Market Indicators - Investor Sentiment

» Slick - Jen

LOL---good rationalization---market be damned---I'm gonna have my expensive caffeine anyway.

Slick

-- posted by Slick

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» Gene - 5/1/2000 - Investor's Sentiment Readings

"You pays your money and you takes your chances" as my mother used to say and that should be the watch words for this market - IMHO. We certainly have seen all sides in full war cry on the various CNBC shows lately and their stated trading ranges of what I calculate to be +/- 20% for crying out loud! What kind of predictions are Dow 9,500 to 13,000 and NASDAQ 3,300 to 5,000? But to these objective and wizened investment eyes, there appears to be something for all persuasions of the Sentiment Reading categories so "You pick'm" as the local bookmaker will say.

The Bulls say nothing has changed in the Economy, ergo the Bull market is still in place and this is just "the pause that refreshes." Their advice is to just be selective in your stock and fund choices along with expectations for returns.

The Bears were able to feast on the highly margined and a few defenseless high valuation dot coms (and what a meal they had for 4-6 weeks!) and with a number of dot-coms heading into cash burn rate oblivion, they feel vindicated. Their advice is just to be selective in your stock and fund choices along with expectations for returns.

And lastly, the Clueless correction folks have all Indices in negative territory thru April so they feel their waffling and meandering are justified. Their advice is to just be selective in your stock and fund choices along with expectations for returns.

Since they all agree on the resulting advice, we admitted to being a bit worried here since that much consensus will breed a some form of contrarian results! Like maybe a return to all time highs with Momentum Investing then a bigger crash, or a Cyclical Bear within a Secular Bull Market that mauls our portfolios or some other disastrous result. But then as will happen every now and then maybe the consensus is right this time and it does sound logical and rational to these ears.

When we first saw the similarities in that advice, we admit to getting a tad worried. Then when the Sentiment Readings came in and were starting to get as volatile as the markets we realized we are now into a "Watch what they do, not what they say" type of situation. Lots more fun that way as we were starting to have trouble reading the tea leaves and to make comments that will hold up for more than, oh say more than 30 to 45 minutes! But give us a day or two to digest our own April YTD portfolio results and what the ordinary folks are doing and we will be move off the dime and be off running to the investment advice & comment races.

Is it just me but after reading all the stories on the Tiger and Soros Hedge funds that are "quitting the business" and saying they don't understand this market, are using it as an excuse? They always claimed that:

When Volatility is thy name
We profit from that game

Somehow we are feeling that if they had paid attention to several of Bob Brinker's rules, they may have had a chance at survival. Like Bob's 4% rule, (Tiger's > 20% ownership of airline stock for instance), don't chase performance (Soros Bio Tech and Dot coms). Looked like a lot of Fear and Greed was working at both Hedge Houses and a different style at work in the New Millenium.

Is it my imagination but does it appear the closer Bob's predictions come to being in the ballpark, the more anti-Bob charts and comments appear hereabouts? Let's face it, these two sites make the warring Montingue and Capulet families from Romeo and Juliet look like the Waltons in their charges and counter charges of intrigue and disingenuousness! Spare us the Jerry Springer food fight and get back to adding value to the lurkers et all at both sites who just want to make a buck :>)

The Rolling 4 week Sentiment average covers the period from 4/10/2000 thru 5/01/2000.

It is also important to remember that Bob Brinker considers a 70% ratio number to be neutral and is only one of his four main indicators with the other three being Economic, Monetary and Valuation.

