a dilemma: How to take my annuity. The supplemental part of my plan is no problem.... I own it, and I can roll it over into an IRA and keep it in cash or bonds until value returns to stocks. But the core part of the plan must be taken as an annuity, and normally, over the very long term it makes sense to go for a stock-based annuity, because the long-term rise in value keeps your annuity in step with increases in the cost of living. However, even the TIAA folks admit that if the stock market should tank right after you buy into the stock-based annuity, your retirement will suffer. Do I want to do this when stocks have remained more overvalued than they were at the 1929 peak, for eight long years? I reflect on the stories from the 1930s, and on my own experience during the 1970s, and decide, well, I don't have to worry about this right now, I'll look at it again later.
April 11, 2003 - Another sharp rally from one of those 8%/9% declines again has my subscribers in index funds, riding the next upward wave in the averages to what will almost certainly be a new high, undoubtedly breaking 13,000 on the Dow. As far as I can tell, I now have thousands of Internet readers using "Timer's Trend" to manage their mutual-fund portfolios. I have continued to warn of the extreme risk of being in stocks, but I guess I just sound like a broken record. (I may be in a distinct minority of people who remember what a record is, even while I still treasure my collection of classical-music LPs.)
April 14, 2003, AM - The ringing telephone wakes my from my slumber. On the caller-ID box, I see that my wife is calling me from work. Well, at least she's not stuck on the road somewhere, but what could be so important that she has to wake me at 7:43 AM? I pick it up. "Hello?"
"I thought you should know about what I heard on the radio while I was driving to work. The news said that last night a big company in Japan went broke, and that all the Japanese banks are in trouble, and that the Japanese stock market dropped 40% in two hours. They think it might cause problems here. Do you know anything about this?"
"I do now", I said, "and I'll check it out on the Internet and call you back". So I stagger out of bed (it always takes me awhile to wake up in the morning), put on a robe and plunk myself in front of the computer, without doing any of my usual early-morning things first, like shaving, showering, dressing, eating, or feeding the dogs.
It doesn't take much surfing on the Web to reveal the seriousness of the situation. Regulators had declared Tokio Financial insolvent, and all of its commercial paper (and it was the country's largest issuer) was worthless. In addition, Tokio was also an aggressive writer of derivatives, and of course could not satisfy its obligations in this market. This "fracture" in derivatives had put all of the major banks in jeopardy, because the pricing models they used for their derivatives portfolios did not provide for such a discontinuity; on paper, the entire Japanese banking system was bankrupt. Naturally, the damage had spilled over into their stock market before it was shut down.
Right away, I can see the danger. Japan's derivatives market had failed, and this had triggered a general credit collapse which was moving at electronic speed into the rest of the world's financial markets. I call my wife back.
"You were right. It's serious. If it spreads from Japan, the banks in most of the countries in the world could go under, including here."
"I thought our money in the bank was insured by the government?"
"It is, but that's no guarantee when you can get your money out. Usually, when a bank runs into trouble, the government folds it into a healthier bank. But that can take months, and in the meantime your money is locked up. This thing is happening so fast, I don't think the government can move quickly enough to keep some banks from going completely under. It may not happen here, but just in case it does, I think I should go to an ATM and pull some cash out. It might be all we have to live on for a few days."
"Well, I think you're overreacting", she said, "but OK. The government would never let something that bad happen. But if you think we should do it, go ahead. It can't hurt. Bye."
"Bye"
Still grubby and hungry, I put on some old clothes and drive down to the Honey Farms. Yes, the ATM is still working, and it lets me pull $800, the daily maximum, out of our savings account. I buy a newspaper (which was printed too early to have any news of the financial crisis in it) and return home.
The first thing I do when I reach work, even before I read my e-mail, is check the progress of the crisis on the Internet. The stock, bond and commodities markets have all announced delayed openings due to "computer problems". News stories indicate that the big banks are in trouble, and that the credit collapse is spreading to Europe.
By 11AM, my Internet connection has died. I still have things I can do on our own computers, but the rest of the world can't see them, and I can't get beyond the campus, electronically speaking.
April 14, 2003, PM - The noon news on the radio, as the lead news item, says that virtually every bank in the country has closed its doors, and that most ATMs no longer work. The financial markets remain closed. A full-scale money panic is in progress.
Before I go home for lunch, I make a quick trip to the supermarket to buy more orange juice and Diet Dr Pepper, because we're almost out. On the way, I drive past three banks and, sure enough, the doors are locked and there are people standing dejectedly outside them, or driving aimlessly in circles in the parking lots.
