Stock Market Predictions

[Mark Heide]

It does not look good for the equities. Currently, I am out of equities, and here are a few reasons why.

First, the market is overvalued. The S&P 500 should be about 775 and the DOW should have stayed around 7200. Some analyst came out today and said the DOW should be 5000, and I believe he is off base unless we go to war with Iraq.

I think a few things will happen this month. Either the DOW will finally drop back to the values I indicate, or we will be in a trading limbo where the DOW will fluctuate between 7200 and 9500. The reason why I say this is due to a few factors.

First, when the dow did reach its real bottom in July, it was still unbalanced. There were still many overvalued stocks that did not justify their price based on the current growth of the economy. Futhermore, there were many stocks that were undervalued at that time, but this is not true currently.

Secondly, it appears that there is a lot of short term trading which is why we see triple digit losses and gains. Basically, I believe that this is emotional trading, and may be the reason that the DOW does not stay at 7200, but may move up to 9500.

Last, is the employment report caused the market to close higher for the end of the week. The problem with the employment situation is that the increase is due to government jobs and not the private sector. The private sector actually lost jobs compared to new hires. So, that indicates a decline in growth.

If you are trading I recommend looking for value but only short term and be ready to sell. You could also probably make some money on shorting still. Don't buy any indexes or Mutual funds, if you do you will subject yourself to losses from what is currently going on in the market. Don't forget the institutions can trade faster than you.

Good Luck

Mark

[Wildbill]

I read that spin about the employment report early this morning, but I put no faith in it and here is why. Private sector just about always cuts jobs right now. There is the clear and fundamental switch-over from summer to non-summer work. While a lot of people that stop working right now are students or others that may not race over to the unemployment line, the double whammy of seasonal layoffs and the changeover to different business cycle will always lead to lower private sector workers and higher government workers. Simply put, never put too much into the indicators at this time of year because they tend to be skewed and unreliable. The lack of back to school shopping was another one, sales for this "event" began about the end of June as one retail analyst precisely noted. Retailers are so cutthroat right now they are trying to get the jump on each other and it will very likely skew the Christmas season as well as he predicts before Halloween a lot of retailers will be trying to get us all in the mood to shop early. In this way they will try to avoid what has been a recent trend of slow starts to shopping that force edgy retailers to discount more than they would like. With such a late Thanksgiving this year, its almost certain to happen.

Just things to watch out for, I think the flood of information with so many people worried about the economy has gotten it to the point where trading is driven by false signals and few people seem to be taking everything into account with prudence. They jump on one indicator and then when its proved false or not so bad, they jump back the other way. I think that is causing the volatility more than anything. As for valuations I still think you are ignoring the effect of far lower inflation and interest rates in valuing the markets as a whole. For sure there are overvalued companies out there as there is at any time, but in general I think the market is close to fairly valued, if not slightly undervalued due to the clouds of war and corporate scandal. The models I see and one I tend to use say the S&P is about 2.5% undervalued at the moment and the various NASDAQ indexes are from 3% undervalued to 5% overvalued, depending on which you want to look at. Its really hard for the market to be that overvalued simply because one always has to take alternative investments into consideration because in the end the market's price has little to do with fundamental valuations, but supply and demand. With bonds at ridiculously low levels, cash holdings paying almost as much as keeping your money under your mattress, and housing at extremely high valuations, eventually the option becomes get back into the market and that is what will drive the next rally.

[Mark Heide]

I disagree with you on market valuation for the S&P and NASDAQ. There are many stocks that are overvalued growth stocks simply because the growth is not there to justify the cost, even future growth over the next two years. Take for example the technology sector, which is still overvalued compared to its real expected growth. Overcapity in telecommunications. There is much telecom equipment out there that is installed and not being used. This is basically reflected in the stock price of Nortel or the worst case Worldcom. Furthermore, the PC market was expected to pick up for back to school and it didn't. The studies even showed students buying used PCs, because there has not been any applications developed to demand that faster processors are needed for the applications running today. So, I don't expect much growth in the PC market, until software companies develop applications that need faster processing power. Lastly, as long as capital spending is down, I don't see growth for the router companies like Cisco, especially with some of the big telecom companies unloading a lot of Nortel equipment at bargain prices. As long as companies are not expanding operations, you will not see the sale of high end router products from Cisco. There is a glut of ATM equipment out there from Nortel and customers are not buying into the high costs of high bandwidth products.