From Barron's 5/1/00 Page MW 85:

Investor's Intelligence

Bulls = 50.5% Last Week = 54.9% Two Weeks = 56.9%
Bears = 29.3% Last Week = 28.3% Two Weeks = 26.7%
Corr = 20.2% Last Week = 16.8% Two Weeks = 16.4%

% Bulls/(% Bulls + % Bears)= Sentiment %

50.5%/(50.5% + 29.3%) = 63.28%%

Rolling 4 week average = 65.65%

Weekly Bullish Sentiment %:

Week 04/24 = 65.99%
Week 04/17 = 68.06%
Week 04/10 = 65.28%
Week 04/03 = 64.79%
Week 03/27 = 67.84%
Week 03/20 = 64.33%
Week 03/13 = 65.93%
Week 03/06 = 64.84%
Week 02/28 = 64.42%
Week 02/21 = 66.63%
Week 02/14 = 65.60%
Week 02/07 = 63.78%
Week 01/31 = 68.17%
Week 01/24 = 67.08%
Week 01/17 = 67.37%
Week 01/10 = 64.84%
Week 01/03 = 67.07%
Week 12/27 = 64.41%
Week 12/20 = 64.43%
Week 12/13 = 63.83%
Week 12/06 = 64.87%
Week 11/29 = 64.16%
Week 11/22 = 62.61%
Week 11/15 = 55.29%
Week 11/08 = 52.70%
Week 11/01 = 51.70%

07/20/98 Bulls = 52% Bears 24% for 68.42%
10/12/98 Bulls = 38.5% Bears 42.7% for 47.41%

Gene

-- posted by Gene

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» JenL_2 - Good Job Gene!

Thanks again for one of your Gene-Special Takes on The Market. Always look forward to reading the Sentiment thread.

<img src="http://www.geocities.com/jeninvestor/emo..." width=250 height=250>

....Jen

-- posted by JenL_2

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» tele - The Plastic Surgery Indicator

My wife has her own market/economic indicator. We take a 2 hour walk on the beach every other day, and have done so for the past 10 years. Last week my wife commented that she had never seen so many skinny women that were - um - so well built as in the last 2 years. I guess I've noticed this too, but had my mind on things other than the market/economy at the time (g).

-- posted by tele

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» Rande - Great stuff Gene.

Great stuff Gene. Keep it comin'.

-- posted by Rande

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» Gene - Jen, Rande and Tele

Jen & Rande - Thanks and it looks like there is lots of market stuff now going on so we certainly won't lack for stuff to comment on. Like the Time / Warner & Disney squabble and folks not getting major network shows - shades of Governement shut down. It maybe causing concern about another "Monopoly" for the Justice Department to keep the lawyers fully employed!

Tele - I'd be careful there with the eyes (:>)as today's news contained a story of a woman in Louisiana who ran over her husband with her car (took her 3 tries) AFTER she caught him looking at another woman in Church!

Gene

-- posted by Gene

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» SteveT - Gene

Appreciate your data and maybe even more your wisdom concerning the anti-Bob comments that can go on from time to time. I for one pledge to watch it and try to improve.

-- posted by SteveT

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» Gene - Kirk

Actually I had a comment but realized that by the the time my posting was done, it was only 48 hours to the Wednesday release of this week's figures so I held it back. I didn't think a 68% to 63% swing over 3 weeks between Newsletter writers was much of a newsworthy item when the NASDAQ et al were bouncing around the big % they were lately.

What did catch my eye and is worth a comment was the drop to 50.9% actual Bullish for those guys. Why? Because of the "Watch what they do not what they say" I mentioned. They are saying less Bullish BUT are POURING $$ into this market to either buy those perceived bargains or else prop up their stock prices for a sell.

Therefore I thought that one more week to get the April YTD $$ inflow to see what the results got them was worth looking at before lowering the boom on them! Why again? Methinks some REAL window dressing may be going on but I'm willing to look at what Galvin et all are saying for Tech buys.

Gene

-- posted by Gene

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» tma500 - Well, Your thoughts please (if you don't mind) Tara

1929-30 vs. 1999-00
by Dr. Kurt Richebacher

April 28, 2000

THE WORST IN HISTORY

The economic contraction that started in 1929 was the worst in history. Given the scale and importance of this event, it is remarkable how little is generally known about both its course and its causes. Most probably, this largely has to do with the predominant conviction that the central banks and governments of today possess the superior wisdom and the better instruments to keep everything under control. Why bother about foolishness in history?