At the supermarket, there are lots of angry customers shouting at the manager, because the registers will not process credit, debit or check-cashing cards and because, as a precaution (against bouncing checks), the store has limited purchases by check to $50. Some shoppers waiting in line, when they get wind of what's going on, just abandon their filled carts and walk out of the store. Since I have cash, I have no problem paying for my purchases at the cash-only express register. On the way home, I fill the car with gas, even though it's only half empty.... just in case.
When I return to work, the Internet is still down. News bulletins on the radio make it clear that the money panic has begun to affect commerce. Goods are not being delivered, because there is no way to pay for them; and goods are not being sold, because there is no way to pay for them other than with cash. The economy is grinding to a halt.
Late in the afternoon, the phone rings. It's my wife, home from school. "I think you should come home", she says.
"What for? This is just an ordinary, typical, old-fashioned run-of-the-mill money panic. It'll be over soon." But of course it isn't, really, and she has a point. I go home early.
The first thing we do is check our food supplies. We had just shopped over the weekend, so we're pretty well stocked. We probably won't run out of anything for at least a week and, most important, we have three weeks' worth of dog food on hand. We could always survive on dandelion greens and daylily tubers from the yard if we had to, but the dogs wouldn't understand. They expect dog food. My wife also filled her car's gas tank on the way home (not because of the panic, just because her gas was getting low), so we have transportation.
"I get paid Thursday", she says. "How can I pay the bills if I can't deposit my paycheck?"
"Well", I say, "The banks will probably be open again by then. And if they're not, people couldn't deposit the checks you mail them anyway. So just wait. If we're late, we're late, so what? At least we have enough cash to buy necessities for a month or two.... as long as people continue to accept cash. Besides, the school may not even give you a paycheck on Thursday if the banks aren't open, so you'll have nothing to worry about!"
"What about our savings?"
"Well, money in the bank should be safe, but we may not be able to get at it for awhile. What's more of a problem is our retirement. Yours is essentially guaranteed by the state, but mine is currently mostly in money-market funds, and they could take a 'hit' from this. We just won't know until the financial markets reopen, then we'll see where we're at."
Now neither one of us hardly ever watches TV, but this is a big enough event that we both think we'll watch the talking heads on the evening news to see how they explain what is going on. So we pull the TV out of the closet, set it on the counter, dust it off and fire it up while dinner is cooking.
The local news is mostly about how people are unable to buy food and other necessities because machines won't accept checks or plastic.... variations on the same things I'd seen at lunchtime. The national news is mostly about what the government is doing to fix the problem and get things moving again. The Federal Reserve has promised any liquidity necessary to stem the panic, and all of the banks will be open tomorrow for business as usual. The talking heads place the blame on a "computer glitch" in the "totally-unregulated derivatives markets", implying that if the government had more control over the markets that the panic would never have happened.
What bulls--t, I think to myself. If the banks did what they were supposed to, which is to keep the money you have deposited with them in demand accounts (that is, immediately accessible) always available for your use, this panic would never have happened. But instead, while we are asleep they ship it off to some other part of the world to earn a fraction of a tenth of a percent interest. Obviously some part of it disappeared into the derivatives "black hole" that appeared in Japan, and it hadn't been returned at wake-up time. The fault lies not in the derivatives market, which can rise or fall on its own merits, but in the fractional-reserve banking system created by the regulators, which allows your money to be used by other people essentially without your knowledge.
One of the talking heads indicates that maybe as much as a third of the value of derivatives had gone poof! Let's see, last week the open interest in derivatives was in the neighborhood of $315 trillion, as I recall, about 33 times last year's GDP. That's $105 trillion that the Fed has to finance to right the markets. Even if the Fed can do this by putting up only 3% of the "missing" open interest, that's still more than $3 trillion, or one-third the GDP. That's a lot of money that needs to be printed overnight.... if issued as currency (unlikely), it would double the money supply. It seems to me, the Fed must have told the banks to pretend they have the money to do business as usual, and that by the time the shortfalls worked their way back into the Federal Reserve System, they would be covered.
All evening the TV stations pre-empt regular programming.... and commercials, be thankful for small favors.... to cover the ongoing crisis. A lot of the coverage is of the impact on ordinary people, how they can no longer go about their daily business. People appear to be shell-shocked. They can't understand how, only last week, the economy could be bubbling along nicely and the stock market appeared to be on its way to yet another new high, only to find that in less than a day's time they are worth only the clothes on their backs, their material possessions, and the cash in their pockets. How could this have been allowed to happen?
