Economy Is The Key
The
tug-of-war between tech bulls and tech bears is at a very important
juncture right now, since a pretty solid case can be made for either side. What
makes this pivotal moment even more interesting is the fact that for the last
couple years, the market refuses to accommodate both sides of the debate. It
seems that one side ends up looking like geniuses while the other side gets
slammed
Bulls were pleased
this week to see the Nasdaq continue to stage its miraculous recovery from its
September lows, as it managed to finally touch its 200-day moving average for
the first time since early September 2000. Bears that kept looking for a retest
of the September low, now argue that the recent Nasdaq run has come “too
far, too fast.”
So with the Nasdaq
finishing the week slightly below its 200-day moving average, the stage is set
for a classic duel between the bulls and the bears. Bulls were pleased to see
the Nasdaq back above an upward sloping 50-day moving average while bears make
the case that the two-month run is yet another fakeout-breakout.
The tech bears have
reigned for most of the year, and their case right now is strong. Bears in
general point to the fact that the S&P 500, with its average PE hovering
above 22, is nowhere near the historical 12-13 PE level that usually marks the
bottom of a bear market. They also point out that 10 rate cuts have failed, for
the most part, to jump-start the economy, and with consumers still saddled with
debt, a quick recovery is a pipe dream.
As for the
technology sector, the bear case is even stronger since the 12-month trailing PE
on the Nasdaq 100 is still at an extremely elevated PE of 70! In their view, the
overhead supply of battered tech stocks will also weigh heavily on any rally
attempt. Many believe that the hangover from the bubble build-out in tech will
take much longer to work out than anyone has imagined.
So are there any
positives for tech right now? What really was great to see was the Nasdaq hold
above its October 1998 lows and stage an incredible bounce back over the past
two months. Both the Dow and S&P 500 also held above their October lows, and
given the fact the swoosh down came after the terrorist attacks, the odds that
we saw a permanent bottom are pretty good.
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Since the Nasdaq
bottomed intraday on Sept. 21 at 1387.06, it bounced back more than 35%, and the
more concentrated Nasdaq 100 bounced back more than 50%. This came against the
backdrop of guys like Warren Buffett and Sir John Templeton saying investors had
better get used to low, single digit returns for the next decade. So whatever
way tech goes from here, 35% to 50% is still a very impressive move.
Another plus for
tech (and the market in general) are the TEN rate cuts by Alan Greenspan. You
remember him. He was the guy who kept telling us the Wealth Effect was
unleashing inflationary pressures, creating too many jobs, erasing the deficit,
and making everyone rich. So after raising interest rates for two years,
Greenspan has now CUT rates ten times to put them at their lowest level in 40
years. Ten!
The guy who hated
stocks now seems to be doing everything possible to jump-start the party that he
crashed, and that is ultimately a huge positive for the economy and stocks. This
may be yet another time when the “don’t fight the Fed” moniker should
be followed.
As for the sky-high
valuations in tech, some analysts are making the case that some of the high PE
ratios are justified now because of the extremely low rate of inflation to which
they are compared. (which is bordering on deflation) The key for valuations now
is for the economy to fire back up enough to reverse the slide in earnings – –
and this is where the battle between tech bulls and bears will be decided. It
all boils down to the economy.
Early this week, the
National Bureau of Economic Research finally said that we are in a recession,
and I ask what planet have these guys been on for the last year? And why were
they so slow to realize what everyone has already known for so long? Of course
we have been in a recession! It was clear by September 2000 that the economy was
in dire straits. But at least now we have the Fed wholeheartedly behind
orchestrating a recovery.
Historically a
recession in the U.S. has lasted for 11 months, and since the National Bureau of
Economic Research said the current one started in March of 2001, that would mean
that we should see a recovery in three more months (on par with the average).
Stocks generally anticipate an economy about six months in advance, so the
current two-month run MIGHT be saying we get a recovery by early spring. Let’s
hope so!
Have a great
weekend!
Dan
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