The Bull Is Dead, Long Live The Bull

  • March 6, 2001
  • Goran Yordanoff

After being
called “un-American” for shorting stocks, I have come to
one very large conclusion: The American public is totally brainwashed. 
They are brainwashed because they are so easily made to believe everything they
are told.  What can be more alluring than the promise of riches and the
opportunity to become rich by doing absolutely nothing more than buying and holding
what you are told to?  However, “the great game” as it was
lovingly labeled by our friends on CNBC is becoming more like a giant game of
musical chairs. 

The music sounds intoxicatingly beautiful on the way up but when it suddenly
stops, there are never enough chairs to go around.  All the while the professionals who were supposed to warn us of such an event plead total
ignorance and shrug their shoulders as the gullible individual investor gets
taken to the cleaners by the Wall Street Mafioso in three-piece suits.

All you have been hearing for the past several sessions is the following: 
“Is this the bottom? Is this the bottom? Where is the bottom? Do you think we’re at a bottom?  Does this look like a bottom?” etc., etc., etc  
Around two years ago I caused a scene at a Starbucks in Chicago around Christmas
time because I had heard “Grandma Got Run Over By A Reindeer” for the
umpteenth time in my life and it triggered some type of “fight or flight”
mechanism in my body.  I literally felt blood rush to my appendages, I
dropped the cinnamon dispenser into my tall latte and grabbed the poor counter-clerk by his apron and demanded that the music be stopped immediately. 
Needless to say, I’ve walked the extra block to the next Starbucks each day ever
since that ugly event. I’m getting awfully close to duplicating that same
natural response if I hear “Are we at the bottom?” one more time. 
Unfortunately, since the stock market has become such a household institution
(Remember, all those traders we see on the NYSE trading floors are there to make
you money. Right?), you literally cannot turn off financial television at the
risk of missing some type of emotional overreaction to a news event.  At
times, however, it is fun to use it as a tool to fade the foolish lemmings who
ran
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never learn.

I learned this strategy from ex-President, Bill Clinton.  I wanted to
loosen you all up with a funny anecdote before I break the bad news.  Now
that you are feeling nice and comfortable… here it is:  The bull market
in the Dow Jones Industrial Average has come to an end.  Would you believe
me more if I was an analyst for Goldman Sachs or Merrill Lynch?  Would you
believe me if my name was Ralph Acampura, Tom Galvin, Henry Blodget, or Abby
Cohen?  None of those people told us the bull market was over in the Nasdaq
before it broke, did they?  In fact, if you look around there is absolutely
not one person on the street who is bearish on the Dow.  At least when the
Nasdaq was flying past the 5000 level and Internet stocks were going up 30-50
points each day, we heard some people warn us about the Internet bubble and high
valuations in that sector.

Nevertheless, no one heeded the
warnings about the Internet sector because we had our analysts friends tell us
that “things are different this time” and we began to believe that we
could ignore price/earnings ratios and valuations.  Looking back, wasn’t it
ludicrous to assume that business cycles that have dictated the actions of our
economy and that of Europe’s for thousands of years would suddenly be rendered
obsolete by the advent of the personal computer and silicon wafer? 

There is no denying that presently there is a public love affair with the Dow
index.  The average person wishes they never heard the word “tech
stock” as they have been feverishly rerouting their capital into the “safe
haven” stocks of the Dow.  Buy up the Federated Dept. Stores
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$40, they don’t care that it is up 100% in the past eight months, just get them in. 
They don’t care that basic material stocks like
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just give them a fill. Make sure you get them in Tenet Healthcare
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end of the day because that sucker has been running for the past 11 months and
they don’t want to miss out on the next 11 months.  The market is playing
the old Metallica song “Search and Destroy” now as it has so expertly
been rerouting money into the next areas that it plans to take to the woodshed
and beat mercilessly.  This is why sector rotation exists.  We saw
this same thing take place with the Nasdaq glamour stocks that continued making
new 52-week highs even thought the Nasdaq Composite was getting crushed. 
Stocks like Juniper Networks, Brocade Communications, Micromuse, Comverse
Technologies, Siebel Systems, etc., etc., were all part of the elite group of
technology stocks that were anointed as the new Messiahs of the stock market. 
Just a handful of months later, they are all trading at levels 50%-70% below
their highs of August, 2000.

This is how the Wall Street players make their millions and billions each year. 
It isn’t by publicly telling us where we should put our money, it is by selling the general public on areas they want them to put their money.
People, I have made millions and millions of dollars fading the mass-mentality. 
Fading the fact that the majority of American investors never, ever learn their
lesson. At this time, everyone loves the Dow.  Most consider it a “sure
thing” that a breakout over 11,000 is in the cards. I have not heard one
person come on television or write about the fact that the retailers have been
run up to ridiculous levels based on the expectations of a second-half 2001
economic recovery.  When it becomes clear that the recovery won’t happen,
the same firms that pumped the retailers will shrug their shoulders and tell us
to become “long term investors” and to “ignore the temporary
setback.”  Today, in fact, Prudential Securities stated that although
they expect the February retail sales numbers to come in lower than expectations, they still recommend buying retailing and apparel stocks because the economic
environment in 2001 will be favorable for them because of an expected further
decline in interest rates and the Bush tax cut.  As soon as I read this
today I immediately reached to feel for my wallet.  I felt like Prudential
was holding up the American public at gunpoint to buy retail stocks because of
lower interest rates and the Bush tax cut.  Honestly, this might be the
most ludicrous thing I have heard come out of a major brokerage house since the
Mary Meeker and Henry Blodget calls.

Further, have we heard anyone talk about the fact that Tenet Healthcare
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trading at a 38 PE multiple with market cap of over $13 billion?  Does
anyone consider this to be slightly overvalued compared to the historical mean? 
Why isn’t anyone speaking up?  Does anyone consider Federated Department
Stores to be overvalued at a PE of… oh, wait… they don’t actually earn any
money… so I guess you can get away with running them up another 100% because
noone can prove that they are valued to high when there isn’t an “E”
in PE.

The list goes on and on, and the simple truth remains that the overvaluation in
the Dow and S&P 500 indexes is going totally unaddressed by the financial
media and brokerage houses.  You would think the fact that the Dow Jones
Industrial Average has only been this far inflated above its century (how’s that
for long term) median valuation line only one other time in history would get
some attention.  The only other time in history that the Dow was this far
stretched above its median valuation line was back in 1928-1929.  Spooky,
very spooky.

We have begun to see the initial stages of the new Dow bear.  Have you
noticed the selling into strength we now see regularly?  Are you noticing
how early rallies are always sold into the afternoon unless there is some type
of news event driving the market higher (some fabricated news event like the
Angell lunacy or the IBM rumor)?  Are you noticing that institutions are
performing high-level distribution for several months now in many Dow favorites?

You had better get seated soon, because the music is ready to screech to a halt
once everyone owns Dow stocks.

No one warned you at the top of the Nasdaq.  I’m warning you now at the top
of the Dow.  Take it for what it is worth, my opinion is no better than
anyone else’s.  But what I want you to do is to take into account what I
said above and formulate your own conclusion.

It’s more important to be the first one out than the first one in.

Goran