By 1:30 AM, we are both exhausted from TV burnout, and we decide to get some sleep. (After all, my wife has to get up at 6AM to get to work on time.) We haven't watched this much TV at one sitting since the bombing of Baghdad in 1991.
April 15, 2003, AM - The last day for filing your income tax. Sure enough, the banks open almost as if nothing had happened. Electronic money is again flowing, and the economy appears to be rapidly snapping out of yesterday's near-comatose state.
Is the appearance of normalcy but an illusion? I am inclined to think that people want to believe that yesterday's near-shutdown was just a glitch in the system, because the alternative would be to admit that something is fundamentally wrong, that the inconvenience of a living for a few hours without (most of) your money is but a precursor to hard times ahead.
At any rate, one thing is not normal at the banks.... people, not fully believing that another "glitch" will never again happen, have discovered the joys of keeping a little extra cash on hand. Banks are actually rationing cash.... a withdrawal limit of $20 per account from ATMs, and $50 per account from a teller, at most banks. This isn't really affecting the snapback, though; plastic works just fine.
At work, I find that my Internet connection is back, though it's a bit sluggish. A quick surf through my favorite financial sites reveals that I'm not the only person who has figured out that the Fed is about to print a bunch of money. The NYSE has announced a two-hour delayed opening, because stocks clearly will open below all of the circuit-breaker levels; but once open, we are told the market will remain open 'til its normal closing time.
The bond traders are also savvy about the impending inflation threat. The Fed can either (a) print money without tapping the bond markets, which means double-digit inflation and higher interest rates directly ahead, or (b) create money, then sell bonds from its inventory to "replace" the money it manufactured.... leading to an enormous overhang of bonds, depressed prices and - you guessed it - higher interest rates. Either way, rates go up.
Last week, short-term rates were around 6%, and long-term rates around 9%. When the bond markets finally open, short-term rates hover around 11%, and long-term rates are 37%.... an astounding, near-instantaneous 68% drop in the value of bonds!
At 11:30, the stock market opens. The Dow opens at 2741, well below my estimated fair value last week of 5025, and at about the current fair value (based on short-term rates). That's about a 78% loss.... and the market then drifts lower on very heavy volume.
On the "computer warmline" I write to my readers and subscribers:
The country is bankrupt. Actually, it has been bankrupt for some time; it just took the derivatives accident in Japan to bring the bankruptcy out into the open where people could see it. Even so, most people don't see it yet. Hard times lie ahead as the truth begins to dawn on them....
Oh, by the way, "Timer's Trend" failed to give a sell signal before the panic. Sorry about that, faithful subscribers - but I had warned you of the high risk.
For eight long, tough years the market was not an acceptable place to have any money. Then came 1975-1982, as the market battled higher oil prices, higher inflation and rapidly rising interest rates but still refused to decline and stayed in a trading range. I remember going into a brokerage house in the late 70s and was told by a seasoned veteran (or die-hard gambler), "kid, to beat this game you got to be a trader. Investors can't make money". He was fighting the last war.
I remember being told by a number of friends, in early 1982, that the market can't go up with government bonds yielding 16%. "Bonds are the answer". They were fighting the last war.
By 1987, as the market was accelerating to the upside, I saw many new investors increasing their purchases in 1986-1987, just in time to sell after the 1987 decline. Many had sworn off the game after having lived through the fear. They would not invest any more. They were fighting the last war.
The market was trying to regain confidence in 1989, just when the arbitrage community was blasted by the end of the UAL deal. 1990 saw the Gulf war, which helped to create an environment of fear. Investors remembered 1974 and 1981 with rapidly rising oil prices. Fear of war. They were fighting the last war.
The public was too smart then to go for stocks. The war ended, confidence slowly returned and the market was making new highs by 1994. The flood of money was growing as the baby boomers started aggressively moving money into the market. After all, we survived the crash, recessions, higher interest rates, wars, advisors daring to talk about overvaluation - "Since we invest in the market we can go on vacation, put an addition on our house because our money will grow in the market for retirement". The uptrend started to accelerate.
Success breeds success. In 1997, now, the number of mutual funds continues to skyrocket. We have low inflation, a good economy, the baby-boom generation needing to save for retirement pouring hoards of money in. We live in perfect times. We are seeing the continued rise of the market, and can't wait till the next paycheck to put money in.
