Is There Such A Thing As A ‘Safe Haven?’ Don’t Count On It. Plus, The Anatomy Of A Home Run

• March 5, 2001
• Goran Yordanoff

Is this what it has all come down to?
Do we really want the economic reports to show us that the economy is getting progressively worse so it gives the Federal Reserve more reason to cut rates? What about the prior two 50 basis point rate cuts, why haven’t they helped yet? Why didn’t a prime rate of nearly 0% in Japan help them recover over the past decade? 

I want everyone who reads this column to print out today’s and put it somewhere safe, because we will look back several months from now and laugh our heads off that market psychology had gotten so pathetic.
Pathetic to the extent that even though the Nasdaq is down over 60% from its highs, market spindoctors continue to be bullish and put a
positive spin on virtually any economic situation or earnings implosion that surfaces. This is clearly not the psychology that the equities markets need for a meaningful, long-term bottom to be in place. 

Rather, we find that we have practically the opposite. It is disturbing that in the face of all the extensive destruction of wealth we have witnessed during the past eleven months that investors still buy the bullish “don’t worry, be happy” argument. In fact, investment professionals continue to maintain and even increase the historically high levels of equity allocation in their model portfolios. The
mind-set of a bottom? I think not. Before this year is over, we will see the Dow Jones Industrial Average collapse from its current lofty status and the analysts and stock gurus will look us in the eyes and swear that they didn’t see it coming.

What is utterly terrifying to me is that the typical American consumer, when purchasing a VCR, will consult at least
two to three electronics review publications and compare prices with at least
three different stores or sources before they make their choice. However, when it comes to investing a significant amount of their savings and retirement funds, they will buy whatever they see hyped on television or read about in the
newspaper. 

Worse still, they will buy when their brokers call and push something on them. Then, after buying whatever they were told or persuaded to buy, they will not only practice what the Wall Street big dogs want them to by being “buy and hold” investors, but they will continue to buy when their holdings have been decimated. Whoever once said “you can’t fool all of the people all of the time” must not have had any experience in the stock market. 

All of the stock gurus and economists we hear being interviewed on CNBC keep telling us to buy stocks here because “the market always begins to recover half-way through a recession” so we need to beat the mad rush to equities. Forgive me, but I didn’t hear anyone finally acknowledge that we actually were in a recession and, oh yes, the statement regarding a recover half-way through a recession is true except for one key point… Past recessionary downturns didn’t come off a massive bubble. As such, we are being lied to once again by economic
“experts” who are trying to help us beat the ensuing equity feeding frenzy. I know I speak for all of us when I say “thank you so much for your unselfish concern about us little people.” 

Ask not what your clients can do for you…but what you can do for your clients

Hey, Mr. Fund Manager on CNBC, I don’t care what you are “holding in your model portfolio” or what you “like long-term.” Your fund is down 40% in the last twelve months, obviously you have not demonstrated the
“error-proof” judgment you are trying to sell us on. I think you should try to minimize the losses your clients have already incurred before you hype them to buy more stocks that have clearly not bottomed yet. 

Worse yet, these are the guys who have their investor relations department tell concerned clients that their fund is designed for “long term appreciation” and “not to get concerned over short term volatility and weakness.” All the while, we are hearing about huge mutual funds raising record cash levels to prepare for something. Do you think they are anticipating a severe leg down which will result in a rush of redemptions? My magic 8-ball says “Count on it.”

I’m all about “long term capital appreciation” but I don’t think you have to lose 40%+ of what you have on the way there.

Which brings me to my next point… safe havens.

When one ponders the thought of a “safe haven,” your imagination conjures up thoughts of peace and tranquility. Close your eyes and you soon feel a sense of relaxation and complete safety. When I think of safe havens, I think of a cabana on the beach at a Sandals resort, not the stocks and sectors that are being portrayed as such. 

A “safe haven” implicitly implies safety. Would you consider many of the healthcare services, HMO, and managed care stocks to be “safe havens” when they are trading at 40-60+ price to earnings? Would you consider a large portion of these stocks which have appreciated almost 500% in the past 12 months safe havens at this point? Nonetheless, the market continues to hype this sector as a safe haven and a place for money to go when technology is being sold off. Interesting. We saw the same thing at the end of 2000 with the pharmaceutical stocks being hyped as “recession-proof” and “predictable earners” in the face of the technology sector debacle. 

Now, hardly two months later, stocks like Merck & Co.
(
MRK |
Quote |
Chart |
News |
PowerRating)
(that Goldman Sachs put on their “recommended list” at 95 1/4 at the beginning of 2001) are down nearly 25% from their highs of January, but that’s
“OK” because we need to think of “long term appreciation and learn to ignore the short term volatility.” Seriously, whenever I hear of a Goldman Sachs upgrade or “recommended list” call, the theme of “Hee Haw” plays in my head uncontrollably. It gets even worse when I see calls come out of Prudential and Deutsche Bank…. we’re talking the theme from “Three’s Company” and “The Love
Boat.” Arghhh! Someone stop the voices!

But seriously folks, I want to drive the following point home. Until the market stops creating imaginary sectors that are immune from bad news and a downturn in business and moves stocks like the HMO’s and healthcare services back in line on a relative
PE basis, the bottom will not come. The same goes for the retailing stocks, tobacco stocks, and whatever else has been rallying to silly levels on the premise that it was a
“safe haven.” Take out your wallet and look at the paper money you keep in it. That, my friends, is the only safe haven I know of.

Remember, the market can take as much time as it needs to find its bottom, it certainly doesn’t need all of us to hypothesize and watch every tick of its internal indicators to pinpoint it. Why? Because we will be wrong, dead wrong, 50 times before we are right. Why risk it? Rather, look for the trades that setup ideally based on current market sentiment and the current environment. You just spent
5-10 minutes reading what I wrote above concerning the truth about “safe
haven” stocks. It might be prudent to find over-extended stocks in those sectors for short candidates rather than trying to catch the elusive bottom on technology. You might be surprised by your success if you try this.

And now, something completely different…….

The Anatomy Of A Homerun

by Goran Yordanoff

On Feb. 15, 2001 I pointed out in my column subtly titled “The G-Man Initiates Coverage Of AEOS (American Eagle Outfitters) With A
‘Run Like Hell’ Rating, that the aforementioned stock was being dropped like a bad habit by key insiders. I also went on to point out that the technical indicators on the chart were displaying negative divergences which I concluded to respresent intense distribution. 

I went on to point out that AEOS was being hyped by analysts who worked for the same firm that was handling the nearly 6 million shares of insider sales for AEOS insiders. I went on to discuss the firm’s overvaluation and stock manipulation on many occasions subsequent to the initial February 15th column. 

Today, J.P. Morgan helped us finally knock the ball out of the park……

I haven’t gotten out much recently, but when was the last time you made 40%+ return on a trade in 2 weeks?

I hope all of you profited handsomely from this trade. 

Goodnight and have a pleasant tomorrow.