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| Mr Biz on DougStephan.com |
BOCA RATON, FLA. (Aug.
1, 2002)--Fundamental and technical realities are
now in place on Wall Street and Main Street, for an economic recovery in the
remainder of 2002 which recoups much of the earlier year's losses.
I just smile politely when people parrot, "Well, of course nobody can
predict the market...." because in a world of rocket scientists,
practitioners, and savvy veteran traders and floor specialists, the
macro-trends can be, and have been repeatedly predicted by the brave few who
are contrarians for many decades.
At the end of January my
forecast was for the broad, investment-grade,
equity market to be down single digits for the year, later refined to down 6%
to 9%. A look at the S&P 500 averages this week leads me to this further
prediction:
--After a few detours,
a strong year-end rally will boost the Dow, S&P
100 and S&P 500 up another 20 per cent or more from current levels. The
S&P
500 should finish Year 2002 around 1080 which would be 90 points off of highs
of 1170 at the start of this year. This would put the conservative,
investment-grade, middle America, growth and equity-income mutual fund type
of investor down just 7.7% for the year. After the roller coaster of the
past 36 months, a -7.70% ending to 2002 will be refreshing to many investors.
You will notice I leave the NASDAQ Composite out of my calculations.
Reiterating a thread in many of my columns, I feel that NASDAQ is a
two-tiered or bifurcated market. At the top are a handful of institutional
core holdings--a very few--which include Microsoft, Dell, and Intel. The
rest are too-often artificially manipulated by news touts, foolish amateur
day traders, and unscrupulous boiler room market makers. Homey don't play
that game.
Here's my theoretical calendar
and the rationale for each scenario.
DOW RALLY--with corporate and personal bankruptcies still at monthly,
and year-over-year high levels, a new Dow supporter above 8,500 will move
slowly up, but involve plenty of trading range profit-taking.
SEPT. FEARS--The long Labor Day weekend, the early Jewish High Holy Days
this year, and the observance of the first anniversary of the September 11th.
2001 murders, will dampen optimism on Wall Street. It will be a good month to
stay on the sidelines or take a vacation (which I'll do). Historically, back
to school obligations, college tuition bills, and return from summer
vacations, makes it a tough rally month.
OCTOBER SURPRISE--Every
October the financial news media feels the need
to replay the mandatory "stock market crash" stories of 1929 and 1987.
This
year the stories will be augmented by a reminder that the would-be "recovery"
can be wiped out by a cataclysmic event. Individual investors who have no
stomach for volatility will again be frightened away.
INTERNATIONAL EVENTS--Saber-rattling
over Iraq, and other international
events will either prop up the global view of the United States leadership as
a "safe haven" for money, or send the dollar tanking again as the
Euro, Swiss
Franc, Yen and other currencies are favored by overseas investors and
speculators. By year's end conventional wisdom will show that the United
States and its equity markets have a remarkable resiliency.
INTEREST RATES--Last autumn
we speculated that in a year mortgage rates
could very well be exactly where they were in October of 2001. It now looks
as if rates in August of 2003 could be very close to where they are right
now, in August of 2002. If anything, perhaps a 100 basis point ( 1 per cent)
rise in long-term bond and mortgage rates is probably already "in the
market." Such interest rate stability helps long-term corporate and
government infrastructure expansion plans (municipal bonds), but it also
helps financial institutions whose interest rate hedges can stay in place
with no adverse development to portfolio returns. Recent hints of a "real
estate bubble" include numbers showing the prime areas of Atlanta and Phoenix
were not as positive as first thought. In these cities, and I suspect
elsewhere, the housing boom has been predominantly in the upscale and
super-upscale market. Lower and middle-income financing and refinancing has
slowed, and construction for all but the fanciest homes of former Worldcom
executives here in Boca seems to be easing up as well. The final step in
helping the stock and bond markets will be a flight from overpriced REITs
(real estate investment trusts) which historically pay too much for property
in boom cycles, and cut dividends and lose principal value in down cycles.
The long-term investor (5-20 years or more) should keep in mind that the
Great Depression might have been triggered by the Crash of '29 but the market
didn't bottom until 30 months later in 1932.
In August 1982 after a
decade of doldrums the biggest Bull Market in
history got started. Briefly interrupted by the Crash of 1987, the investors
who did not panic saw their annual total returns actually in the plus column
by the end of 1987.
All of this points to the
final stages of a Bear Market which in a
declining NASDAQ environment was worsened triggered by a bad announcement by
Proctor & Gamble (NYSE) in March of 2000, almost 30 months ago. A
three-to-four year pullback in every 12-16 year time frame weeds out lots of
Wall Street garbage. This time some of that garbage might end up in the
Federal Prison System. But at the end of the year, I look for a modest
negative result, and a firm catapult for a 2003 Raging Bull.
--
Mark Scheinbaum is chief investment strategist for Kaplan & Co. Securities,
Boca Raton, Fla., members Boston Stock Exchange, NASD, SIPC, fully disclosed
correspondents of Bear, Stearns Securities. Kaplan handles more than $600
million in institutional, corporate, and private investments, and runs two
government agency bond hedge funds in New York.