SUMMARY - "PIG" :
The Contrarian's View is published 11 times per year on a mostly-irregular schedule, and the views expressed are those of the author and editor, Nick Chase. Because nobody can predict the future, results of past suggestions or recommendations are no guarantee of future results. Material in this publication may be freely quoted provided proper attribution is given to its source. Subscription rate: Free on the Internet through the World-Wide Web service at Assumption College. Using your favorite Web-browsing program, Open URL http://www.assumption.edu. Mailed paper subscriptions, one year for $39 to The Contrarian's View, 132 Moreland Street, Worcester, Massachusetts 01609. There is a limit of 50 paid subscribers at one time; please check for availability before sending any money. Sorry, Visa and Mastercard are not available. Overseas subscription rate, U.S. $54. Unsolicited material sent to us by UPS or by courier other than the postal service is refused and returned to sender! Phone: (508) 757-2881
In the spring and the fall, large numbers of ducks and geese will stop by for a few weeks on their way north or south. In the summertime a few ducks (and more recently, a few geese) will stay with us for the summer. But what's more interesting, in the past few years a few of the geese have stayed (or attempted to stay) all winter long. The experts call these "nonmigratory geese", that is, birds who have become accustomed to living on human handouts, rather than foraging for food in the wild.
Surely there are few sights more inspiring than a flock of geese taking flight, soaring in the sky in V-formation as they migrate to their summer or winter home. Poets just eat up this stuff.
But the picture changes when the geese decide to hang around instead. They pick the lawn down to a stubble to be ruined by the summer sun. They defecate everywhere, leaving on (what's left of) the lawn a layer of goose guano thet must be raked up. They walk incessantly back and forth across the driveways, slowing down traffic. They're noisy. And when you get close up to them, you find they have ugly dispositions. In short, nonmigratory geese are about as lovable as city pigeons.
Last time I checked, both migratory and nonmi-gratory geese were the same bird, biologically. The only difference is that the nonmigratory geese prefer to hang around for the humans' handouts. But our perception of the attractiveness of the two "kinds" of geese differs radically according to their behavior.
So it is with those of us who are bearish (or at the very least, cautious) toward the current stock market, and who refuse to jump on the bandwagon of the current mania. We are about as popular as non-migratory geese, or city pigeons, because we refuse to fall in line with the conventional "wisdom" of the thundering herd. It's times like these.... at the tail end of many years of a bull market.... when most people flatly declare that timing the stock market is useless, and that a buy-and-hold strategy is the only long-term successful one: The real risk, they say, is being out of stocks.
I beg to differ. History has shown that the real risk is being fully invested in stocks at historically extreme levels of overvaluation, such as in 1929, 1968/69, 1987, or now, and not being in stocks when they were historically undervalued, as they were in 1932/33, 1946, 1974 and 1982. Other people call this "risk allocation"; I call it plain common sense. Such a strategy will not always allow you to pick off market tops or bottoms; in fact, it virtually guarantees you will miss investment manias, as I did in 1995 when I did not follow my own "Timer's Trend" because stocks were already ridiculously overvalued.
At any rate, though (in hindsight) I was premature, I have clearly stuck my neck out in stating that the odds greatly favor a market meltdown worse than the 1987 Crash. This is the third "crash prediction" I have made. In November 1986, only a few months after I began writing The Contrarian's View, I described quite accurately how program trading would cause what became the Crash of 1987.
But in 1986, there was only a handful of subscribers who saw my "success", and I don't believe any of them still subscribe, because those were mostly complimentary subscriptions as a thank-you for donors to WCUW's capital campaign.
I 1989, I again saw we were headed toward an event which turned into the 1989 minicrash and, as I expected, the "circuit breakers" kept it from turning into a full-scale rout. A few of the subscribers who were with me then are still subscribers today and can recall that correct call.
But with my current expectation of a market meltdown, it's a different story, because The Contrarian's View is offered up free on the World Wide Web, and readers number certainly in the hundreds, possibly in the thousands or tens of thousands. The accuracy, or lack thereof, of my anticipation that the stock market will melt down in an electronically-facilitated, full-blown panic is on display for all the world to see.
Why do I remain so stubborn in the face of almost universal bullishness? Because I learn from history, so I am not doomed to repeat it. Because I do not earn my living from The Contrarian's View, so I do not have to follow the herd or risk losing my subscribers. Because I am close enough to retirement that safety is paramount, and I will not follow the herd with my pension funds. Time will tell who gets in the last honk, and I fully expect it will be me.
Then she pulled out, and worked on, what appeared to be a fat proposal for some sort of investment product. (It was in financialese gobbledygook, so it was hard to tell just what the product was supposed to be.) After an hour of this, she finally decided to relax with a paperback novel.