Interest rates have been good for the housing markets, and has helped the car industry. I do not see any other sector where this is helping. Actually, the low interest rates have hurt the automotive market simply because the car manufactures like GM also do the financing, but they are doing fine as long as volume stays up.

Lastly, the price of oil is up. This will hurt the manufacturing and transportation industies and drive costs up. Now, when Bush finally decides to go to war with Iraq, I can not even image what the price of oil will be. Futhermore, he will probably have to start drilling in the artic, because the middle east and Russia will punish him with high oil prices for political reasons. Finally, consider how the war will be financed. Eventually, interest rates will go up to finance the war. This is the area that is not clear at all to investors.

Mark

[Wildbill]

I have a feeling that oil prices will go down pretty quickly. The uncertainty of it all is what has the price going up right now, little of it has to do with legitimate supply or demand issues. Losing Iraq's supply to the world will have almost zero effect, in fact in the name of high prices and countries rushing to so philanthropically cover the Iraq supply, I think you might see more oil come on the market and after a one or two day panic, oil prices will come down and crash down in 6 months. Iraq has absolutely no defense against a US attack, their lack of airpower would instantly doom them within a week. I don't know if an attack is all that imminent, Bush is in a spot where he can't really de-escalate this until there is a breakthrough with the UN inspectors. I would say there is 50/50 chance of a significant attack because I just don't see the gain in it for either sides to keep their hardline stance to the point of actual battle. It will be a clear cut case of buy the rumor and sell the news. Without the Iraq situation oil would be a good 20-30% cheaper and this break will have to end one way or the other. Add to it that prices are so high right now that cheating is growing and about to become rampant if prices don't come down. Quietly budgets in Russia and Mexico show about 6 million more barrels and those two probably only foreshadow what others will do. In the end, oil isn't an issue as long as the US diplomatically settles its Iraq issue, either with an attack that has the support or at least not the opposition of OPEC members, or ideally with thorough Iraqi inspections and maybe some democratic promises from Saddam (not that they would be carried out).

As for tech, I think there is too much focus on where growth isn't coming than from where it will come. New ideas are bound to be there, just few ever can really make a good call on that. Further I don't think there is anything but upside out there for business spending, the real driver of tech sales. Forget all the bluster about back to school, any analyst worth paying attention to knows that consumer spending on computers will never make much difference because consumers buy low margin equipment from box makers and don't exactly tee it up with tech add-ons. What will drive this is the eventual business pickup in spending because they buy machines for double, on average, than households and they buy software and networking equipment that far surpasses their spend on the basic gear. I don't think capital spending could go much lower, there has been a clear disconnect between it and the economic growth of the last couple of years. Technology is so cheap that it doesn't take much of a return to recoup your investment these days. With productivity sky-high, companies are coming close to the point where they either have to raise their spending on people or on further capital enhancers to accomodate their slimmed down staff. Either way the economy wins and that will be the driver that kicks in growth. The basic outlook for tech growth isn't great and maybe you are right to be out of the market for a short time frame as this is always a dangerous time of the year for the market, but if you are advising an average investor I would say there is a lot more upside than downside and if you can handle potentially volatility you should be very likely to come out ahead within a two year time frame. If you are just interested in timing the market and finding good entry points then I would say at this point the market is questionable due to the season we are entering and the uncertain direction that every investor seems to be clinging to.

Yesterday on CNBC they had people predicting if the market would hit 10,000 or 5,000 first. As usual, there were mixed views. I like Peter Lynch's view on this matter- " I do know the market will be at 20,000 before it is at zero". Therefore, I try to buy quality companies at reasonable prices, hold long term, and sleep well.