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Top 6. Mar 19, 2001 10:00 AM

» JenL_2 - Don Hays' analysis - June-Oct 2000

Some Don Hays posts from the "The Bad News Bears" thread:

Author: Kirk
Date: June 8, 2000 5:00 AM
Subject: Don Hayes says we are in Phase I of a Bear Market

This guy says we are in "Phase I" of a bear market.

Month In Review
The Denial Phase Has Ended
http://www.haysadvisory.com/
6/06/00 2:00 PM

I am really enjoying writing this monthly commentary for the general public part of our web site. For the last 23 years I have alternated from writing and recording a morning market commentary to my current pattern of writing one three times a week for my web-site and clients. I'm one of those fortunate people that love their job. But in this intense market analysis, sometimes you get so involved in the day-to-day market analysis that you almost forget what conditions were a month ago. So this new exercise gives me the opportunity each month to go back and review the previous monthly comments to refresh my memory of prior conditions and comments. This is month number 5 for our monthly comments, and there probably has been no other time in US history when so much has happened in the market in such a short period of time. And much of the action has been done under a camouflage that almost obscured the real personality of the market. I covered that last month in the chart and commentary that illustrated the percentage of stocks that trade on the New York Stock Exchange that have been trading above their 200-day moving price average. Many professionals use the 200-day moving average as the dividing line, with stocks that are trading above that average considered in a healthy bullish (strong) trend, and stocks under that average being in an unhealthy bearish (weak) trend. That chart illustrated the bull market myth that has been so popular in the last two years. The chart shows that the majority of stocks hit their peak of bullish patterns 30 months ago, in November 1997, and have been faltering ever since, even though the popularly covered indices continued making persistent new highs.

Then in our March edition, with the NASDAQ composite index--heavily weighted with big-cap technology companies--moving above the 5000 level, and achieving a 265 price-earnings ratio, I shared a few thoughts how the Federal Reserve and the revered Alan Greenspan's runaway money supply had fed this feeding frenzy of speculation, but that game was about over. Despite the new high by the NASDAQ, the Dow Jones Industrial Average and most other indices had made their high three months earlier. In hindsight, that did prove to be the month that burst the speculative bubble of the NASDAQ, and began what I believe would prove to be the first phase of the bear market in that "New Era" index.

That's enough review for this column, so let me get to a little description of bear markets. In many ways the stock market has not seen a traditional bear market in at least 10 years, and by some definitions in the last 20 years. I believe that we now are in the beginning stages of a good old-fashioned bear market. To help those of you who didn't invest in those days of 1960-1984, let me describe what a bear market looks like. It always begins with a huge flurry of positive news, with corporate earnings reaching new records. Everything is wonderful, and everyone knows that these conditions are going to last indefinitely. For that reason, savings levels go down, and consumer spending goes up. Everyone has a job, and the phones are ringing off the hook trying to entice you to come work for another firm that offers special signing bonuses or perks to join up. Obviously, you are a genius, and you need to look like one in a new car, new clothes, and new and bigger house. To finance these items, all you have to do is to buy stocks. Since so much of your money has gone into houses, cars, clothes, etc. you know that you should leverage your stock purchases to help yourself get rich enough to pay off your debts, and the brokerage houses and banks are eager to loan this new genius money to finance more stocks. No risk, since stocks ALWAYS go up.

This certainly fit the pattern of last March, with margin debt (debt financed through brokerage firms using stock as collateral) exploding, a price/earnings ratio for the NASDAQ reaching an unheard of level of 265, consumer sentiment at historic levels, and the economy so hot that the unemployment level dropped to 3.9%. At the same time, another indicator hit a level that in the past has always been a prelude to a change of trend, from a hot economy to a much slower economy. This indicator is called the "Quit" ratio, and measures those workers who are voluntarily leaving their jobs. That means they are confident they can get a better job, with higher pay, better benefits, and more signing bonuses than their current job that does not appreciate their true genius. In all times in history, that this "quit ratio" has moved up to 15% of the total workforce, it has been a sign that the Federal Reserve was going to about to cool off this major inflationary trend. Almost immediately after our March commentary, the NASDAQ began a sharp decline that reached its lowest interday level on May 24. From its high of 5132 reached on March 10, 2000, it dropped to 3042, a 41% loss. This certainly has cooled the speculative fever some, but still the television shows (and many Market Strategists) were still having a hard time telling whether this was a bull market or a bear market-hence the name denial phase.

