In my February 2000 newsletter, I mentioned the near-term possibility of the DOW testing 10,000, which could represent a bottom of the trading range. Well, on 2-25-00 it tested and closed below 10,000 at 9,862.12 and has since moved up to 10,367.20. This may represent a near-term bottom and a resumption of the bull market within the DOW and a rally to 12,800.
As I discussed within some of my market alerts, I decided not the trade the last portion of the short trade from 10,400 to 10,000 due to the limited profit potential and not the trade the long side due to the uncertainty of the resumption in the bull market. By early April 2000, I should have a much clearer picture of the wave pattern analysis and know with more certainty if we have bottomed near-term and may consider buying the DOW or the S&P 500.
Presently, there will be more profit potential with higher levels of certainty in currency spreads as funds are reallocated to other currencies due their attractive bond yields. Also, with the continued concern of inflation and high crude oil prices, there will be opportunities in shorting the T-Bill market (Eurodollars) with the expectation of higher interest rates in the near-term.
Crude oil prices vs. Interest Rates increases:
It is estimated that the rise in crude oil prices to above $30 a barrel translates into a $70 billion drag on the US economy and possibly $200 billion worldwide. So, with some respect, the rise in crude oil prices has done some of Alan Greenspan’s work of raising interest rates for him without actually doing it. The equivalent interest rate level to accomplish the same level of braking impact would require a Fed funds rate of between 7 3/4 to 8 percent and the current rate is only 5 3/4 percent.
With OPEC considering raising oil production by 1 1/2 to 2 million barrels a day, there could be a temporary reduction in oil prices, but the increase is “too little, too late” from keeping fuel prices from rocketing to $2 a gallon or higher this summer. The problem being that normally there are substantial buildup’s of gasoline inventories between December and March due to reduced level of travel during the winter months. Well, this time last year, gasoline inventories stood at 229 million barrels, and with a five year average of 216 million barrels. Today, inventories stand at 197 million barrels or 14 percent below last year and 9 percent below the five year average.
As demand swells when the driving season swings into high gear, refiners will increase crude oil prices to the mid-30’s. Obviously, I don’t see prices staying in the mid-30’s per barrel, but see the year 2000 having an average crude oil prices of between $26 to $27 per barrel compared to 1999 average of less than $20 per barrel, which is a substantial increase of 35 percent.
Technology/Internet Revolution of today vs. Automobile Revolution of the 1920’s:
The comparison between these two periods offer a number of important similarities. Today, the technological revolution has created a new world of computers and automation which has even allowed old-style companies to improve productivity with fewer employees. Even when these old-style companies fired employees, restructured and downsized, the new high-tech and Internet firms have taken up the unemployment slack. Therefore, employment remains high, consumers remain confident, and spending remains robust, and is being referred to as a “new era.”
In the 1920’s, consumer confidence was at record levels and the belief that good times would last forever, was also based on a technological revolution — the introduction of electricity into everyday lives. This was obviously even more important then the introduction of personal computers and the Internet. The huge boost in productivity brought about by factories run on electricity, plus new production methods (like Henry Ford’s use of the assembly line), allowed fewer employees to produce increasingly more goods.
During this time period, there were 3,000 new automobile companies launched, with their starting capital being provided by enthusiastic investors hoping to find the next Ford Motor. There were a continuos stream of new electric products and patents that had promising new-tech startups all over like Marconi, Emerson, and RKO, which are similar to the Microsoft’s, Intel’s and Yahoos of today. The era also have it’s Bill Gates and Warren Buffet in the form of John D. Rockefeller and Joseph P. Kennedy where one was an industry builder and the other a sharp investor.
After the major bear market of 1929, it became clear that technology revolution create longer economic expansions, but also allows for excesses in the economy and the market to reach extremes. Unfortunately, larger declines are required to correct those excesses.
Today, we actually have a phenomenon for two noticeable different markets The old market, the DOW and S&P 500 operate where earnings, dividends, valuations and interest rates are still considered relevant, The new market, NASDAQ, has the embodied impression that the bull market will never stop, earnings or lack there of, don’t matter, and valuations are of no concern. Nothing seems to matter but the hype and momentum. With this euphoric state, you can confidently buy a stock that is going up, regardless of how high it’s already risen, and reasonably expect someone to be excited enough to buy it from you later at a much higher price. Of course this scenario didn’t exactly play out in previous bull markets, regardless of whether they were in stocks, real estate, baseball cards, Cabbage Patch dolls or Beanie Babies.
In addition to the concern of oil prices and the similarity of technological revolutions, it is also very important to keep in mind that we are in a global market now. The only economy showing signs of strong growth is the US and there are a number of foreign countries depending on that continued high level of growth. The current trade deficit stands at $705 billion and this imbalance or dependency has only been reduced in the past with a weaker dollar policy and reasonable stock levels.
The bond market is already showing an inverted yield curve, as discussed in the February 2000 newsletter, which is normally signs of a slowing economic expansion and the prelude to a stock market decline.
As discussed in prior newsletters, a majority of stock actually topped in April of 1998 even with the Dow hitting news highs on January 14, 2000. This high level of divergence or complacency will continue until investors recognize that their losses are real and are continuing to mount. It will likely be at that time when many investors attempt to exit the market. However, given the fact that blind stock bullishness has become ingrained into the psyche of most individuals, it maybe unclear how investors will react when we actually start a major decline.
It is important to diversify and hedge your existing portfolio should we start a major stock market decline. Should you have any questions in how the derivatives/futures market can accomplish this for you or have further questions in regard to the currency spread discussed at the beginning of this newsletter, please feel free to send me an e-mail with your question to JOHNTMOIR@aol.com or call me at (775) 841-9400.
John T. Moir
Wavetech Enterprises, LLC