Corrections in 1997 now last two to three weeks. We see nothing that can stop the permanent plateau of prosperity. Where will it end? Who knows? The odds are relatively soon - if it ends today, next month, next year, will it make a difference? No one will sell. If the Dow goes to 10000, will it make a difference? No one will sell. Why? Because we all remember the "fools" who sold at the bottom of 1987. Those scared investors who sold in 1990 just before the market was taking off. The mutual fund industry showed us the better way. Long term investing.
Money managers no longer control the markets, the public does. A newsletter writer, hot in the 1980s, would run ads about bagholders (people who would hold stocks as the market kept falling). That is the future. No one will sell as the next bear hits... until we near the bottom. Not at the top when the market begins to correct for no reason. Only after they have carried stocks down vowing not to sell and panic out. As jobs begin to disappear and economic fear is seen all around us, only then will they try to sell, all at the same time as liquidity no longer exists. Why won't they sell at the highs? Because money is being made too easily. Corrections continue to be buying opportunities. They will be fighting the last war.
As I think back to those days in 1975, I remember what my first broker told me. He was retiring and was not concerned with being a spokesman for the industry. He said, "When the next bull and bear market ends, very few people will have made money - it's always the same". Then again, maybe a sophomore from Cornell who I spoke to the other day will be right. He said, "Our generation is smarter than others in the past".
P.S. My mother calls me every day asking me if I can give her the names of a few stocks to buy.
- "JK"
Why save for a rainy day when Washington is promising nothing but sunny skies for many days ahead? The balanced budget agreement is currently zipping along through the Senate Budget Committee as the Republicans (formerly concerned with fiscal restraint) have now seen the wisdom in the Democrats' vision of having a cake, eating it, and paying for it later.
Many Americans have taken this philosophy to heart as well.... a recent Fidelity survey found that 40% of the Baby Boomers (aged 33 to 50) have less than $10,000 saved for their retirement. For 51- to 61- year-olds, the number was 30%. The pathetic figures have been recorded during a time when the country is enjoying one of its strongest economies in its history if the Clinton GEE (Golden Economic Era) men are to be believed.
Why aren't Americans saving more during this period of bounty? Two-thirds of the Boomers polled indicated that they didn't want to worry about saving for retirement because it might put a crimp in their current lifestyles. Even though Boomers have little confidence in Social Security, only a tiny percentage of them are very concerned about having enough money to provide a decent retirement in the 21st century. I think the lack of concern is likely related to the generation not having experienced the hard-ships that the previous generation experienced (the Great Depression, World War II, etc.). Consumerism is very much alive and well and it is one of the major things that keeps the current economy going. If everyone began to save a lot of money and stop consuming, the economy would grind to a halt as the excesses are wrung out.
With Social Security already slated to go broke some time in the early 21st century, what kind of additional pressures will arise when the Boomers (a demographically large set of folks) hit retirement age with only a small amount saved up? The younger generation is not going to be numerous enough to pay their share in the Ponzi-scheme like the Boomers did for the previous generation. In short, just as the government is borrowing from the future, so are the Boomers (at least 40% of them), and there is going to be one hell of a bill due in the next century for all the cake that has been eaten. - Marc Sexton (Fiend SuperBear)
The Fed is operating under what I would call the Greenspan standard. There are no rules and no targets. It's a fun standard if you're Mr. Greenspan, but it leaves the rest of us guessing. - Lawrence Kudlow
The Federal Reserve has made a de facto admission of intervention. Stability is the operating word. We know the Fed is worried about the effects of a bubble, both to the upside and the downside. Best Fed strategy? Buy bonds back to boost their value, as they have done, and raise rates the same time to curtail speculation and pray that good earnings continue in a "stable" environment in order to work off overvaluation in the market. ...Viewed in this context, everything makes sense. That's not a real bond chart, for goodness sakes! It's one beautiful painted tape.- Teresa Lo
A government (Albania) was brought down because a nationwide investment plan collapsed and many lost their life savings. Could it happen in the West? ... Look at these facts: People in every nation are heavily into mutual funds and unit trusts. In the US, many millions have their life savings socked into mutual funds. Americans are fast to complain, emotional, and less stoic.... When the selling hits the fan and the mutual-fund bubble bursts, and tens of millions are wiped out or lose over 50%, will Americans do nothing? ... Will Americans hire their eager and able lawyers to represent them in the mother of all class action suits for compensation? ... Is that impossible? Or likely? This isn't 1929 when people took responsibility for their actions. Today it's always someone else's fault. - Harry Schultz
