February 10 - You Either Believe Or You Don't
The contradictions will continue to become augmented as long as consumers continue to spend and the
big stocks rise. People feel that all is well.
New Economics
The basic theme behind the new paradigm argument is rising stock prices forever: which impacts confidence, spending and GDP, combined with technologically enhanced
productivity gains:which keeps inflation subdued. Looking back over the last year, which marks the single best performance by an
exchange in the history of the markets (Nasdaq 85%), it becomes apparent that headline news keeps people happy and not the underlying stats: Since January 1999 the S&P 500 owes over 70% of its gains to a mere 10
stocks and from the same period only 208 of the 500 stocks are higher today. The "new" investment club doesn't mind more stocks heading lower as long as the select leaders continue to impress. The
"nifty fifty" comparison has never been more sound.
Were Is The Money Coming From?
The unrelenting buying power in large cap stocks is a direct result of decreased savings, increased liquidity, and skyrocketing margin as well as alternative methods of
credit. The savings rate has now decreased 7 years straight and sits at an all time low (2.4%), margin has spiked in recent months to pushed past the $225 Billion plateau, and
consumer credit outstanding, excluding
mortgage debt recently posted a 9.7% annual rate in December to yield a seasonally adjusted $1.39 trillion reading. One would think that some of the above numbers would be concerning but as long as headline stocks
continue to rise and more people jump into the party trading volumes and stocks prices do continue to rise. But what the numbers might be telling us is that the new members may not continue to find patches of capital to
throw at the horses forever.
Speculation In The "New Economy"
Not even a proud believer can disagree that the markets are a tailor made playpen for speculation. A look at almost any popular Nasdaq companies trading volumes versus share
float is enough to suggest shareholders are either holding stock picks for a shorter period than ever before or that 10 million plus daytraders are flipping stocks like pancakes. Perhaps also it is the combination of
both.
Days Needed To Trade Entire Float (3 month Volume Average)
AMZN |
10.4 Days |
EBAY |
10.7 |
YHOO |
11.3 |
QCOM |
44 |
MSFT |
131 |
CSCO |
152 |
Increased trading volumes (no surprise) is what typically powers large cap tech stocks higher. However, the inherent risk with this condition is that the underlying value of the asset is rarely the impetus for higher prices, buying frenzies are. Conversely as stocks continue to have a broadening impact on the economy it is selling frenzies which can produce economic havoc. In no instance in history have the U.S. markets had a comparable buying frenzy (inflated asset base) and then entered a period of tranquility. This is why you either believe in the new economy or do not (some don't believe but love the liquidity).
Vanishing Demand
The basic threat to the markets is always what an investor is willing to pay for a piece of a company, but what may become a theme in the latter half of 2000 is what an investor can afford to pay for a piece. With consumer spending, confidence and credit rising and the savings rate declining while interest rates are rising it is obvious that people expect and perhaps also need capital gains to keep there financial habits intact. One would imagine a world were a 85% gain would bring at the minimum a cooling off period, but new investors except nothing but greatness. If that greatness does not materialize then there could be sever problems.
Speculation Inside A Soft Landing
The exchange of capital (trading) inside an environment in which the markets do not always rise is the largest single threat to stocks, not an immediate quick decline which is "action" to traders and a dip to buy on for others.. If the activity on the Nasdaq for instance taper's off for a sustainable period of time, even the craftiest daytrader can not absorb the losses which are associated to a sideways trading atmosphere; The losses are in part self imposed due to the precarious financial situation many people have placed themselves in because they feel good.
-- Demand could then vanish because dreams would die.
A ponzi pyramid needs new members to keep functioning. As the new members stop arriving that is when immense fear sets into the people's minds who are left in the holding pattern: The fallout is then a self fulfilling prophesy because the actual rise was due to temporary augmentations.
The conflict today is new paradigm versus same old story. Lets just say that we are in the new paradigm until the same old ending arrives. I don't believe.