To get back to the description of a typical bear market, there are generally at least three phases. Between each phase there is an interlude when the market moves back up some, but each of those interludes serve to usher in the next bearish phase. Phase II is described as the "concern" phase. In this second phase the first sign of weaker corporate earnings begins to creep in. During the interlude investors actually become more optimistic, because their biggest fear up to now had been a Federal Reserve that was going to continue to raise interest rates. But now the news is showing a slowing economy, so that dominant threat is being diluted. Good news, right? Only for a few weeks, but it does serve to allow a few weeks or months of a rally. As noted in our title, I believe we have started that interlude. I do not expect the NASDAQ index to make up more than about 50% of its decline, but believe that one more big cloud of camouflage could even lift the Dow Jones Industrial Average to one more all-time record high before the Phase II of the bear market begins. Putting an exact time for the end of this "interlude" is frivolous, but here I go anyway. My guesstimate is that the second bearish phase will begin by late July of this year.

So what should an investor do? As we have been suggesting since our first report in January of this year, every investor should arrange his or her portfolio in a defensive posture depending upon your risk/reward tolerance. If you have fallen victim to the herd mentality, and find yourself very much over-exposed to equities, I strongly recommend that this interlude rally be used to perform defensive portfolio adjustments.

That's enough "bear market" explanations for now, but in the months ahead I will continue to complete the description of the bear market's third phase that is described as the "capitulation" phase. It is longest lasting, and the most destructive as the final bulls turn to bears. That will produce our buying opportunity, and if I am right perhaps the most exciting buying opportunity in the history of stock markets. So stay tuned, but for now get defensive.

Don't be fooled by the "denial" rhetoric in these next few weeks.

Kirk Lindstrom

Author: Will_L
Date: June 8, 2000 9:59 AM
Subject: Who is Don Hayes?

Who is Don Hayes?

Author: Kirk
Date: June 8, 2000 10:05 AM
Subject: not sure.

not sure...
looks like somebody selling fear, doom and gloom.
He has a newsletter.

Kirk Lindstrom

Author: FCSTECKIII
Date: June 8, 2000 10:24 AM
Subject: Interesting ...

I recall an article in Barron's (1996 ?) and it
featured Don Hays (Wheat First Union). He claimed
that 'Corporate Downsizing' was the major factor
for propelling the markets upward and was a major
BULL at that time ...

Obviously his 'sentiment' has now changed. Maybe
do to a tighter Labor Market (less downsizing)?

Oh well ...

Fred C. Steck, III

Author: Steven_Russell
Date: October 22, 2000 11:48 AM
Subject: Re: Don Hayes says we are in Phase I of a Bear Market

In response to message posted by Kirk:

Here is another fascinating excerpt from the Hays Advisory, dated 9/26/00:

http://www.haysadvisory.com/

With this backdrop, a new ominous signal that has never failed to presage a serious market decline in the last 75 years has just been triggered. This signal is called the "Sign of the Bear." Space does not allow a full description of the signal, but if interested send me an e-mail at donhays@haysadvisory.com and I will relay those back to you, but simply stated it says if the market during a very optimistic environment suddenly stays lethargic for a period of 21-27 days, and the next deviation in that period is on the downside, it is a signal that a bear market will start to show its ugly head in the next few weeks or months. That signal was activated on September 18, 2000 for only the seventh time in the last 75 years, and let me repeat, it has so far never been wrong. The dates of those seven occurrences are:

July 22, 1929
December 14, 1961
January 31, 1966
October 25, 1968
December 12, 1972
April 6, 1998
September 18, 2000

If you have even a faint experience in market history, you will recognize that in every one of those previous cases it set the stage for a very serious bear market. It is very interesting that these are the only times in 75 years that the necessary set of conditions have been triggered.

Author: Kirk
Date: October 22, 2000 12:38 PM
Subject: 2 Questions for Steven

In response to message posted by Steven_Russell:

- How many signals have come that were false?

- How long after the signal was given did it take for each bear to occur?

Some bears sold out of stocks in early January and if we don't get a bear in 2000, then I bet there will be many unhappy campers wishing they had held on for another year, even if we get a bear in 2001. Why pay taxes too early?

Kirk Lindstrom

Author: Roger_Babson
Date: October 22, 2000 1:58 PM
Subject: Re: Don Hayes says we are in Phase I of a Bear Market

In response to message posted by Steven_Russell:

Don Hays is no perma-bear. He has been around the securities industry for more than 30 years. He is a former aerospace engineer, and has had a distinguished career (now age 60 or close to it) as an investment strategist.

He left WheatFirst (involuntarily due to a merger with First Union) to return to his home state of Tennessee, where he is publishing an on-line advisory letter.

