SPECIAL UPDATE #29
July 19, 2002
IN THIS ISSUE:
1. Stocks have been hammered, but are we near the bottom?
2. Democrats gain some traction, but will it last?
3. Why Bush had to sell his Harken stock?
4. Accounting scandals in Social Security.
5. Who says the communists lost?
Despite the strong economic rebound and very favorable monetary conditions, stocks have taken a beating since late March. The last six weeks have been nothing short of a collapse. Many investors are bailing out but we have yet to see a mass exodus, although it could still happen. Everyone wants to know, how low can it go? Let's look at the numbers.
The Dow peaked in early 2000 at just above 11,600. It traded mostly between 11,000 and 10,000 from February 2000 to September 2001. When trading resumed after the September 11 attacks, the Dow plunged to 8,100 intra-day, and the lowest close was around 8,200. As this is written, the Dow is back to 8,200 and under heavy pressure.
The S&P 500 peaked at 1,550 in early 2000. After September 11, it plunged to 940 with a low close around 970. As this is written, the S&P 500 is around 870, clearly below its September lows. The Nasdaq low after September 11 was around 1,100. It has recently traded below 1,000 although it has rebounded to 1,350 as this is written.
The Dow is now down over 15% for the year, and over 27% from its peak. The S&P 500 is now down over 20% for the year and over 42% from its peak. The Nasdaq is down over 30% for the year and over 70% from its peak.
It is estimated that stock losses on US exchanges alone topped $5.5 trillion!! And that number has only gotten bigger so far this month. The vast majority of investors in the markets now have losses in their portfolios, what with the S&P 500 at the lowest level in 5 years.
U.S. Trust Corp. released a survey on June 25th on the wealthiest 1% of Americans, who have annual income of $300,000 per year and assets of $3.2 million. It found that 85% of these super rich have seen their portfolios decline by an average of 17%. That number is significantly larger now.
Mutual-fund investors, who represent a broader segment of America, have also seen their investments evaporate. The latest estimate I can find, as of June, shows mutual fund investors losing about $700 billion in value since March 2000. Here, too, that number is larger now.
Conditions were near perfect for a resumption in the bull market this year. The economy grew over 6% (annual rate) in the 1Q, with the 2Q widely expected to have been strong as well. Corporate earnings have been on the mend. Interest rates have been at rock bottom, and inflation has been almost non-existent. A huge pile of money that bailed out of the markets just after 911 has been anxiously waiting for a place to jump back in. Everything looked to be in place.
But then came the accounting scandals. First it was Enron last year, then Global Crossing, then WorldCom and at least another dozen major companies that have admitted to overstating revenues and/or earnings and/or profits. The public is growing increasingly wary.
President Bush called for an independent review board to oversee the accounting industry and restore confidence in the market. However, a new TIME/CNN poll released Saturday indicated that task may not be an easy one. The poll of 1,003 adults found 72% believed the recent scandals were not isolated incidents but "may indicate a pattern of deception on the part of a large number of companies."
Bush also stated that he would make it a crime for CEOs to, knowingly or unknowingly, allow the reporting of false financial information. Under Bush's proposal, CEOs would have to sign-off on all financial records and be held legally responsible for their accuracy.
The problem is, all this will take time, and the list of "bad boy" companies is growing longer. Meanwhile, even companies who do not "cook the books" are taking a more conservative approach to their reports on revenues, earnings and profits. 2Q earnings reports will be out shortly, and the word is that many companies are shaving their numbers back to be more conservative.
WHERE'S THE BOTTOM?
When I wrote my latest newsletter, the S&P 500 and the Dow were still above their post-911 lows. My guess at the time was that the post-911 lows would hold, and that if they did, we could finally see the rally that most analysts had been expecting. However, the continuing accounting scandals sent investors over the edge, and we saw a huge selloff over the last two weeks, which continues as this is written.
Keep in mind, though, that the equity markets are severely oversold now. If there is hint of good news, the markets could turn strongly higher in a move that might well be worth trading. This will be even more likely if the Dow doesn't close below its post-911 lows around 8,100-8,200.
There's another reason the markets will move up strongly when they finally turn around. There are a record number of shares that have been "shorted." The NYSE reports that there are now a record 7+ billion shares that have been shorted. This number has gone up from less than 4 billion in 2000, and it hit a new record high in just the last few weeks. Nasdaq has over 4 billion shares that have been shorted.
Of course, the question is when? The answer is, no one knows. I'll venture a guess and say soon. The equity markets are about as oversold now as I have ever seen them. Thus, it will not surprise me to see this severe selloff reverse higher anytime now.
If I was a trader, I would look to be buying next week (July 22-26) on the odds that the market will rebound from these massively oversold conditions. But I'm not a trader anymore, and haven't been in a number of years.
