StreetSmartPost

Saturday, November 30, 12 noon.

Investors typically complained after the 2000 bubble burst that no one warned them. At the top the economy was still strong (the recession didn’t begin until 2001). Fed Chairman Greenspan denied the market was in a bubble. Earnings were still positive and corporations were upbeat. Wall Street’s forecasts were for more of the same.

But of course Wall Street is always bullish. Even during severe bear markets every week of declines is just another buying opportunity to take advantage of the dip.

But outside of always bullish Wall Street there certainly were warnings in 2000.

To mention a few:

None other than Warren Buffett warned in 1999 of an extremely overvalued market that was headed for trouble. In a famous summer gathering of media, technology, and financial leaders in Sun Valley Idaho in July, 1999, Buffett said that contrary to popular opinion there was no “new paradigm, no new era”, that the market was way out of synch with what the economy could produce in the way of corporate earnings. He said, “The next 17-years will be quite unlike the last 17 years. It might not look much better than the dismal 1965-1982 period when the Dow went exactly nowhere.”

Nobel Prize for Economics winner (2013) Robert Shiller’s book ‘Irrational Exuberance’ appeared in 2000, warning of a substantial bear market in no uncertain terms; “The present stock market displays the classic features of a speculative bubble, sustained largely by investors’ enthusiasm rather than by any consistent estimation of real value.”

Even in the financial media, which was subsequently criticized for mostly egging on the exuberance of investors, there were warnings.

Floyd Norris wrote an article in the New York Times on March 31, 2000, publicizing that Nobel Laureate Franco Modigliani was warning that Internet stocks were “very much a bubble” and that the Dow could fall to 8,000 or 9,000. [It fell to 7,425 at its bottom in 2002].

Kansas City Star columnist Stephen Winn, warned in an article on March 18, 2000, that, "The people who get hurt when today’s stock-market bubble bursts should never complain that they weren’t warned," going on to quote Warren Buffett and others who feared a market collapse. "The collapse of inflated prices always comes as a terrible shock to those who lose their shirts. The cries are loud and pitiful: Why, oh why, weren’t we told this could happen? But anyone who can’t hear the warnings about today’s speculative frenzy just isn’t listening."

In my own 1999 book, Riding the Bear – How to Prosper in the Coming Bear Market, I summed up by saying, “The U.S. stock market has gone for the longest period in its history without a serious bear market to correct the excesses. So, not surprisingly, in the process the excesses have reached never-before-seen extremes.”

“Put those extremes – high stock valuations, overbought market conditions, record public participation, record allocation of the nation’s wealth to the stock market, and so on – into a pot, add a pinch of reality and allow to simmer a bit longer, and what do you get? It seems clear that it’s not a question of ‘if’, and there’s not much room left for ‘when’, leaving the main question as ‘how much’. . . . The worst bear market since the 1929 crash is right around the corner, and will be at least as severe as the Dow’s 46% decline in the 1973-74 bear”.

Warnings this time around are growing.

It remains to be seen how much time investors who are ignoring them, preferring Wall Street’s bullishness and next Fed Chairman Janet Yellen’s assurances that she sees no signs of a bubbles anywhere, have left before reality takes over this time.

Other voices:

Robert Shiller: “The current adjusted price/earnings of 25 is quite a bit above the average, which is about 16. But it’s not so much above average that I would disqualify stocks as an investment. . . . . . But I’m starting to get more worried about the market as it keeps going up. When CAPE gets as high as 28, stocks would start to look unattractive.”

Wall Street Journal, Ahead of the Tape column: “Surging Stocks Don’t Pass The Sniff Test. While the current move lacks many aspects of a bubble, the rally smacks of a rush to buy almost any stock to compensate for the Federal Reserve keeping interest rates so low. The 27% gain in the S&P 500 in 2013 has come even though revenue growth is seen at a little under 2% and earnings growth at 5% for the full year. Investors are simply willing to pay more for each dollar of earnings. There are more-traditional signs of froth, too. The latest Investors Intelligence poll of newsletter writers puts the percentage of bears at 14.4%, the lowest since 1987. And in a sign investors are putting not only their money but also others’ where their mouths are, margin debt as a share of gross domestic product is nearing historical peaks, such as in March 2000.”

Robert Frank, Yahoo Finance: “According to Spectrum Group’s Millionaire Investor Confidence Index, millionaires are feeling better about the economy, but more skeptical of the stock market. . . . . The number of millionaires saying they do not intend to invest in the coming months reached a three-month high. Those planning to invest in stock mutual funds fell by 5 percent. But the wealthy do plan to keep pouring money into real estate and cash, with each up 7 percent or more. Experts say the wealthy are increasingly worried about the divergence between the market and the economy, and growing talk about a bubble in financial assets.”

