October Crash Redux? (October 4, 2005)
One reader reports that every time she reads one of my financial entries, she gets an urge to jump out the window. Yes, I know I write about evidence for a doom-and-gloom outcome to this era's bogus "prosperity," but I am not the only one. In general, the press is rather more skeptical of a bright prognosis for the U.S. economy than the financial industry--the big brokerage houses--who are of course eternally optimistic. It's always a good time to buy stocks of some sort, or better yet, cash out of one sector and move the money into another, and thus generate two commissions instead of one.
Compare the bullish bias of Smith Barney's top U.S. equities analyst, Tobias Levkovich, with Barrons magazine's run of skepticism. While hardly a bastion of anti-capitalist fervor, Barrons' columnists and technical analyst are bluntly wary of U.S. stocks and the prospects for the usual fourth quarter run-up.
Nobody is predicting an October crash similar to the one which caught everyone by surprise in 1987, so allow me the honor. Let's compare some very basic factors which underpin a bullish market heading for the stars.
Levkovich is aware that he has to come up with some huge sources of cash in order to support his bullish claim, and so he stretches out, way out, to dig up some arcane measures of liquidity to show us that there is money around, but unfortunately we can't see it directly--it's in hedge funds and foreign hands.
But instead of trusting his fancy-footwork, let's look at sources of cash we can measure reliably: the amount of cash sitting in mutual funds, and the amount of borrowing power sitting in stockholder's margin accounts. (Margin is a loan which brokerages extend based on the value of your portfolio.) According to Barrons, mutual funds are holding a mere 3.9% of cash, far lower than the 8-10% which they've held prior to market runs. Margin debt is currently an enormous $208 billion, compared to only $83 billion ten years ago before the great bull run began in earnest.
Even more damning, the source of cash Levkovich is counting on to fuel his 15-month bull market is classic "hot money"--money that spins in and out of "investments" with lightning speed. That's hardly the basis for a sustainable bull market.
But again, let's look at more trustworthy numbers. According to Barrons, Investors Intelligence Poll of Bulls/Bears is currently 53.2%/26.6%, compared to a ratio of 31%/50.9% ten years ago. Note that the numbers are exactly reversed: before the great bull run of 1995, 50% of investors were bearish--the perfect contrarian setup. Now investors are 53% bullish, a perfect bearish setup--yet Levkovich sees only blue skies and another 15 months of bullish upside. Are we touching the elephant's trunk while he feels the tail? It would seem so.
So allow me to posit the unthinkable: the markets are poised not for a 15-month run up to new and giddy heights, but for a sudden, sharp drop of 10% to 20% this month. There, I said it. Let's see if thunder rumbles and lightning strikes.
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