Don’t Follow The Crowd, Especially Now–Here’s Why
Before I get into today’s thoughts, I did want to
let you know that I have again been invited by the White House to participate
in another “Radio Days.” My radio show will emanate from Washington DC next
Wednesday April 6th. Slated to appear…and of course, subject to schedule
changes are White House Chief of Staff Andy Card, Treasury Secretary John
Snow, Labor Secretary Elaine Chao, new Commerce Secretary Carlos Gutierrez and
other luminaries. I will have more on this event next week.
I am back from our skiing vacation and I have one
question: why did I come back? My whole family had a fabulous time. This will
be an annual event in the Kaltbaum household. Next year, we will stay in
Beaver Creek. If you get a chance, I highly recommend dinner at Beano’s Cabin
in Beaver Creek and Sweet Basil in Vail. Take your kids up to Adventure Ridge
in Vail for tubing and go snowmobiling with Nova Snowmobiles.
Those that have followed my commentaries and
thoughts for years know that I have called most important turns in the
market. At those junctures, I had no idea what would become of those
turns…jus that the market had turned. Sometimes the turn was of intermediate
consequence and other times, longer term. For instance, in February of 2000, I
told you to sell the high flyers and get off margin. Of course, that turned
into the worst bear market in 70 years. Last year, I alerted you to impending
lower prices in January. That led to a 10% drop in the DOW and S&P and 20% for
the NASDAQ. This year, specifically Jan. 3, I told you we went to defense.
Even when the DOW/S&P went to new highs, you were told that the divergences
would come back to haunt the market. Well, unfortunately for the bulls, all
the distribution we have been seeing has led to lower prices…and the market
is starting to leave no stone unturned. To be short and blunt…UNTIL THE
MARKET SHOWS SIGNS OF ACCUMULATION, WE WOULD CONTINUE TO PLAY THE LONG SIDE
WITH CARE. For the tenth time, the markets could bounce at any time. I expect
any bounce to be of low quality. One cannot be thrilled that Thursday’s anemic
bounce was sold off the same day.
That leads me to one other aspect of the markets I
wanted to talk about…and that is to NOT follow the maddening crowd. Simply
put, the biggest losses occur in the previous biggest winners…that have the
loudest noise. What do I mean?
I am now starting to see some EXTREME examples of
investor bullishness…AFTER THE MOVES.
Some examples:
3 weeks ago, I appeared on FOX NEWS CHANNEL and
gave out the prediction that Martha Stewart stock would drop 30% in 3-6
moths. It happened in 3 weeks. What did I know? Just that on that Friday, the
stock reversed a 3-point gain into a 3-point loss and more importantly,
Newsweek’s front cover was entitled: “Martha’s Last Laugh”…The cover came
out AFTER THE BIG MOVE was already made.
Just last week, Newsweek did it again. Their cover
was entitled:” The Incredible Shrinking Dollar.” The next day kicked off the
biggest move the dollar has had in months. The Economist also had a front
cover about the lower dollar. Once again, loud noises AFTER THE MOVE.
OIL PRICES…maybe oil prices are destined for
$100. Maybe COMMODITIES are going to continue to go to the moon. I am just
letting you know that for this second, I see them coming down as bullishness
in these areas are off the map and all ANALysts and articles are bullish on
these areas…AFTER THE MOVE.
HOUSING PRICES…I am not allowed to guarantee
anything in my business…but I can tell you that I believe we are a stone’s
throw away from the top. What day? Not a clue. I am just letting you know that
every sign sentiment-wise I saw for TECH/INTERNET in 99-00, I am now seeing in
the HOUSING market. I have not shorted any yet but believe we could be
getting closer to the top for HOUSING stocks. I have purposely kept quiet
about HOUSING in the past couple of years because I did not believe the noise
was loud enough. I now believe the noise is becoming loud enough…AFTER THE
MOVE. Do not be the last one in…especially in those areas that have had the
biggest move. There is a definite mania going on caused by Alan Greenspan’s
keeping rates low for too long, finance companies lowering the bar in their
lending as well as coming out with more and more aggressive mortgages and of
course, you can’t have a mania without investor greed. Let me be clear!
Economics 101 states when prices go too far, eventually, demand dries up. In
order for sellers to get rid of product, they must lower prices to move
inventory. Since most buyers are already in, there is no one left to
buy…thus the double whammy of expanded supply and lowered demand happening
at once. Maybe there is one more surge up in prices. I am just letting you
know I believe we could be in the final stretch of this move.
I brought all this up today because I still do not
believe that most investors know how to measure risk. The most important part
of having money is to protect that money. In areas mentioned, I believe
investors have let down their guard because of all the noise they are hearing
AFTER THE BIG MOVE. I believe these areas could be at important junctures
where turns could occur. You must learn to control your emotions at these
important junctures…or else! Â It is easy to get caught up because greed is a
strong emotion. Just recognize that the markets are not out to hand money over
to anyone…and if you are not careful, the markets will take it away very
quickly.
Gary Kaltbaum