In principle, there are two diametrically opposite explanations of the unusual severity of the Great Depression of the 1930s. One strongly associated with the leading economists of the Austrian School (Mises, Hayek) regards the Depression as the unavoidable, disastrous end of the unsustainable, structural maladjustments which the monetary and financial excesses had inflicted between 1927-29 on the economy and the financial system. In this view, the severity of any depression is largely predetermined by the magnitude of the economic and financial maladjustments that have accumulated during the preceding boom.

This view about the ultimate cause of the Great Depression predominated among economists around the world until the early 1960s. But one book, appearing in 1963, radically changed that view, at least among American economists. It was Friedman's and Schwartz's classic, Monetary History of the United States. This book categorically postulated that there had been neither inflation nor any money or credit excesses in the 1920s that could have caused the economy's collapse between 1929 and 1933. From this followed the conclusion that the Great Depression essentially had its crucial cause in policy faults that were made during these years.

To quote a decisive passage from the book, "The monetary collapse from 1929 to 1933 was not an inevitable consequence of what had gone before. It was the result of the policies followed during those years. As already noted, alternative policies that could have halted the monetary debacle were available throughout those years. Though the Reserve System proclaimed that it was following an easy-money policy, in fact it followed an exceedingly tight policy."

For American economists, the views expressed in this book on the role of monetary policy in precipitating the depression have become standard history and the standard explanation of the Great Depression. One important, inherent conclusion of this monetarist approach for the future was the comforting message that sufficient monetary easing is enough to prevent a serious recession after a boom. This is, for sure, one assumption of central importance behind the currently prevailing bullishness about the U.S. economy.

Considering the still-booming economy and the reigning optimism about the economic outlook, the Federal Reserve responded in October-November 1929 with admirable promptness to the crash. On Nov. 1, when the selling panic was barely one week old, the Fed slashed the discount rate to 5% and a fortnight later to 4.5%. On Oct. 25, one day after Black Thursday, it had instantly reduced its buying rate on acceptances from 5 3/8% to 5%. This was followed by a rapid sequence of further cuts to 4% on Nov. 21. Yet the economy collapsed across the board with unprecedented and unbelievable rapidity like a house of cards.

THE ROLE OF THE CRASH

We have always favored the explanation of the Great Depression tendered by Austrian theory. Of the various considerations speaking in its favor, one appears to us compelling, and that is the extraordinary speed and breadth of the economy's plunge. Consider that real GDP fell in 1930 abruptly by 9%. Such a virtual collapse can only happen to an economy that is badly out of balance and therefore highly vulnerable. The big contraction in the money supply by 42% to which Milton Friedman attributed the Depression only started in late 1930, not in precedence but in coincidence with the economic collapse. The one big event that had preceded the economic collapse was the start of the stock market crash.

Yet the role of the crash in precipitating the economic and financial disaster is highly controversial among American economists. It is estimated that the stock market crash involved a wealth destruction of about $85 billion in total. Capital losses in the first wave of the crash in late October and early November 1929 amounted to about $25 billion. This compares with a decline in the stock of broad money between late 1930 and end-1933 by $13 billion. But for Milton Friedman, the money supply's shrinkage was the one and only decisive mechanism that drove the economy into the protracted, deep depression. And what's more, this monetary shrinkage in his view had no other cause than coincident, bad policies of the Fed.

We would never dispute the decisive importance of the following, drastic monetary contraction during those years, but it grossly defies any logic to discard the prior, rapid and huge wealth destruction through the stock market as almost a non-event. In the logic of the Austrian theory, the booming stock market had operated to prolong the boom by unduly boosting wealth-related consumer spending. As soon as stock prices collapsed, this artificial element in consumer spending evaporated with a prompt and, heavily negative effect on economic growth in 1930.

In reality, personal wealth is not the only victim of such a crash. Overall liquidity is the other victim. It is a gross mistake to measure liquidity only by changes in the money stock. Far more important is the liquidity of assets, financial assets above all, in the markets. In times of loose money, low interest rates and booming markets, corporations, financial institutions and consumers tend to reduce their cash balances in favor of financial assets, regarding them under given bullish market conditions as highly liquid assets.