The mass of investors... - doubtlessly - they'll... be... wrong again. It has to be that way, or colored, carbonated sugar water stock would not sell at 43 times earnings - and six year old boys would not be telling you how much money they're making in their mutual funds. We are close to a nasty turn-around - the last buyer is already in the market! - Grant Knutson
People shouldn't expect the mass media to do the investigative stories. That job belongs to the 'fringe' media. - Ted Koppel
According to White House Press Secretary Mike McCurry, President Clinton has consistently opposed partial-birth abortion. Of course: That's why he vetoed the bill opposing it last time round. (Mr. Clinton has consistent views? Now there's a surprise.) Vince Foster and dozens of other Clinton pals committed suicide despite evidence to the contrary, obviously a ringing endorsement of life under Bill. TWA Flight 800 was brought down by mechanical failure, despite published photos showing the missile advancing towards the plane. It's true that when a missile hits an airplane the result will be quite a serious mechanical failure, but that is being somewhat economical with the truth. Those are just a few of the untruths circulating in the fantasy realm of Washington's media stooges. Yet these are not merely a child's exaggerations, but the words of high officials in the government of the world's superpower. What are we to think about such stories? Just brush the deceptions under the carpet? - Steve Myers
Most Americans do not appreciate how much of the government's power actually springs from its control of information. Mendacious officeholders obscure and distort inconvenient facts, contrive bogus crises, incessantly propagandize the citizenry and, if need be, simply lie to achieve their own ends. - Robert Higgs
What we have to go on is the circumstantial evidence that the Fed intervened in 1987, and Greenspan's specific reference to 1987 as the kind of event needing direct market intervention, plus his stated willingness to intervene when (he thinks it's) necessary.
Beyond that, we have only the evidence of the market itself. It's been almost seven years since blue-chip stocks suffered a 10% correction. Meanwhile, there have been selloffs in the low-cap stocks that have, for all the world, looked like brief bear markets: in 1994, in July 1996, and again in March/April 1997. This period-of-no-10%-correction exceeds by three years the previous record of duration, established in the 1920s, which did not include "hidden" minibears. What is different this time ar ound?.... draw your own conclusions.
Some correspondents thought that if the Fed were propping up stocks as I surmised, it was certainly doing a bad job of it, what with all the volatility. On the contrary - I said propped up, not comatose. If the Fed is buying options or futures directly, it would be better for it to do so after a selloff, then have the impact of its intervention drive prices higher, whereupon the purchases can be sold at a gain. There's no profit to be made in keeping stocks comatose.
More likely, most of the propping-up comes from the Fed's open-market operations and reliance on derivatives to transmit the effects of expanding or shrinking supplies of money to stock prices. Direct intervention would be needed only if a selloff threatens to get out of hand (but would produce the best profit).
For me the increased volatility of late is a sign that the "natural" tendency of stocks is to go down, until an intervention (direct or indirect) gives them another burst of hot air.
Meanwhile, back in the propaganda mills of bubble-feeding euphoria, a Merrill Lynch ad currently running on our area's commercial classical music radio station purports to offer sound advice on home financing. Paying the largest down payment you can afford, or making extra payments to principal may not be the best strategy, the add suggests. Rather, a Merrill Lynch "financial planner" may recommend strategies such as a zero-down mortgage or interest-only payments, while you keep your "investment assets at work" (that is, in the stock market). Used creatively, the ad indicates, debt can be an asset. (Deceased accountants, please, no turning over in your graves.) What are we supposed to think when a supposed bastion of stodginess and fiscal integrity such as Merrill Lynch offers such cockamamie advice? Will the adwriters be blameless when the stock market tanks, but those "creatively-financed" homeowners find that their mortgages loom larger than ever in what is likely to be a less job-friendly economic environment?
Anecdotal evidence of a top to the contrary, we.... or at least I.... see no evidence yet that the series of near-10% corrections, preceding the arrival of the bear market in all sectors, has ended. It's still possible for the meltdown to arrive in July (after, say, an early- or mid-June peak in the Dow), but I would say the odds now slightly favor its arrival in the fall. This would be typical stock-market timing for the likely arrival of the next recession in the spring of 1998 (which I originally felt would arrive in the second half of 1997). At any rate, you money-market fund investors should not lose patience; over the past year, you have slightly outperformed the average equity mutual fund despite the efforts of the indexing fanatics and the media shills to make you believe otherwise.