This episode got me to thinking how much the nature of the stock market has changed over the past two decades, but most especially in the last few years. At one time (ancient history, back in the 1960s, even during the mutual-fund craze of the late 60s), individual ownership of stocks far outweighed that of the institutions. To some extent, people "married" their stocks; they got annual and quarterly reports, dividend checks (usually), and could follow the progress of the business and take pride and interest in being part owners of the enterprise.
This lent a certain stability to the stock market, because people who had married their stocks really were in them for the long haul; selling was painful, like a divorce. If they did finally sell, it would be in desperation and capitulation, as in the bear-market bottoms of 1970 and 1974.
Today, institutional ownership of stocks vastly outweighs ownership by individuals, and trillions of dollars have been placed in the hands of about 6,000 equity-fund managers, of whom about half (around 3,000) are more prominent and have garnered the lion's share of the funds. There is no particular loyalty among owners of mutual funds, that is, the public: Generally, they have bought into their particular funds for only one reason - performance.
And there is certainly no loyalty among the fund managers for the companies they buy. Stocks are bought for only one reason - performance. Long-term corporate planning and growth, which might have been important to the individual owners of a company, mean diddlysquat to the fund manager. In a mutual fund, a stock is bought only because the manager expects the company to do well over the short term, so the manager can unload the stock at a higher price to another institution. This is why (given tacit support by the Federal Reserve) stocks can soar while companies cut their guts out through "downsizing" and put hundreds of thousands of experienced but older pre-baby-boomers on the unemployment rolls.
Individuals can buy stocks for a number of reasons: Income, dividend growth, belief in a company's products and plans.... but generally, individual owners expect growth of an enterprise and, if they're happy with the results, will hang in there through the occasional rough spot.
The charter of a fund manager is different. He or she is expected to buy stocks in line with the fund prospectus, stocks that are supposed to rise more than other stocks that could have been bought but weren't. Each money manager is in the same performance competition with the other 2,999-plus managers; those that don't perform lose their jobs.
In effect, millions of people who have many diverse reasons for buying stocks have concentrated the buying power of the stock market into the hands of a few who have only one charter - to be invested in stocks - and one objective.... performance.
To the extent that people have transferred their authority to the fund managers, they have bought into the "performance" argument, otherwise known as the "greater fool" approach. We can see this in the recent departure of Jeff Vinik from his role as manager of Fidelity Magellan. Vinik had the temerity to anticipate that stocks might actually go down someday soon, and he maneuvered to protect about 40% of Magellan's assets in the relative safety of bonds and cash. This caused him to underperform the market averages in 1996, and that simply was not tolerable to the Magellan shareholders and to Fidelity management. After all, Magellan is supposed to own stocks, not time the market.
Here is demonstrated the arrogance of the public.... hey, fund manager, don't you time the market. You just buy the right stocks, and I'll switch into cash when the market tops out.
So the fund managers do what they're told, they flip stocks. All 3000-plus of them, flipping stocks to each other. And the performance-conscious public keeps sending in more money, which must be invested in stocks, and the managers keep on flipping stocks to each other at ever-higher prices and with ever-more ridiculous rationales. (Necessity is the mother of invention.)
What happens when the bear market strikes? Well, the charter of the fund is to be invested in stocks, and when the prices of the stocks decline, the fund managers can rightfully say to the shareholders of the funds, "Hey, we're supposed to be invested in stocks, that's our charter", to which the public can claim, yes, but you're supposed to buy stocks that go up.... even in a bear market. We expect performance.
The 3,000-plus fund managers find that it's much more difficult to locate stocks that go up in a bear market than when everything is rising in a manic frenzy. In fact, it can't be done. So the public starts cashing in.... redemptions exceed new money.... and the funds must sell stocks to meet redemptions, even though they remain "fully invested".
The fund managers have had several years now of basking in the limelight of their supposed genius. How many of them realize their "genius" is merely the end result of having a constant surplus of funds to invest? And how many of them are prepared to face the wrath of an irate public when the "genius" of their performance is proved fraudulent in the bear? Not many, I'll wager. And.... key question.... how many of them, trapped by the charters establishing their funds' objectives, will panic in the face of their almost instantaneous change of fortune? A large number of them, I'll wager.
As I watched Mrs. Cellular Phone, it occurred to me that at the peak of a financial frenzy, time is at such a premium that work infringes on what, for most of us, is a time of relaxation. In a bear market, she'll have plenty of time on her hands. In fact, I thought to myself, she'll be lucky if in two years' time she's still employed.