As long as the stock market kept booming, the vast stock holdings represented, indeed, highly liquid assets for their owners. But the plunging stock prices transformed these huge stock holdings abruptly into illiquid assets which could only be liquidated at a heavy loss. Considering the amount involved in this wealth and liquidity destruction, we don't have the slightest doubt that the stock market crash was the most important, immediate cause of the ensuing depression. The pattern of the depression might well have been radically different from what happened had it not been preceded by the stock market catastrophe. But this implies, indeed, that the Great Depression primarily originated in the excesses of the preceding boom.

DISPUTED CAUSE

With these questions and aspects in mind, we have drawn a comparison between events and excesses in the late 1920s and in the late 1990s. How do the monetary and credit excesses in the two periods compare in kind and scale?

Before we come to the tremendous differences, first an important common feature: In both periods, credit creation took place overwhelmingly outside the banking system - that is, through the securities markets and the money markets. Also common to both periods is the complete absence of Federal government borrowing. All the borrowing and lending that took place was on account of the private sector, businesses and consumers.

Next, we have to point out that credit is the most neglected aggregate in American history books about the 1920s. In their voluminous Monetary History of the United States, Friedman-Schwartz don't bring one single figure about credit growth, but instead pages and pages of detailed figures about money growth from month to month. They don't even mention the ill-reputed brokers' loans for stock speculation, totaling $8.5 billion at their peak in September 1929. Consumer borrowing in the form of installment loans played a great role in fueling the consumer spending boom in the 1920's, but statistics about their extent and source of finance are non-existent.

As explained in past letters, one critical measure of credit "excess" is growth of credit relative to the simultaneous nominal GDP growth as the statistical denominator of growth in economic activity. During the four years from end-1925 to end-1929, U.S. GDP grew by $13.9 billion, or 15.3%, from $90.5 billion to $104.4 billion.

Over this same period of four years, corporations issued securities for $27.4 billion, of which more than $10 billion was equity. Total bank loans increased by about $8 billion during these years, mostly for mortgage lending. Further considerable lending took place through institutions outside of the banking system, chiefly savings banks and building and loan associations. However, no statistics are available. The habit of America economists to focus exclusively on the money supply and to ignore credit has a long tradition.

Yet despite the lack of comprehensive statistics, the available evidence leaves no doubt that there was rampant credit creation. This recognition is very important because, in striking contrast, the money supply grew only modestly. Between 1925-1929, broad money grew by no more than 10%, from $50 billion to $55.5 billion. Demand deposits at banks in late 1929, at $22 billion were no higher than in late 1925. But this weakness in money growth, as already mentioned, had its cause by no means in lacking credit expansion but in the fact that credit creation occurred overwhelmingly through the securities and money markets, essentially involving no money creation. Stock prices, at any rate, more than tripled, and the total value of all shares listed on the New York Stock Exchange soared from $27 billion in 1925 to $89 billion at their peak in early September 1929.

THE BANKS FLOOD THE MARKETS

This brings us to one of the most important and most striking differences between the boom of the 1920s and that of the 1990s. It concerns the financial strategy of corporations. At the time, corporations took full advantage of the abundant availability of cheap capital and issued bonds and stocks vastly in excess of their investment needs. In 1929, almost 70% of total corporate issues in securities were in stocks. To quote Schumpeter on this point: American corporations "eventually entered the Great Depression with a financial outfit which was nothing short of luxurious." Many of them could finance their investments for years to come with the funds they had raised during the speculative mania of 1928-29.

What did the corporations do with their surplus cash? Well, they did put it straight back into the stock market, but through a different channel. Instead of buying stocks for their own account, they lent these funds in large part as call loans at 10% and more to brokers, who financed soaring margin loans for the stock speculation of their clients. In the last 12 months before the crash, brokers' loans increased by 50%.