Original cost: $ 8,090.45
Present value: $ 7,185.62
Increase: $ -904.83 [-11.18%]
The performance of this portfolio and its predecessors ("Hedger's Delight", "Present and Future Income", "Crapshooter's Folly") from January 1987 to the present is +0.71%, for a compound annual rate of return of 0.06%. COMMENT on "Phoenix": There is no change from the last issue.
B. "Professors' Investment Group (PIG)" - investment club portfolio.
SUMMARY - "PIG":
Original cost: $ 7,505.00
Present value: $ 7,277.00
Increase: $ -228.00 [3.04%]
COMMENT on "PIG": Since I now have the financial records, the transaction dates and amounts shown are now accurate. In the files I found a copy of the 1995 authorization form that allowed me to do trades; I took it to Fidelity's local (here in Worcester, the financial backwater of America) office, and after a little haggling they accepted it, so I can now access the account on the Internet. (God knows what happened to the original form submitted to them.). There are two open orders: buy 50 Alkermes @ 11-1/2, and a stop-loss on Silicon Graphics @ 16-1/4 (15% trailing stop). The PIGs' Web page is at
http://www.assumption.edu/HTML/Faculty/Kantar/WPigs.html.
C. Fidelity IRA - real portfolio, includes commissions:
SUMMARY - IRA:
Original (1983-86) cost: $ 8,326.19
Present value: $16,735.12
Increase: $ 8,408.93 [100.99%]
The performance of this portfolio (including its predecessors) from January 1, 1987 to the present is +52.59%, for a compound annual rate of return of 4.15%.
D. CREF Pension plan; I switch between indexed stock/bond/money funds:
Date Sold Bought
13Mar92 stock @ 56.65 MM @ 13.41
29Apr92 MM @ 13.48 bond @ 31.19
19Jun92 bond @ 32.14 MM @ 13.55
29Jun92 MM @ 13.57 stock @ 56.74
24Jul92 stock @ 56.76 MM @ 13.61
29Oct92 MM @ 13.72 stock @ 58.61
23Dec92 stock @ 61.48 MM @ 13.78
16Jan95 MM @ 14.83 equity-index @ 26.44
20Jan95 eq-index @ 26.19 MM @ 14.84
Values, 27May97: stock, 121.85; MM, 16.85
Gain, 1988: 18.91%; 1989: 14.48%; 1990: 8.28%; 1991: 27.93%; 1992: 10.20%; 1993: 3.08%; 1994: 4.07%; 1995: 4.80%
Gain, January 1 through December 31, 1996: 5.28%
Total gain since January 1, 1988 (9 years): 145.96%
Compound annual rate of return: 10.52% (My long-term target: in excess of 15%)
Gain shown excludes the impact of additional monthly cash contributions.
Buying CREF stock on January 1, 1988 and holding it gained 249.17%, for a compound annual rate of return of 14.91%.
TIAA/CREF now offers a new bond fund (I got the mailing after writing the "Alternate Scenario" piece which leads this issue) designed to invest in U.S. and foreign inflation-indexed bonds (including a few corporates, but mostly "sovereign debt"). That sounds like a pretty good place to hide during a bear market in stocks provided the various governments, and especially the U.S. government, don't "fudge" the cost-of-living indexes to hide the true rate of inflation.... as they may already be doing to some extent. Before I buy in, I'd like to make sure we get beyond the possibility of deflation, such as Japan has been suffering since 1989, since there's no point in buying inflation-indexed stuff if the cost of living starts heading south.
E. Current unfilled portfolio good-til-cancelled orders: None.
COMMENT on "Timer's Trend": We're currently on a BUY signal given May 2, and it looks like "Timer's Trend" will capture at least another hundred-plus Dow points.... making its record for the year, so far, quite good (562 Dow points or 8.7%, not including dividends or six weeks of money-market interest). Those of you who blindly follow the indicator with an index fund should be as contented as clams.