Mr. Hays's reference to the "Sign of the Bear" (SOTB) is from the work of Peter Eliades of the "Stock Market Cycles" newsletter:

Peter Eliades's Stock Market Cycles Newsletter

Roger Babson

Author: Steven_Russell
Date: October 22, 2000 2:17 PM
Subject: Re: 2 Questions for Steven

In response to message posted by Kirk:

To answer your question #1, let me quote again from the article:

"That signal was activated on September 18, 2000 for only the seventh time in the last 75 years, and let me repeat, it has so far never been wrong."

So only 7 signals in the last 75 years, and NO false readings in any of them.

For your question #2, let's look at the dates again:

" The dates of those seven occurrences are:

July 22, 1929
December 14, 1961
January 31, 1966
October 25, 1968
December 12, 1972
April 6, 1998
September 18, 2000"

Just going by memory, the major bear declines followed soon after, within a few months of each of those dates, except, so far, the last one listed.

So it is incorrect to measure this signal by Bob's call to cash in January. This signal is measured by September 18, only one month and one week ago. Judging by the other dates in the list, I would say a fair test of the signal would be a major decline by year-end.

Author: Rande
Date: October 22, 2000 3:18 PM
Subject: All major indices declined for six straight weeks from Sept.

All major indices declined for six straight weeks from Sept. through mid-Oct -- first time in 10 years that's happens. I'd say that qualifies. If it's anything like 98, then better days ahead.

Rande Spiegelman

Author: Roger_Babson
Date: October 22, 2000 4:05 PM
Subject: Re: All major indices declined for six straight weeks from Sept.

In response to message posted by Rande:

Rande wrote:

"All major indices declined for six straight weeks from Sept. through mid-Oct -- first time in 10 years that's happens. I'd say that qualifies. If it's anything like 98, then better days ahead."

I think this rather nicely places the proverbial line in the sand over which either the bear or the bull will soon cross to defeat the other to declare victory.

Okay, folks, let's see your money! What'll it be? The furry one or the one with the horns? Place your bets here! ;-)

Roger Babson

Some Don Hays posts from "Roger's" thread:

Author: ourisman
Date: October 30, 2000 10:00 AM
Subject: Don Hays' analysis

Don Hays http://www.haysmarketfocus.com has posted the following analysis of the market (which I have abridged and edited). I wonder what others think of it:

The bull market for most stocks ended in April 1998. The bear market for all the major indices started in the first week of this year, with the fall of the final man standing being the NASDAQ that finally received its terminal blow at its peak of March 10, 2000.

The price of oil will be much more stubborn than the herd believes, with the possibility that it will rise above the $40 a barrel level.

The U.S. will suffer a recession, with the probable date of total recognition being sometime around October of next year. I believe the recession will be much worse in the heavily export dependent European and Asian Pacific countries, approaching something close to a depression in Japan.

The dollar will remain the strong currency of the world, and the weak Euro will create all kinds of crises.

The NASDAQ could fall to 1800-1900 in the next 8-10 weeks, ending the second of three bear market phases. I expect the total bear market in the U.S. to end about the same time that the recession is totally admitted to, around October of next year. The NASDAQ could drop as low as 1000-1200 in that period.

All the signs are pointing to at least 3-10 years of deflation beginning in the world as those recessionary forces get rid of the Greenspan excesses that have served to delay the war-ending natural tendencies that have always led to deflation.

The long-term US government bond yield will be 4% by October of next year. The 91-day T-bill rate will drop to 2% in that time period, and these low rates will prevail for much of the next 3-10 years.

The greatest bull market in history for the small innovative companies that produce productivity enhancing products (and also produce earnings) will begin sometime either late next year, or very early in 2002.

David Ourisman

Author: Kirk
Date: October 30, 2000 11:22 AM
Subject: Re: Don Hays' analysis

In response to message posted by ourisman:

How would he explain the Financial sector ENDING its bear market about the time he claims the bear started?

http://investor.stockpoint.com/quote.asp...

Sector rotation makes far more sense to me...

Kirk Lindstrom

Author: Roger_Babson
Date: October 30, 2000 4:34 PM
Subject: Re: Don Hays' analysis

In response to message posted by ourisman:

Mr. Hays wrote:

Agree completely.

The price of oil will be much more stubborn than the herd believes, with the possibility that it will rise above the $40 a barrel level.

I somewhat agree here, although a pop above $40 would not surprise me. The inflation-adjusted price of oil today is approximately where it was before the dollar devaluation and first oil spike in 1973-74. Oil is not highly priced by any fundamental measure. We have become spoiled by $12-$22 oil of the past decade and a half.