The question is, however, Where is this mystical land of stable, fast-growing businesses that will deliver handsome investment returns to permit a comfortable retirement, but in the meantime cannot accomodate the full employment of bright, capable and experienced people? Those who can justifiably ask that question may discover that the answer is the same one that previous generations of the financially displaced discovered: It doesn't exist. It's not true. - Donald Christensen
The stock-market averages have been rising more-or-less linearly since the November 1994 lows, but the amount of additional cash into mutual funds required to support that linear rise has been increasing exponentially. In the first five months of 1996, almost as much new cash was poured into the funds as in all of 1995. Extrapolating the trend, by September, to keep stocks linearly rising, almost $300 billion would have to have been added to stock mutual funds in the first two-thirds of 1996, with new money arriving at the rate of $140 billion per month.
That's not likely to happen, so we're looking at July or early August as the likely time period for the final top.... and some averages may have already peaked. If the flow of new money continues at the present rate of about $25 billion per month, stock prices could coast into September before serious selling sets in.
A peak in July/August means the meltdown is likely to occur in October. If stocks rise no further, but just coast into the fall, a meltdown is not likely before November (after the elections!) and is more likely to occur in early 1997.
At any rate, the odds are not good for the buy-and-hold-forever crowd. Each new dollar added to stocks today has only about one-eighth the clout (to push up prices) of the November 1994 dollar, and the clout level is diminishing fast. A look at past manias, such as the South Seas and Mississippi bubbles and the Tulipmania, shows that great gobs of cash poured in at the end without much change in the price level. And the end came shortly after the exponential rise in new cash could no longer be maintained, but cash flows simply leveled off.
In my humble opinion, there is no way anybody should be invested for any reason in stocks today, except to be short or in precious-metals shares.
A. "Phoenix" -real portfolio, begun on October 1, 1995.
Original cost: $ 8,090.45
Present value: $ 8,529.39
Increase: $ 438.94 [5.43%]
Yield: $ 311.53 [3.87%]
The performance of this portfolio and its predecessors ("Hedger's Delight", "Present and Future Income", "Crapshooter's Folly") from January 1987 to the present is +19.55%, for a compound annual rate of return of 1.92%.
B. "Professors' Investment Group (PIG)" - investment club portfolio.
SUMMARY - "PIG" :
Portfolio cost: $ 5,120.00
Present value: $ 5,368.42
Increase (decrease): $ 248.42 [4.85%]
COMMENT on "PIG": The group's regular treasurer has returned from his overseas sabbatical and has resumed control of the portfolio, so the updates here may come more slowly than when I had direct control.
C. Fidelity IRA - real portfolio, includes commissions:
SUMMARY - IRA:
Original (1983-86) cost: $ 8,326.19
Present value: $19,685.20
Increase: $11,359.01 [136.43%]
Current yield: $ 886.95 [4.49%]
The performance of this portfolio (including its predecessors) from January 1, 1987 to the present is +79.49%, for a compound annual rate of return of 6.41%.
F. CREF Pension plan; I switch between indexed stock/bond/money funds:
Date Sold Bought
13Mar92 stock @ 56.65 MM @ 13.41
29Apr92 MM @ 13.48 bond @ 31.19
19Jun92 bond @ 32.14 MM @ 13.55
29Jun92 MM @ 13.57 stock @ 56.74
24Jul92 stock @ 56.76 MM @ 13.61
29Oct92 MM @ 13.72 stock @ 58.61
23Dec92 stock @ 61.48 MM @ 13.78
16Jan95 MM @ 14.83 equity-index @ 26.44
20Jan95 eq-index @ 26.19 MM @ 14.84
Values, 30Apr96: stock, 98.12; MM, 15.93
Gain, 1988: 18.91%; 1989: 14.48%; 1990: 8.28%; 1991: 27.93%; 1992: 10.20%; 1993: 3.08%; 1994: 4.07%
Gain, January 1 through September 30, 1995: 3.34%
Total gain since January 1, 1988 (7.75 years): 127.93%
Compound annual rate of return: 11.21% (My long-term target: in excess of 15%)
Gain shown excludes the impact of additional monthly cash contributions.
Buying CREF stock on January 1, 1988 and holding it gained 179.14%, for a compound annual rate of return of 14.17%.
COMMENT on "Timer's Trend" : It continues to be "whipsaw city" for "Timer's Trend", which last turned bullish on May 10. The market trend continues as dead neutral (a top?), and continued whipsaws of this signal are highly likely.