Sam Ro, Business Insiders: “This morning, economist Nouriel Roubini pointed to no less than 17 global housing markets he thinks look bubbly. . . . And bond king Bill Gross tweeted “We should call this “Green Friday” – But be careful of red numbers in 2014. All markets are bubbly."

So we have ample warnings. Those listed are but a few of many.

But should we invest based on them?

Probably not. But they are a sign of the high risk that has developed.

We prefer to incorporate technical indicators with the fundamentals, to indicate when a trend has actually reversed.

Santa Claus rally?

Mark Hulbert, MarketWatch.com:

“Do you believe in Santa Claus? Wall Street does — or at least is hoping that you do. Every year around this time, many analysts and brokers begin referring to a “Santa Claus rally” that will propel the market higher.

Don’t fall for the sales pitch. The stock market’s average performance before Christmas is no better than mediocre. It is only in the last week of December that the market has strong seasonal winds blowing in its sails. . . . .

Not all experts who refer to a Santa Claus rally equate it with how much the market rises through its December high, though few bother precisely defining what they do mean. But other attempted definitions don’t fare much better. . . . . .

One that has been used over the years by some of the advisers the Hulbert Financial Digest monitors is based on supposed market strength over the entire period between Thanksgiving and Christmas. Yet the average Dow gain over these few weeks is statistically indistinguishable from how it performs at any other time of year.

In other words, you shouldn’t let the Christmas season sway you from whatever investment strategy you already were pursuing. . . . . .

There is one version of the Santa Claus rally that enjoys strong historical support: the last five trading sessions of December and first two of January.

This year, for example, a trader wishing to capture this rally would buy stocks as of the close on Dec. 23 and sell them at the end of the trading session of Jan. 3.

Since the Dow was created in 1896, it has gained an average of 1.7% during this seven-trading session period, rising 77% of the time. That is far better than the 0.2% average gain of all other seven-trading-session periods of the calendar.

Are these heightened odds of success good enough to justify the transaction costs involved in a specific bet on strength over just these seven trading sessions near the turn of the year?

The answer isn’t clear — especially after you consider short-term capital-gains taxes, brokerage commissions and “bid-ask spreads,” or the gap in price between the price you have to pay when buying a stock and what you get when selling it.”

To read my weekend newspaper column click here: Market Seasonality and the Fed Are a Powerful Combination

Subscribers to Street Smart Report:

There is a mid-week Markets Report from Wednesday in your secure area of the Street Smart Report website. And the next issue of the newsletter will be out on Wednesday.

Yesterday in the U.S. Market.

A mixed half-day session (early close), positive for speculative issues, negative for blue chips.

The Dow closed down 11 points, or 0.1%. The S&P 500 closed down 0.1%. The NYSE Composite closed unchanged. The Nasdaq closed up 0.4%. The Nasdaq 100 closed up 0.5%. The Russell 2000 closed up 0.1%. The DJ Transportation Avg. closed down 0.3%. The DJ Utilities Avg closed unchanged.

Gold closed up $12 an ounce to $1,251.

Oil closed up $.48 a barrel at $93.11 a barrel.

The U.S. dollar etf UUP closed down 0.1%.

The U.S. Treasury bond etf TLT closed up 0.1%.

Asian markets closed mixed in their last session of the week.

Among individual countries:

Australia closed down 0.2%. China closed up 0.1%. Hong Kong closed up 0.4%. India closed up 1.2%. Indonesia closed up 0.5%. Japan closed down 0.4%. Malaysia closed up 0.1%. New Zealand closed down 0.3%. Singapore closed down 0.3%. South Korea closed down 0.1%. Taiwan closed up 0.5%. Thailand closed up 0.9%.

Yesterday in European Markets.

European markets closed mixed and mostly flat yesterday.

The London FTSE closed down 0.1%. The German DAX closed up 0.2%. France’s CAC closed down 0.2%. Belgium closed up 0.2%. Greece closed up 1.3%. Ireland closed down 0.1%. Italy closed down 0.4%. The Netherlands closed down 0.1%. Norway closed down 0.1%. Portugal closed up 0.5%. Switzerland closed up 0.1%.

Global markets for the week. 

A flat week for blue chips in U.S., but speculative Nasdaq and small stock Russell 2000 continue to attract enthusiasm. Mixed picture globally with most of those that were weak the previous week also weak this weak.

Premium Content Area.

For Street Smart Report subscribers only, used to provide additional info to that provided in the newsletter, mid-week reports, and hotlines.

In the premium content area this morning: The U.S. stock market, gold, and bonds, signals and analysis of each.

Tuesday, November 26, 9:35 a.m.

The latest report on housing starts, due out this morning, was delayed due to the government shutdown. It’s not a good time for that to happen given the rising concerns lately that the housing industry, so important to the economy, may be slowing, perhaps even from another bubble already.

