Thursday, Oct 24, 2002 10:53 AM ET
To: KevinMark who wrote (12068)
From: SOROS
"This market is driven by sentiment, period!"
I see I do have you pegged pretty clearly. This is similar to Voltaire's views. It works like a charm in a mania environment, but I've noticed those with this view tend to have a very hard time accepting (or they are at least very late in accepting) a firm change in sentiment. CNBC is a classic example of this type of thinking. I have also noticed (myself included), that those who tend to be bearish, have the opposite problem of accepting when sentiment turns to the bullish side. That said, having just had a 17 year bull market, looking at the US and world economic indicators, examining the current state of affairs, I feel the odds heavily favor following fundamentals right now. Fundamentals, IMO, determine the main market direction for the next long-term. Sentiment only comes into play (remember we are talking next long-term direction) initially and then finally for the end of the next medium period. Right now, people like you are accepting the initial sentiment mistakenly for the next long-term direction. It is the CNBC indicator -- always bullish no matter what the fundamentals point to. This early sentiment in a new long-term direction will be overcome by FUNDAMENTALS. Fundamentals will determine the next medium-term direction. Fundamentals will take over the early sentiment at some point, and then you will see fundamentals bring the market averages back to slightly higher figures than the long-term averages (about an S & P PE of 20, or about 30% lower than current). At that point, your sentiment tool will once again be useful, but the sentiment is what will cause the fundamentals to not be so important on the downside, just as in a mania, fundamentals are not what give you the blowoff tops. Fundamentals get you a little above the averages in a long-term bear (after coming off a long-term bull), and they get you to a little below the averages (after coming off a long-term bear) in a long-term bull. Sentiment is what comes into play in a major way near the final stages of a long-term bull or a long-term bear. So you have:
A. Sentiment in reverse direction at the start of a long-term trend with volatility
B. Fundamentals to bring averages a little above (in a bear) or below (in a bull) the next long-term direction
C. Fundamentals to keep market moving in the correct direction
D. Sentiment to overdrive a long-term bull higher than it should be or a long-term bear lower than it should be
E. Fundamentals to reverse the averages in the direction of the next long-term trend, and then back to A. to start again.
The difference between you and I -- I see us at A. whereas you see us just switching between good and bad sentiment. So I think you will see the average PE's brought down to the low 20's, a continuation of fundamentals being poor and slowly lowering those PE's further, sentiment taking over at some point (probably Dow 7000 or so), PE's being driven to oversold lows (below the 14 averages of the last 100 years), and then fundamentals change for the better and set the next long-term bullish trend.
There are, of course, many mini trends during this whole long-term process, but that is the overall direction. Look at Japan's chart from 1990 forward, and you will get an idea of what the US markets are now facing. We are in about the 3rd inning of a long-term bear trend which started in April, 2000 at my E. above.
Before this is over, you will see CNBC be replaced as the channel of choice at motels, exercise places, and in family homes.
I remain,
SOROS
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