SAN FRANCISCO -- Our long national nightmare of uncertainty showed hints of ending, but ultimately there was no resolution on either the political or market front this week. Early Friday, a Florida circuit court ruled Florida Secretary of State Katherine Harris was justified in denying recount petitions of several counties. The decision appeared to clear the way for a declaration of a victory in the endless presidential election, following the counting of absentee ballots and notwithstanding additional legal challenges. The market rallied initially on the news and the apparent victory (again) by Gov. George Bush. But the rally faltered almost as soon as it started, mimicking the broader trend of recent weeks. Perhaps traders anticipated what would occur Friday afternoon, when the Florida Supreme Court issued a ruling blocking Harris from certifying the election. Concerns and confusion about the election, the economy and corporate earnings were reflected in the relatively modest moves by major averages this week, which saw the Dow Jones Industrial Average rise 0.3% while the S&P 500 and Nasdaq Composite slid about 0.1% each.
Bully for Who?
The week got off to a harrowing start (for those long) as the Comp tumbled 5.6% Monday and closed below 3000 for the first time since Nov. 2, 1999. Tech stocks wilted in the wake of disappointing earnings from Hewlett-Packard ( HWP), while the election morass and OPEC's decision to forego additional production weighed on financial and other economically sensitive stocks. The Dow fell 0.8% and the S&P shed 1.1%. The markets rallied back furiously Tuesday -- the Comp rising 5.8%, the Dow up 1.6%, and the S&P higher by 2.4% -- after a trio of top Wall Street gurus issued bullish calls. Solid earnings by big retailers such as Wal-Mart ( WMT) further underscored the advance, which overshadowed concerns about the loan portfolios at First Union ( FTU) and Bank of America ( BAC), among others. Tuesday's broad rally was also fueled by hopes -- even if unspoken -- the Federal Reserve would adopt a neutral bias at its meeting Wednesday. But that proved more wishful thinking than prudent analysis. An early rally faltered Wednesday after the Fed said the risks remain weighted toward inflation. After falling in the wake of the Fed's announcement , major averages closed on a solid note Wednesday, lifting some traders' spirits. But hopes were diminished late Wednesday after Applied Materials ( AMAT) issued cautious comments and dashed Thursday morning when Merrill Lynch downgraded a host of communication-chip makers. Declines by PMC Sierra ( PMCS), Applied Micro Circuits ( AMCC) and Broadcom ( BRCM), and a host of other richly valued tech names, sent the Comp down 4.2%. Additionally, the Dow fell 0.5% and the S&P shed 1.3% Thursday as downgrades of paper stocks and more bad news from automakers contributed to the unease. The generally lackluster action Friday reflected the collective exhaustion of investors after the wild swings in both the market and the political situation.
Eyeing the Bear
As reflected by the gurus' call on Tuesday, the general feeling on Wall Street is that Monday's lows will prove to be the "final" bottom investors have long been groping for. But every bottom so far this year has ultimately proven porous. That being the case, prudence dictates we give equal time to those with a far more pessimistic view, which Don Hays, president of Hays Market Focus Advisory Group in Richmond, Va., certainly expressed in a conference call Friday afternoon. Hays began the call by noting an "amazing correlation" between the Nasdaq Composite's performance throughout this year and Japan's Nikkei Index in 1990. Most recently/prominently, Hays noted there was a 32-week period between the Nikkei's peak in late 1989 and when it ultimately broke through the lows established in what he dubbed "phase one" of its post-bubble bear market. Last week marked the Nasdaq's first break of the lows it hit during its first big downturn, or 35 weeks since its peak in mid-March. Additionally, both averages reached previously unmatched valuation heights at their peaks, he said, noting price-to-earning ratios of both markets were justified by talk of "new eras" that made old rules obsolete. If the Nasdaq continues to follow the Nikkei's example, the index will continue to decline for the next six to 10 weeks before it reaches the ultimate bottom of this "second phase" of the bear market, Hays predicted. He forecast the end of phase two will come after a "climactic four-five days that will really knock the stuffing out of the market" and take the Comp to as low as 1800 -- or more than 40% below Friday's close. Hays' draconian market view is accompanied by an expectation the U.S. economy will soon enter a recession and that the world economy faces additional deflationary pressures for several years. Reflecting such pressures, long-term U.S. Treasury bond yields will approach 4% by next October, he predicted. The veteran market watcher -- who recanted a long-held bullish outlook in early 1999 -- also warned the Comp's P/E, while well down from its peak of 264, is still a historically high 124. Additionally, the earnings yield of the S&P 500 (12-month earnings vs. 10-year Treasury note yield) is 28% overvalued, he contends. On the monetary front, MZM money supply growth fell under 7.5% on an annualized basis in the first quarter of this year, Hays noted, calling that a key "trigger level" signaling "excess money has dried up." MZM growth has picked up a bit recently, but the trend is of "withdrawing fuel from the bull market machine," he said. Regarding psychology, consumer confidence remains high, in conjunction with low unemployment and as reflected by workers' confidence in their ability to change jobs voluntarily. That outlook, plus higher oil prices, is key to the Fed having to maintain a restrictive monetary policy, Hays said. But at the same time, benefit costs are rising in the employment cost index, which is pressuring corporations' profit margins. Other psychological indicators he cited included the still-high bullish sentiment and continued heavy selling by corporate insiders. The equity put/call ratio is recently suggesting investors are becoming more cautious (which is good from a sentiment standpoint), "but it by itself cannot keep psychological indicators afloat," Hays said. There was more, but I think you get the gist. To those who think by publishing Hays' views I am condoning them, note I give (more than) equal time to the mostly bullish Wall Street gurus. The point is that those folks haven't been too accurate of late and maybe it's time to at least consider the other alternative. That's assuming you haven't already after yet another vexing week on Wall Street.