{, } = "Timer's Trend" (4% and 10% exponential) SELL ({) or BUY (}) signal
=============================TIMER'S TREND===========================
Mon 18 Mar 96 . | . # }| 5683.60 |~.+~~~~~~~~~~~~~~~~~~~~~~~~~~~~~*
Tue 19 Mar 96 . | .# | 5669.51 | . + *
Wed 20 Mar 96 . | .# | 5655.42 | . + *
Thu 21 Mar 96 . | # | 5626.88 | . + *
Fri 22 Mar 96 . | .# | 5636.64 | . + *
Mon 25 Mar 96 . | .# | 5643.86 | .+ *
Tue 26 Mar 96 . | .# | 5670.60 | .+ *
Wed 27 Mar 96 . | .# | 5626.88 | .+ *
Thu 28 Mar 96 . | # | 5630.85 | .+ *
Fri 29 Mar 95 . | # | 5587.14 |~.*~~~~~~~~~~~~~~~~~~~~~~~~~~
Mon 1 Apr 96 . | . # | 5637.72 | . + *
Tue 2 Apr 96 . | .# | 5671.68 | . + *
Wed 3 Apr 96 . | .# | 5689.74 | . + *
Thu 4 Apr 96 . | . # | 5682.88 | . + *
Mon 8 Apr 96 # . I . {| 5594.37 | + *
Tue 9 Apr 96 . I .# | 5560.41 |~+*~~~~~~~~~~~~~~~~~~~~~~~~~~
Wed 10 Apr 96 . I# . | 5485.98 |+.~~~~~~~~~~~~~~~~~~~~~~~~~~~
Thu 11 Apr 96 . & . | 5487.07 + . *
Fri 12 Apr 96 . I . # | 5532.59 + . *
Mon 15 Apr 96 . I . # ]| 5592.92 | .+ *
Tue 16 Apr 96 . | . # }| 5620.02 |~.+~~~~~~~~~~~~~~~~~~~~~~~~~~~~~*
Wed 17 Apr 96 . I # | 5549.93 | . + *
Thu 18 Apr 96 . | . # | 5551.74 | . + *
Fri 19 Apr 96 . | . # | 5535.48 |~.~~*~~~~~~~~~~~~~~~~~~~~~~~~
Mon 22 Apr 96 . | . # | 5564.74 | . + *
Tue 23 Apr 96 . | . # | 5588.59 | . + *
Wed 24 Apr 96 . | . # | 5553.90 | . + *
Thu 25 Apr 96 . | . # | 5566.91 | . + *
Fri 26 Apr 96 . | . # | 5567.99 | . + *
Mon 29 Apr 96 . | .# | 5573.41 | . + *
Tue 30 Apr 96 . | .# | 5569.08 | . + *
Wed 1 May 96 . | . # | 5575.22 | . + *
Thu 2 May 96 . #I . | 5498.27 |*.+~~~~~~~~~~~~~~~~~~~~~~~~~
Fri 3 May 96 . I # | 5478.03 |~.+~*~~~~~~~~~~~~~~~~~~~~~~~~
Mon 6 May 96 . I #. | 5464.31 | + *
Tue 7 May 96 . I# . {| 5420.95 |~+~~~~~~~~~~~~~~~~~~~~~~~~~~~
Wed 8 May 96 . I #. | 5474.06 |+. *
Thu 9 May 96 . I .# ]| 5475.14 | + *
Fri 10 May 96 . | . # }| 5518.14 | .+ *
Mon 13 May 96 . | . # | 5582.60 |~.~+~~~~~~~~~~~~~~~~~~~~~~~~~~~~*
Tue 14 May 96 . | . # | 5624.71 | . + *
Wed 15 May 96 . | . # | 5625.44 | . + *
Thu 16 May 96 . | .# | 5635.05 |~.~~+~~~~~~~~~~~~~~~~~~~~~~~~~~~*
Fri 17 May 96 . | . # | 5687.50 |~.~~+~~~~~~~~~~~~~~~~~~~~~~~~~~~*
Mon 20 May 96 . | . # | 5748.82 |~.~~+~~~~~~~~~~~~~~~~~~~~~~~~~~~*
Tue 21 May 96 . | .# | 5736.26 | . + *
Wed 22 May 96 . | . # | 5778.00 | . + *
Thu 23 May 96 . | # | 5762.12 | . + *
Fri 24 May 96 . | .# | 5762.86 | . + *
Tue 28 May 96 . |# . | 5709.67 | .+ *
Wed 29 May 96 . & . | 5673.83 | + *
Thu 30 May 96 . | .# | 5693.41 | + *
Fri 31 May 96 . I #. | 5643.18 |~*~~~~~~~~~~~~~~~~~~~~~~~~~~~
=====================================================================
[, ] = 4% exponential change unconfirmed by 10% exponential (not a signal).
@ = market overbought or oversold. I or & (on baseline) = 10% exponential SELL.