However, this over-liquidity of corporations amassed from the heavy issuance of securities had further monetary implications. For the banks it entailed the loss of their traditional chief borrowers. As the lending to corporations came to a complete stop, the banks had to look for alternative sources of revenue. After all, they embarked aggressively on two new outlets: investments in corporate bonds - and stocks through affiliates – and security loans, that is, loans to buyers of stocks and bonds against bonds and stock collateral. In the last analysis, it was the banking system that fueled the boom in the bond and the stock market, partly though purchases for their own account, partly through loans to other buyers of stocks and bonds.

To cite from a contemporary report by the League of Nations about this development: "The credit expansion after 1927 in the United States went largely to the financing of speculation. According to available statistics, no less than 86% of the total increase in bank credit was used for that purpose. Thus was laid the foundation for the stock-exchange boom which followed."

EXCESSES COMPARED

Now to the present, with the postulate of the Austrian theory in mind that every economic and financial bust is in large part a function of the scale of excesses in the preceding boom. The gauges to look at are self-evident: first, stock valuations; second, money and credit expansion; and third, economic fundamentals.

As to valuations, the collapse of the stock market started in early September 1929 with the price-to-earnings ratio at a level of 13.5, after a high point of 16.2 in January. In comparison with a traditional 10 to one ratio, these valuation levels unusually high looked at the time. Measured against the ratios of today - around 29 for the S&P 500 index, around 35 for the S&P Industrial Index and more than 200 times earnings for the Nasdaq - those of the late 1920s appear almost insignificant. To mention another measure: Before the 1929 crash, the total capitalization of listed stocks tallied with about 100% of GDP. This time, it has been almost 200%. In short, present stock valuations vastly exceed those in the late 1920s.

Next: underlying money and credit expansion. How do they compare for the two periods? As already mentioned, money in its broadest measure increased during the four years between end-1925 and end-1929 by 10% while narrow money (Ml) stagnated. For comparison: During the four years from end-1995 to end-1999, broad money (M3) has grown by a stunning 41 %, or more than twice the simultaneous GDP growth.

If money growth has been record-breaking, it is wildly outdone by credit growth, which, like in the 1920s, is overwhelmingly taking place outside of the banking system. Mr. Greenspan has presided over a credit explosion that simply defies reason and comprehension. Looking exclusively at the inflation rate, he readily sanctioned a free-for-all in credit creation. In 1995, total financial and non-financial credit had expanded by a little more than $1 trillion. After a rise to $1.4 trillion in 1997, credit flows abruptly swelled to more than $2.1 trillion in 1998 and further to $2.25 trillion in 1999. In comparison to GDP growth of $459 billion in 1998 and of $500 in 1999, credit creation has been truly running amuck.

THE GREAT DIFFERENCE: CORPORATE FINANCE

Yet there is still another critical and dramatic difference between the two periods to be noted. It concerns corporate finance. In the late 1920s, as already expounded, American corporations frantically bolstered their liquidity by issuing equity vastly in excess of their financial needs for investment spending. In the past years, American corporations have pursued the diametrically opposite policy. They frantically depleted their liquidity and embarked on an unprecedented borrowing binge to finance acquisitions and repurchases of their own stocks. For the S&P 500 companies, for example, the debt-to-equity ratio has shot up over the last 10 years from 84 to 116.

For sure, a fascinating difference. But why? Of the two patterns, the one of the 1920s hardly needs explanation. Bolstering liquidity in times when booming markets offer cheap capital for the long haul, is just traditional corporate financial strategy. Yet the massive issuance of new stock may well have played an important role in breaking the boom in 1929.

The puzzling part is what has been happening in the late 1990s. Even though high tech companies are heavily tapping the stock market with IPOs, the corporate sector, as a whole is the big net buyer in the stock market on account of soaring acquisitions and stock buybacks.

Purchasing shares with record-low dividend yields around 1% at sky-high prices above book value with borrowed money that costs at least 6-7% is clearly at odds not only with corporate tradition but also with a reasonable profit calculation. In short, it's a folly. But the widespread adherence to this folly suggests a general compelling reason which is, indeed, easy to identify: unprecedented obsession with short range maximization of shareholder value.