I prefer to leave those decisions to professionals who time the market. Market timers are not perfect by any means, and most have struggled this year. The market timers we recommend have been largely or entirely in cash recently, thus missing the carnage of recent weeks, and they are significantly outperforming the S&P 500 this year. (Past performance is not necessarily indicative of future results.)
DEMS FINALLY GETTING SOME TRACTION
The Democrats finally seem to be getting at least a little political traction against the Republicans due to the worsening situation with accounting scandals and corporate distrust. Polls released in the last week or so show that more Americans favor the Democrats to clean up the corporate world than Republicans.
Democrats have been quick to jump on this bandwagon. And they should be, because I am not at all convinced that the scandal story is going to have legs for the Dems. If the truth be known, the Dems are just as much in bed with big business as the Republicans.
DNC chairman, Terry McAuliffe, who has criticized Bush and Cheney for corporate shenanigans, has plenty of scandals in his own past. You can read about them below. Few Americans know it, but Senate majority leader Tom Daschle's wife is one of the most powerful lobbyists in Washington. The list goes on and on and on.
We will have to wait and see how this plays out, but if it becomes clear that Democrats are just as responsible for corporate financial scandals and sugar daddy stock deals, they'll drop this issue like a hot potato!
YOU NEED US GUYS TO WATCH THOSE GUYS
Whatever plays out with the theme of "Republicans are responsible for the financial scandals," I expect the Democrats will embrace the theme noted above - you need us guys (Dems) to watch over the other guys (Republicans). In the past, polls have shown that a majority of Americans favors divided government. This was especially true during the Clinton years.
If the public does buy into the Republican blame game for the financial scandals, that would suggest that the Senate stays in the Dems hands, and maybe they even gain seats in the House. But as noted above, the Dems blame-game could fade quickly if the Republicans are smart enough to get the word out that there's plenty of blame to go around.
BUSH'S APPROVAL RATINGS REMAIN HIGH
The Democrats are extremely frustrated that the president's approval ratings remain very high - 72% - in the latest Washington Post- ABC News Poll. Even in the swirl of concern over Bush's sale of his Harken Energy stock, his approval ratings remain very solid.
Being in Texas, we have known about Bush's business background and his Harken stock deal. While the Democrats are trying to say that Bush was guilty of the same kind of insider trading that he criticizes today, the truth is an entirely different matter.
Quite simply, Bush sold his Harken stock to raise money for an equity stake in the Texas Rangers baseball franchise. He was required to put in at least $500,000 of his own money to get a piece of ownership in the Rangers. He actually put in $606,000. In June 1990, he sold two-thirds of his Harken stock - 212,000 shares - at $4 for a total of $848,000. He used this money to fund his equity contribution to the Rangers.
Yes, Harken stock did drop to as low as $1.25 not long after Bush's sale, but about a year later, Harken was as high as $8 per share. The #2 man at the SEC, a Democrat in charge of the enforcement division, investigated the matter and determined that no wrong-doing by Bush had occurred.
You can read the whole story of Bush's business life in the link below. It's a 1999 story based on columnist Byron York's investigation of Bush's past life.
The bottom line is, Bush may not have been the "sharpest knife in the drawer" during his years in the oil business. And there's no doubt that because his last name is BUSH, a lot of people were willing to help him where others of us would have failed. Yet I don't believe Bush did anything illegal, and neither does the SEC. Of course, that doesn't stop the Democrats!
THINK STOCK SCANDALS ARE BAD? SOCIAL SECURITY IS MUCH WORSE!
Read the column below by Texas congressman Ron Paul. Then again, maybe you don't want to read it!
THE COMMUNIST MANIFESTO - HOW MUCH DID THEY ACCOMPLISH ?
NewMax.com recently reprinted the 45 goals of the Communist Manifesto. Even though the Soviet Union is gone, many of the Manifesto's goals were accomplished. Read it in the link below.
I hope you're having a great weekend and a super summer!
Gary D. Halbert
Forecasts & Trends E-Letter is published by ProFutures, Inc. Gary D. Halbert is the president and CEO of ProFutures, Inc. and is the editor of this publication. Information contained herein is taken from sources believed to be reliable but cannot be guaranteed as to its accuracy. Opinions and recommendations herein generally reflect the judgement of Gary D. Halbert (or another named author) and may change at any time without written notice. Market opinions contained herein are intended as general observations and are not intended as specific investment advice. Readers are urged to check with their investment counselors before making any investment decisions. This electronic newsletter does not constitute an offer of sale of any securities. Gary D. Halbert, ProFutures, Inc., and its affiliated companies, its officers, directors and/or employees may or may not have investments in markets or programs mentioned herein. Past results are not necessarily indicative of future results. Reprinting for family or friends is allowed with proper credit. However, republishing (written or electronically) in its entirety or through the use of extensive quotes is prohibited without prior written consent.