The Brave Get Braver

April 28, 2001
Goran Yordanoff

Let’s talk economics for a
moment. I observed a few individuals on television
state that this GDP number shows that “any chances of recession in
the U.S. are dead.” Whoa. That was a
mighty powerful statement. After all, historically,
economists have never been able to accurately forecast a recession
until after the country had already entered one. But perhaps this time
is different and we can have stock and bond gurus make the calls.

The gallant men and women who are so quick to announce the
death of the bear (did it ever
really exist for more than 10-20 minutes on that fateful day of March
22)? are now claiming the impossibility of a recession. (Note: we have
now eliminated statements claiming the
“improbability” of such events and have
jumped over to ‘impossibility,” as in: “it can’t, and won’t, ever
happen. It’s not possible that
it will happen.”) How can they be so sure? An analysis of yesterday’s
GDP report clearly shows an economy operating at a much weaker pace
than the headline 2% number would imply. The most important thing to
establish is that 80% of this quarter’s
reported gain in GDP can be attributed
to imports declining at an annual rate of over 10%. A falling trade deficit
translates into rising net exports and, as such, is reported as growth-positive.
Interestingly, such a sharp drop in imports is just another characteristic
of the economy’s pronounced deceleration. Factoring out this import
contraction, GDP grew at a rate of just 0.4%.

Add to this the fact that Greenspan’s “new
economy” driver — technology investment
— has broken down, and the picture becomes a bit more troubling. High-tech
information processing equipment and software investment, after more
than doubling last year, fell at an annual rate of nearly 12% in the
first quarter of 2001, the largest decline on
record. As such, the Fed panicked
again by realizing this threat to its “productivity revolution.”
Isn’t is amazing how we’re hearing from the exact same people now who
are claiming that things are getting better having just last year told us
(Greenspan included) about how technological
advancements had created a new standard
and maintainable level of productivity? What happened to the maintainable
level of 5% GDP, and why should we believe you now?

What is occurring in the stock market right now is
actually quite simple to explain.
First, the institutions that had to buy stocks when nobody wanted them
and continually bid them down for several months now need to puke them back
out to the once again equity crazed
public…at much higher prices.

Imagine that. It took
(
JNPR |
Quote |
Chart |
News |
PowerRating) roughly 30-35 trading
sessions to go from 70 to 28,
but only 10 trading sessions to go from 28 to 70 again (on incredibly
high volume). Have things really changed that
much from the April 4 lows on
the Nasdaq to now? Have things really changed since the March 22 lows to now?
Yet, the Dow Jones Industrial Average is trading nearly 1700 points
above its March 22 intraday low and the Nasdaq
traded nearly 40% higher in only
12 sessions. Could it be that perhaps the perception of reality is
being manipulated so as to facilitate a high
level sale of equities back to the
same people who sold them in the first place?

From a technical standpoint, we are witnessing a huge
rebound from the March/April
lows which has been stimulated by a huge infusion of credit, in addition
to a 2% drop in interest rates over only a 115-day period. By the Federal
Reserve essentially panicking and pumping up the money supply like
never before and cutting rates with newfound
abandon, the bond market certainly
believes that such action will most certainly generate inflationary
pressures. This is evidenced by the behavior
of the 10-year T-note and by the
strength that gold and gold stocks have exhibited lately. In other words,
we can literally hear Greenspan trying to
feverishly blow the bubble back up to
counterattack the corrective forces of this bear market, forces that are
essential in reverting valuations back to
their historical means and eliminating
the excesses of the past 20-year bull. Greenspan is making a very dangerous
bet that the strength of the dollar will maintain the inflow of investment
money into the U.S. and continue the trend of cheap imports, thus keeping
inflation in check. The moment the dollar begins to show signs of cracking,
watch what the bond market does. It won’t be pretty. In the meantime,
the U.S. dollar rages higher as the Wall Street love-fest drags on.

If this scenario actually unravels and a weakening U.S.
dollar eliminates Greenspan’s
safety net, they might have to take the book about Greenspan, “The
Maestro,” off the shelves.

At present, this broad-based rally is taking many sectors
along with it. The market has totally discounted that an economic recovery has
already taken place as the media
and market analysts have been quick to point to the latest round
of economic numbers which fail to show increased deterioration in the
economy. As such, although the market is
severely overbought on many technical
levels (for instance, the NYSE tick has only recorded a few negative
readings of the past three sessions while recording at least 10 readings
over the 800 level), there is no end in sight
to this rally at the present time.
It is important to observe, however, that the Nasdaq Composite has not confirmed
the new “post rate cut” highs made by the NYSE. Unless the Nasdaq
exceeds its April 20 highs of 2200 and all
three indices confirm this leg up, a
failure of this “breakout” mode would most certainly be eminent.

At this juncture, I cannot recommend any longs with good
risk/reward scenarios. If you
want to play from the long side, take continuation entries on
recently uptrending stocks (two weeks now a trend makes, right?) as they trade
above their prior day’s highs only with the backdrop of all three indices
trading positively.

Short Watch: Hmm…Reminds me of this old story where this
farmer and his son are standing
on a hill overlooking a herd of cows when the boy says: “Dad,
can we run down there and make love to one of those cows?” The father
turns to his son and says: “No, son. Why don’t we walk down there and
make love to all of them?” Let’s take our
time and not over-trade. When the right
entry presents itself, we will be ready. I will be looking for signs
of a failure to this rally early this coming
week. If it doesn’t come, it doesn’t
come. The market is living in a vacuum right now seemingly unaffected
by the forces of overhead resistance, etc. Don’t jump on any shorts
until the market shows us it has expended all of its ammunition on the
upside. If it happens, we should have a
multi-day/multi-week downturn. With earnings
season winding to a close and the May FOMC meeting holding as much
suspense as a “Baywatch” episode,
the market may be running out of news to twist
bullishly.

Goran

Due
to illness, Goranâ€™s next commentary will not appear until Tuesday morning May 1, 2001.

The Brave Get Braver

BUY THE FEAR, SELL THE GREED

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