July 22, 2002
From the desk of Jane Galt:A couple of people have
A couple of people have emailed me to ask what's going to happen in the stock market this morning. Tee-hee! If I knew that, I would even now be on the phone with my broker placing the appropriate bets, and I would not publicize the results until I had made a killing. Unfortunately, I'm as ignorant as everyone else. To wit: I predict that it will either go up, go down, or remain flat.
Now, the most likely occurrence is that it will go down. As the head of the New York stock exchange, in a miracle of understatement, said, our experience with Monday markets after sharp Friday declines is not good. What he really meant to say is that our experience with Monday markets after sharp Friday declines is that they plummet like a fragment of a neutron star thrown from the top of that uber-tall building in Kuala Lampur.
You see, a lot of people got hurt on Friday. And they've had a lot of time to brood about it -- all weekend, in fact. They have envisioned their altered retirement plans, priced Friskies, started looking out for a nice refrigerator box they can pick up on the cheap. And then on Sunday night, after a long series of arguments with the spouse about whose idea it was to put all the retirement savings in tech stocks, along came the news that WorldCom is going bankrupt, reinforcing their belief that they'd be better off changing their money into singles and using it to economize on toilet paper than giving any of it to those crooks in Corporate America. All of those people are panicking and looking to sell at any price.
On the other hand, there are still people out there who believe in "buying on the dips" -- people, that is, who still haven't quite learned that the 90's are over. These people are busily subsidizing the day traders and panic sellers. While "buy on the dips" seemed like a genius strategy when the market was rising, these days it works like this: you buy on the dips. People who have been waiting to take profits or avoid losses sell as soon as the stock rises a little. This makes the stock fall further.
[Standard Jane rant about equity valuations: Right now, the S&P stands at 32 times earnings. While the P/E ratio usually does rise at the bottom of a recession because earnings are very depressed, this is still nearly 50% higher than the historical highs for S&P P/E's. We used to think that the abnormal ratio meant that the risk premium on equities, the higher rate of return that investors demand on stocks compared to risk-free treasury bills, had gone down. Oops. Turns out that the risk premium was only lower when investors thought that stocks could only go up, or in other words, were mispricing the actual risk. Now it looks like the S&P et. al. have to get back somewhere near that 20 mark for the market to have actually bottomed. Maybe earnings are so depressed, and the risk premium is sufficiently altered, that it will bottom at 25. But probably not at 32. Remember, the spectacular rises before were fueled by everyone pouring all their spare cash into the market. That's not coming back. Even if the market bottoms now, it probably won't go anywhere much for a couple of years yet; people simply are not going to come back at the previous volumes. People are scared, and they're diversifying out of equity. Sensibly so. But it's hard to see how they can support P/E's of 32.]
Anyway, the point is not to make fun of people who buy overvalued stocks in the mistaken (IMHO) opinion that they are undervalued; the point is to note that they are a countervailing force against the market falling, and if there are more of them than panicky investors, the market will rebound. However, I personally think that any rebound will be what's known as a "dead cat bounce", which refers to a trading axiom that even a dead cat will bounce -- once -- if it falls from a sufficient height.
Or the market could do nothing much. This will happen if there are about as many "buy on the dips" people as there are panicking people.
But there's no way to know how many people are panicking, vs. how many are plotting to stake out new equity holdings, because there's millions of them all sitting in their offices, livingrooms, or cars, right now, and they haven't phoned me to let me know what they're thinking. The only thing to do is wait.
We'll know soon enough.
Posted by Jane Galt at July 22, 2002 6:00 AM | TrackBack | Technorati inbound links