{, } = "Timer's Trend" (4% and 10% exponential) SELL ({) or BUY (}) signal
=============================TIMER'S TREND===========================
Mon 6 Jan 97 . | # | 6567.18 | .+ *
Tue 7 Jan 97 . | . # | 6600.66 |~.+~~~~~~~~~~~~~~~~~~~~~~~~~~~~~*
Wed 8 Jan 97 . | # | 6549.48 | .+ *
Thu 9 Jan 97 . | . # | 6625.67 | . + *
Fri 10 Jan 97 . | . # | 6703.79 |~.~+~~~~~~~~~~~~~~~~~~~~~~~~~~~~*
Mon 13 Jan 97 . | .# | 6709.18 | . + *
Tue 14 Jan 97 . | . # | 6762.29 |~.~~+~~~~~~~~~~~~~~~~~~~~~~~~~~~*
Wed 15 Jan 97 . | .# | 6726.88 | . + *
Thu 16 Jan 97 . | . # | 6765.37 | . + *
Fri 17 Jan 97 . | . # | 6833.10 |~.~~+~~~~~~~~~~~~~~~~~~~~~~~~~~~*
Mon 20 Jan 97 . | . # | 6843.87 | . + *
Tue 21 Jan 97 . | . # | 6883.90 |~.~~+~~~~~~~~~~~~~~~~~~~~~~~~~~~*
Wed 22 Jan 97 . | .# | 6850.03 | . + *
Thu 23 Jan 97 . | .# | 6755.75 |~.~+~~~~~~~~~~~~~~~~~~~~~~~~~
Fri 25 Jan 97 . # . | 6696.48 |~.+~~~~~~~~~~~~~~~~~~~~~~~~~~
Mon 27 Jan 97 . I# . | 6660.69 |*+~~~~~~~~~~~~~~~~~
Tue 28 Jan 97 . | .# | 6656.08 | + *
Wed 29 Jan 97 . | # | 6740.74 | + *
Thu 30 Jan 97 . | . # | 6823.86 |~ +~~~~~~~~~~~~~~~~~~~~~~~~~~~*
Fri 31 Jan 97 . | .# | 6813.09 | .+ *
Mon 3 Feb 97 . | .# | 6806.16 | . + *
Tue 4 Feb 97 . | .# | 6833.48 | . + *
Wed 5 Feb 97 . | #. | 6746.90 | . + *
Thu 6 Feb 97 . | # | 6773.06 | .+ *
Fri 7 Feb 97 . | . # | 6855.80 | .+ *
Mon 10 Feb 97 . | # | 6806.54 | .+ *
Tue 11 Feb 97 . | .# | 6858.11 | .+ *
Wed 12 Feb 97 . | . # | 6961.13 |~.~+~~~~~~~~~~~~~~~~~
Thu 13 Feb 97 . | . # | 7022.44 |~.~~ +~~~~~~~~~~~~~~~~~~~~~~~*
Fri 14 Feb 97 . | . # | 6988.96 | . + *
Tue 18 Feb 97 . | . # | 7067.46 | . + *
Wed 19 Feb 97 . | # | 7020.13 | . + *
Thu 20 Feb 97 . |# . | 6927.38 |~. *+~~~~~~~~~~~~~~~~~~~~~~~~~
Fri 21 Feb 97 . | .# | 6931.62 | .+ *
Mon 24 Feb 97 . | . # | 7008.20 | . + *
Tue 25 Feb 97 . | . # | 7038.21 | .+ *
Wed 26 Feb 97 . | #. | 6983.18 | .+ *
Thu 27 Feb 97 . & . | 6925.07 | .+ *
Fri 28 Feb 97 . I# . | 6877.74 *|~ +~~~~~~~~~~~~~~~~~~~~~~~~~~~
Mon 3 Mar 97 . I .# | 6918.92 | + *
Tue 4 Mar 97 . I .# | 6852.72 |~+~ *~~~~~~~~~~~~~~~~~~~~~~~~~
Wed 5 Mar 97 . | . # | 6945.85 | .+ *
Thu 6 Mar 97 . | .# | 6944.70 | . + *
Fri 7 Mar 97 . | . # | 7000.89 |~.~~ +~~~~~~~~~~~~~~~~~~~~~~~*
Mon 10 Mar 97 . | . # | 7079.39 |~.~~ +~~~~~~~~~~~~~~~~~~~~~~~~*
Tue 11 Mar 97 . | .# | 7085.16 | . + *
Wed 12 Mar 97 . | #. | 7039.37 | . + *
Thu 13 Mar 97 . #I . * | 6878.89 |~. +~~~~~~~~~~~~~~~~~~~~~~~~~
Fri 14 Mar 97 . I #. | 6955.48 | + *
Mon 17 Mar 97 . #I . | 6935.46 |+. *
Tue 18 Mar 97 .# I . {| 6896.56 + . *
Wed 19 Mar 97 .# I . | 6877.68 |-. *