Plainly, under this imperative corporate governance philosophy has radically changed in the United States. But for the better or for the worse? The bullish consensus view claims dramatic improvements in corporate efficiency and takes it for granted that this change - in conjunction with the new technology – is essentially at the heart of the U.S. economy's astonishing, recent growth performance.

Yes, corporate strategy and policy in the new market climate have in many ways radically changed. In their frenzied endeavor to increase shareholder value, corporate managers resorted mainly to two devices. Reckless financial leveraging and a cost-cutting mania. Financial leveraging implies to run down cash balances and to substitute debt for equity. The emphasis on cost-cutting as a means to raise profits and share prices has implicitly fostered mergers and acquisitions in preference to new capital investment. Under this new American capitalism, buying existing capacity has precedence over creating new capacity, while paper wealth creation through booming stock prices has precedence over wealth creation through real capital investment. And the use and allocation of real resources has led to a major shift in the composition of GDP towards private consumption, rising to its largest ever share in current GDP growth.

NEW PARADIGM OR BUBBLE?

What are we really looking at in the United States? A supply-driven new paradigm economy or history's greatest financial bubble masking the economy's bad fundamentals? Comparing present economic and financial conditions with those in the late 1920s is a shocking exercise. Consider that the U.S. economy in the 1920s had zero inflation for years, owing to high productivity growth. It had a persistent surplus in savings and in foreign trade, and it had strong profit growth in 1928-29. Not to forget moreover the opulent cushions of liquidity that the corporations had accumulated through stock issuance while the stock market was booming. Is this unprecedented prosperity or unprecedented illusion?

And how do these economic and financial fundamentals look today? In short, they make miserable reading in every single respect. All of them are negative. What's more, negative in the extreme. Despite substantial statistical manipulations the U.S. inflation rate is above 3%, the highest rate among industrial countries. America has the lowest domestic savings of all time and the biggest trade deficit of all time. On top of being a low-saving, low investment economy, America is now a capital-consuming country, reflected in the fact that the current rise in foreign indebtedness exceeds net domestic investment.

Ominously, corporate profits, as measured by the official income statistics, have been virtually flat for more than two years, even though the economy has been booming at record growth rates. The stampede of both corporations and private households out of liquidity and into debt during recent years is without precedent.

First question: Is the incredible stock market boom a reflection of real value created in the economy, or is it a purely credit-driven paper bubble? Second question: What are the chances that the Fed will be able to prevent a devastating crash of the stock market and engineer a soft landing of the economy?

Our preliminary answer: The accumulated financial excesses and economic imbalances are far too big for such a happy end to be possible. Their huge scale essentially implies a disastrous bust. Under the influence of the monetarists, most American economists hold the view that it lies in the hands of a central bank to prevent any such bust from happening by simply "printing money." But by focusing narrowly on the banking system and the money supply, they overlook two snags. One is the monstrous scale of credit creation to which the U.S. economy and its financial system have become addicted to in the last years, and other one is the channel of this credit creation. Just as in the 1920s, it is overwhelmingly taking place outside of the banking system, through the financial markets Essentially, any disruption in these financial flows has the very same adverse effect on economic activity as a disruption in bank lending, irrespective of what is happening to the money supply. The usual pattern and early indicators of such disruptions are declining asset prices and widening interest rate spreads between papers of different quality. Considering the vast sums involved in the markets, it should be clear that the biggest danger to the U.S. economy looms in the financial markets, including the currency market and the derivatives markets.

America’s confrontation will begin when the economy shows more distinct signs of slowing and disillusion about the economy and Mr. Greenspan sets in. We wonder whether this may happen in the second quarter or in the second half of this year.

Dr. Kurt Richebacher is editor of The Richebacher Letter, published by The Fleet Street Group. Subscription inquries call (888) 737-9358.

-- posted by tma500

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» MadFrank - my thoughts

I'd say he's a bear. Add one more to the bear column.

-- posted by MadFrank

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