Oil is still in a bear market from the 1973-80 peak. Oil will not begin to rise steadily until the Long Wave downwave has bottomed with the Long Wave trough sometime in the late 2000s or early 2010s. Thus, a price at or below $32-$34 per barrel is NOT inflationary from a secular perspective.

Oil will again fall in price with the next recession and then rise again with the recovery from ~2003-04 through 2008-09. Thereafter, oil will rise steadily for 15-20 years with the Long Wave upwave and growth-oriented inflation.

The timing of "recognition" of the recession is precisely what I have suggested here (or on the ECRI thread). Japan's debt implosion will exacerbate their recession. I expect that Japan will have to devalue the yen as a last resort in an attempt to artificially create inflation and to get Japanese savers to spend their savings; the tactic will not work as planned, and Japan will experience a once-in-a-century change of regime to a highly more Conservative regime, which few analysts in the West see coming. The younger Japanese are not Social-Democrats, per se; they are more reactionary and impatient with "reform" and the Japanese bureaucracy.

I am not so sure that Europe will suffer more than the US. Demographics suggest that we will experience similar trauma. Europe's social welfare system and homogenous population will permit them to weather the storm with less social tension.

The U.S. is due a "crisis" (Strauss and Howe) and "turning-point" election cycle (like 1793-1801, 1838-36, 1864-72, 1896-1904, 1932-40, and 1968-76) that will usher in a centrist, reform-oriented regime that will shape the socio-political climate for the subsequent two decades. Expect a reform-oriented Republican regime (not controlled by the religious right or by corporate interests) to win the White House in 2004-12.

In this context, don't rule out McCain or one of the cadre of intellectual "successors" to the such centrist Republicans as Warren Rudman or Bob Dole. Colin Powell rises to the top of the list as either a running mate for McCain or at the top of the ticket.

The issues will be reform of financial markets, Social Security, Medicare, campaign finance, taxes, environmental protection, and, perhaps a surprise here, "reform of the press". That is, the press will become less "corporatized" (via regulation) and more diverse and concentrate on more populist issues (less elitist).

The dollar will remain the strong currency of the world, and the weak Euro will create all kinds of crises.

The dollar will remain the dominant currency. Global deflation may cause it to strengthen further for a time. However, as we approach the end of the decade and closer to the demographic timebomb, we will be forced to accept much larger deficits than ever, as well as to accept lower trend real GDP with higher inflation (3%-4%) through the period of the 2020s.

The NASDAQ could fall to 1800-1900 in the next 8-10 weeks, ending the second of three bear market phases.

I expect it to take until the spring of 2001 for the NASDAQ to break 2000.

I expect the total bear market in the U.S. to end about the same time that the recession is totally admitted to, around October of next year. The NASDAQ could drop as low as 1000-1200 in that period.

Reasonable call. But this will be the end of the "cyclical" bear market within the longer-term "secular" bear market that will not end until the early 2010s. We are likely to suffer another severe "cyclical" bear market from 2009-09 to 2011-13 and a recession from 2009-10 to 2012-13 before the secular bear market is over and the next Long Wave growth period is underway.

Very good point. I agree. Debt-induced deflation is ahead, as a result of a protracted period of debt workout from the excessively low natural rate of interest maintained by the largest reserve banks since 1994-95.

Still, (sounds counterintuitive but it is not) the rate of change of deceleration of inflation may actually bottom in the next 2-3 years (along with the final rate-of-change bottom in commodity prices, including oil). But the resulting rate of change "acceleration" of inflation (even with "asset deflation") will exacerbate the valuation problem for stocks and reduce the "real" return from the 1998-2000 stock price highs for a decade and a half or more.

Agree here, too, but not necessarily on the timing. It may take until 2002 for long rates to reach 4% (or less later). T-bills may eventually reach below 1% in the worst part of the financial malaise.

Small stocks will indeed have their day, but I think he is early. Small stocks do the best at the first two short business cycle of the early secular inflationary period of the Long Wave upwave. Thus, I expect that we will have to wait until the next bear market 2009-13 for small stocks to shine for 7-10 years thereafter.

Hays has an excellent track record and a profound knowledge of economic and financial markets history, and I urge everyone to consider seriously his analysis.

Thanks, David!

Roger Babson

Roger said....

Okay, folks, let's see your money! What'll it be? The furry one or the one with the horns? Place your bets here! ;-)

Well in retrospect - looks like the furry one won.....but the one with horns will have it's day again!.....Jen

-- posted by JenL_2

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