The report of permits for future starts was released this morning and showed they were up 6.2% in October. But unfortunately, that was almost all due to a big 17% increase in permits for apartment complexes, still in greater demand than single family homes thanks to the anemic economy. Permits for single family homes were up less than 1%.

And the S&P/Case-Shiller Home Price Index, also released this morning, showed home prices were up only 0.7% in September, the smallest amount since last February. David Blitzer, chairman of the index committee at S&P, said "The strong price gains in the West are sparking questions and concerns about the possibility of another bubble. However the talk is focused on fear of a bubble, not a rush to join the party and buy.” He noted that recent housing reports indicate the housing market is starting to shift to slower growth.

Meanwhile, Reuters reported this morning in an article titled “A New Wave of U.S. Mortgage Trouble Threatens” that “U.S. borrowers are increasingly missing payments on home equity lines of credit they took out during the housing bubble, a trend that could deal another blow to the country’s biggest banks. The loans are a problem now because an increasing number are hitting their 10-year anniversary, at which point borrowers usually must start paying down the principal on the loans as well as the interest they had been paying all along.

More than $221 billion of these loans at the largest banks will hit this mark over the next four years, about 40 percent of the home equity lines of credit now outstanding.

For a typical consumer, that shift can translate to their monthly payment more than tripling, a particular burden for the subprime borrowers that often took out these loans. And payments will rise further when the Federal Reserve starts to hike rates, because the loans usually carry floating interest rates.

The number of borrowers missing payments around the 10-year point can double in their eleventh year, data from consumer credit agency Equifax shows. When the loans go bad, banks can lose an eye-popping 90 cents on the dollar, because a home equity line of credit is usually the second mortgage a borrower has.”

Is it already too late to take advantage of the housing recovery.

Upcoming housing reports will be unusually important.

Happy Thanksgiving to all!

NOTE: There will be no blog post on Thursday, Thanksgiving Day! I’ll be back with the next regular blog post on Saturday morning, as usual later than the week-day reports, probably around 12 noon.

To read my weekend newspaper column click here:  The Fed Is Backed Into A Corner

Subscribers to Street Smart Report: In addition to the charts and commentary in the secure area of today’s blog, there will be an in-depth mid-week Markets update tomorrow in your secure area of Street Smart Report.com 

Yesterday in the U.S. Market.

A quiet mixed day, somewhat positive in the morning, and some sell-off in the final hour to a mixed close. The Dow was up 45 points at its intraday high, and closed up just 7 points, less that 0.1%. Volume was average with 0.6 billion shares traded on the NYSE.

The Dow closed up 7 points, or less than 0.1%. The S&P 500 closed down 0.1%. The NYSE Composite closed down 0.3%. The Nasdaq closed up 0.1%. The Nasdaq 100 closed up 0.2%. The Russell 2000 closed unchanged. The DJ Transportation Avg. closed up 0.3%. The DJ Utilities Avg closed down 0.3%.

Gold closed down $3 an ounce to $1,241.

Oil closed down $.68 a barrel at $94.19 a barrel.

The U.S. dollar etf UUP closed up 0.1%.

The U.S. Treasury bond etf TLT closed up 0.3%.

Yesterday in European Markets.

European markets closed up yesterday.

The Europe Dow closed up 0.3%.

Among individual countries:

The London FTSE closed up 0.3%. The German DAX closed up 0.9%. France’s CAC closed up 0.6%. Belgium closed up 0.7%. Denmark closed up 0.5%. Finland closed up 0.3%. Greece closed up 2.5%. Ireland closed up 0.5%. Italy closed down 0.2%. Netherlands closed up 0.4%.  Norway closed down 0.1%. Portugal closed up 0.1%. Spain closed up 0.1%. Switzerland closed up 0.7%.

Asian Markets closed mixed Sunday night and again last night.

The DJ Asia-Pacific Index closed up 0.3% Sunday night and down 0.1% last night.

Among individual markets last night:

Australia closed up 0.1%. China closed down 0.1%. Hong Kong closed unchanged. India closed down 0.9%. Indonesia plunged 2.3%. Japan closed down 0.7%. Malaysia closed down 0.1%. New Zealand closed down 0.5%. South Korea closed up 0.3%. Singapore closed down 0.2%. Taiwan closed up 0.7%. Thailand closed up 0.4%.

Subscribers Premium Content Area.

For Street Smart Report subscribers only.

To obtain access please click on the ‘Subscribe’ link. It will take you to an information page on subscribing to Street Smart Report, a subscription to which includes access to the premium content area of this Street Smart Post blog.

In the premium content area this morning: The U.S. stock market, gold, and bonds, signals and analysis of each.