Thu 20 Mar 97 .# I . | 6820.28 |-.~~~~~~~~~~~~~~~~~~~~~~~~~~
Fri 21 Mar 97 . I# . | 6790.06 |~ *~~~~~~~~~~~~~~~~~~~~~~~~~~~
Mon 24 Mar 97 . & . | 6905.25 |-. *
Tue 25 Mar 97 . I# . | 6876.17 |-. *
Wed 26 Mar 97 . I #. | 6880.70 + . *
Thu 27 Mar 97 #. I . | 6740.59 +.~~~~~~~~~~~~
Mon 31 Mar 97 * # . I . | 6538.48 |~-~~~~~~~~~~~~~~~~~~~~~~~~~~
Tue 1 Apr 97 # I . | 6611.05 | .- *
Wed 2 Apr 97 # . I . | 6517.01 |~.~*~~~~~~~~~~~~~~~~~~~~~~~~
Thu 3 Apr 97 #. I . | 6477.35 *~.~~-~~~~~~~~~~~~~~~~~~~~~~~
Fri 4 Apr 97 . #I . | 6526.07 | . - *
Mon 7 Apr 97 . I #. | 6555.91 | .- *
Tue 8 Apr 97 . I# . | 6609.16 |~-~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~*
Wed 9 Apr 97 . & . | 6563.84 |-. *
Thu 10 Apr 97 . #I . | 6540.05 + . *
Fri 11 Apr 97 # . I* . | 6391.69 |~-~~~~~~~~~~~~~~~~~~~~~~~~~~
Mon 14 Apr 97 # I . | 6451.90 | .- *
Tue 15 Apr 97 . I #. | 6578.16 |~-~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~*
Wed 16 Apr 97 . & . | 6679.87 |~-~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~*
Thu 17 Apr 97 . #I . | 6658.60 | - *
Fri 18 Apr 97 . & . | 6703.55 |-. *
Mon 21 Apr 97 .# I . | 6660.21 |-. *
Tue 22 Apr 97 . I# . | 6833.59 |-.~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~*
Wed 23 Apr 97 . & . | 6812.72 |-. *
Thu 24 Apr 97 . #I . | 6792.25 |-. *
Fri 25 Apr 97 #. I . | 6738.87 |~-~*~~~~~~~~~~~~~~~~~~~~~~~~
Mon 28 Apr 97 . #I . | 6783.02 |-. *
Tue 29 Apr 97 . I . # | 6962.03 |-.~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~*
Wed 30 Apr 97 . | . # | 7008.99 |+.~~~~~~~~~~~~~~~~~~~~~~~~~~~~~*
Thu 1 May 97 . | # | 6976.48 | + *
Fri 2 May 97 . | . # }| 7071.20 |~.~+~~~~~~~~~~~~~~~~~~~~~~~~~~~~*
Mon 5 May 97 . | . # | 7214.49 @|~.~~~+~~~~~~~~~~~~~~~~~~~~~~~~~~*
Tue 6 May 97 . | .# | 7225.32 | . + *
Wed 7 May 97 . | #. | 7085.65 |~.~~+~~~~~~~~~~~~~~~~~~~~~~~~
Thu 8 May 97 . | . # | 7136.62 | . + *
Fri 9 May 97 . | . # | 7169.53 | . + *
Mon 12 May 97 . | . # | 7292.75 |~.~+~~~~~~~~~~~~~~~~~~~~~~~~~~~~*
Tue 13 May 97 . | .# | 7274.21 | . + *
Wed 14 May 97 . | . # | 7286.16 | . + *
Thu 15 May 97 . | . # | 7333.55 | . + *
Fri 16 May 97 . | #. | 7194.67 |~.*~+~~~~~~~~~~~~~~~~~~~~~~~~
Mon 19 May 97 . | .# | 7228.88 | . + *
Tue 20 May 97 . | . # | 7303.46 | . + *
Wed 21 May 97 . | .# | 7290.69 | . + *
Thu 22 May 97 . | .# | 7242.47 | . + *
Fri 23 May 97 . | . # | 7345.91 |~.~~+~~~~~~~~~~~~~~~~~~~~~~~~~~~
=====================================================================
[, ] = 4% exponential change unconfirmed by 10% exponential (not a signal).
@ = market overbought or oversold. I or & (on baseline) = 10% exponential SELL.