Yours truly began self-managing his and his wife's IRA stock portfolios with a discount broker in January, 1987, moving funds from Dreyfus Mutual Funds. That year was like a final exam for a young investor with 7 years of experience in the financial markets. This period now reminds me of pre-crash 1987.
What was happening as the year wore on is that more and more stocks, or stock groups, ran up and then collapsed hard. The averages kept moving up, but the underpinnings just kept looking weaker. Then of course there was an accelerating down-move that simply brought the averages back to their multi-year uptrend line, and the bull market resumed. Shortly before the crash of 1987, Barron's featured an article about a new trend, which was of the sudden riches that young people in Wall Street were enjoying. Sound familiar, with financial companies paying out huge bonuses again?
We are now experiencing what looks like pre-crash 1987-type action. Just as the skeptics have been pointing out, the move off the March 2009 lows has been a low-volume affair. Just today, ARO (Aeropostale) and CVS have had gap openings sharply down on huge volume. Other stocks have done the same recently, and others that would appear to be of high quality such as Northern Trust and FPL have just both collapsed/eroded into bear configurations. And, the chart of Treasuries has just turned bearish. Just as are the financials that led the averages up, these and other gapping-down companies of late have little or no dividend yields. So the longer-term holder of these stocks is left sucking air. CVS was a high-30s stock. What does its owner do when CVS, with little or no dividend yield and selling at over 100 times tangible book value, is suddenly a high-20s stock?
The salesmen, touts and the like for the stock market tell you--correctly--that Treasuries are a risky investment. Their solution: buy CVS and the like because of this and that reason. What they don't tell you is that CVS usually reports a negative tangible book value. This is allegedly because of purchase accounting. But maybe their modus operandus is to overpay for acquisitions to create the illusion of growth in what is not an especially profitable business? If investors don't see a sustainable dividend flow, or a Microsoft-type build-up of cash on the balance sheet, they are at the mercy of being left wondering whether to buy, sell or hold on a 21% down day for the stock when the averages are soaring.
At least if you hold a 10-year Treasury yielding 3.5% for 2 years, you get back 7% and then only have to hold for 8 more years to get a do-over. A stock is forever. Paradoxically, that "foreverness" makes people trade it, because for all they know, CVS will go down every year for the next 20 years.
I recently read an online article about how many bears of 1-2 years ago have switched to the bull camp. On the other hand, I haven't heard of a bull of 1-2 years ago who is now bearish. Yet the energy is to the downside as in 1987.
Plus you may have noticed that unlike in 1987, the path of least resistance as per trendlines is down for the stock averages, especially adjusted as they really should be for the general price level.
I still like McDonald's for the long haul, but I liked it better at $56 than at $61.
With today's soaring productivity numbers, it is looking increasingly likely that the headline news will become "less good". The structure of the stock market makes it look to me increasingly as though a more general "correction" will follow the volume of leaders such as CVS to the downside.
One also wonders if the profit-taking in gold today is a warning for stocks, given that gold has been the leader; or is it the beginning of a welcome turn toward real rather than monetary wealth creation via human ingenuity and effort.
Copyright (C) Long Lake LLC 2009
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