Barron's Article excerpted front page.. Usually I don't like regurgitating articles but rather reading and pulling out what words of advice I can glean from the articles. This article however (I've left out some although its along the same vein simply because of the lengh..but the gist was the same).. really says it all clearly and doesn't need 'paraphrasing, analyzing or anything that would detract' from the impact.
We don't have to agree with it but we should keep it in mind.
It solidifies what we have said about the 'psychological' bullishness lately, and the need to tread softly.
Dow 2500, Anyone?
A veteran theorist fears that the worst still hasn't arrived
An Interview With Richard Russell -- As a long-time interpreter of the venerable Dow Theory, which tracks the primary trend of the stock market, Dick calls 'em as he sees 'em. His comments have graced our pages since 1958, the year in which he launched his newsletter, Dow Theory Letters. These days, most subscribers read his views daily on his Website, www.dowtheoryletters.com. Like any umpire, Dick occasionally misjudges a curve ball. For example, he caught the market top in the spring of 1962, but stayed bearish too long and missed the entire bull move that ran until 1966, when he correctly restated his bearish case. That said, the long-term track record of this technician is impressive at major turning points. He nailed the exact bottom in December 1974, and has been rather prescient ever since.
Last spring (June 12, 2000) and again last fall (December 4), Dick explained in these pages why a primary bear market is under way. Keep your eye on the big picture, he advises, and don't be distracted by short-term fluctuations. Currently, he's invested mainly in Treasury bills. For the reasons, read on.
-- Peter C. Du Bois
Barron's: Last November you correctly warned that a potentially brutal primary bear market had entered the second -- and usually longest -- of three psychological phases. Where are we now in your scenario?
Russell: We're still in the early part of Stage 2, where stocks decline in the face of visibly deteriorating business conditions, and corporate profits are falling. Several things are critical here. First, value is the key to Dow Theory [see below]. Even though popular indexes have fallen sharply over the past year, stocks are still very expensive by historical standards.
Second, studies have shown a relationship between current price/earnings ratios and dividend yields and the likely future performance of equities. With the P/E for the S&P 500 Index now at a lofty 23 and dividends below 2%, stocks aren't priced to even match the return on T-bills over the next 10 years.
Third, I believe we've entered a period that will play out like 1966-74, with a series of mini-bull and mini-bear swings. Over this span, the market on balance will go nowhere for years, then collapse in the third, or "give-up," stage. That's when good stocks are thrown away with the bad, and people want out at any price. This final phase hasn't arrived yet, and likely won't for some time. In other words, we're nowhere near the bottom of this bear market.
Q: Is there any good news?
A: Maybe. The single most puzzling aspect of this bear market is the fact that the Dow Jones Transportation Average [recently at 2716] steadfastly has refused to confirm the downward path of the Dow Jones Industrial Average.
Q: What does that tell you?
A: This could be an intermediate-term plus in a primary bear market. The DJIA recently has been locked in a narrow trading range. If the Transports hold up, the Industrials [recently at 10,056] could rally first to their 50-day moving average at 10,315, then to their 200-day moving average of 10,618 or even beyond. However, this wouldn't mark the start of a new bull market. Remember, bear declines can take well-deserved breathers at any time. These rallies tend to be sharp, sudden and very dangerous. They tend to end as abruptly as they began. The flip side of this scenario is that Transports could turn around and decline, and Industrials could drop to new lows. I'm not certain what will happen. The market will make its own judgment. Meanwhile, a major milestone has been reached. Not since 1982 had the DJIA closed below its low of the prior year. That was a heck of a 19-year run, but it recently was broken when the Dow fell to 9389.48 on March 20, before rallying. The drop below 9796 was a major crack in the structure of the market, but it's not yet a fatal ....
Q: Amen. Let's switch gears. Why do you suppose the public remains so optimistic about the outlook for the stock market?
A: Their resistance to believing we're in a bear market is mind-boggling. People still seem to be hanging on for the "long haul." This really is a tragedy. The losses in the average portfolio must be horrific. Foolish optimism and the speed of the Nasdaq decline literally have "locked in" millions of investors, the people who buy individual stocks and mutual funds..
In my experience, the single hardest concept to get across to investors is the fact that there are tidal movements in the market. The bull tide takes stocks from being undervalued to being overvalued. Then the bear tide comes in, corrects the bull movement, and takes stocks back to undervalued again. Why can't people accept this? Probably because the idea is too simple, too basic, too theoretical.
Oldtimers have seen extreme undervaluations before, and can envision them returning. However, the vast majority of investors and analysts don't relate to extreme undervaluations. This phenomenon isn't new. Way back at the turn of the 20th century, Charles Dow wrote that the most difficult concept to teach people is the inevitability of change. Sometimes the simplest ideas are the hardest to get across.
Q: Does anything else account for today's blind bullishness?
A: Sure, the very nature of Wall Street itself. The awful truth is that Wall Street doesn't care about you as a person. It only cares about your money. Wall Street isn't interested in conserving your assets, Wall Street is interested in getting control of your assets. Everything about Wall Street is directed toward selling merchandise to you. Brokerage-house managers ask their brokers: "How are your sales?" They don't ask: "How are your customers doing?" May I tell you my fundamentals of investing?
Q: Of course.
A: First, above all don't take big losses. This is critical. It means: When in doubt, get out. There's nothing wrong with moving to the sidelines, even though current propagandists tell us we should be in the market at all times. Lose 60%-70% of your assets and psychologically you are whipped. And the odds are that you'll never recover those losses.
Second, understand the power of compounding interest. Compounding is the royal road to riches. For more on compounding, read the article on my Website.
Third, learn some history. Learn what great values are. Learn what overpriced stocks look like.
Can additional rate cuts halt or slow this bear market?
A: No. Before it's over, we'll see the end of the "cult of the Fed." The fact is that the Fed created the biggest economic and stock market balloon in U.S. history, and they did it over a period of years. This allowed, in particular, the technology sector of the economy to expand production capacity far beyond what was needed.
Lowering interest rates and flooding the banks with liquidity won't solve the problem. Only time will solve the problem. Excess capacity will have to be worked off. The Fed can't work it off. Time, bankruptcies, removal of excess capacity are what will work it off. That entails time -- and pain. And everybody is up to his eyeballs with debt. Corporations are choking on it. To work off debt also takes time and pain.
In a bear market, margin debt is a speculator's worst enemy and a trader's worst nightmare. The peak for margin debt on the New York Stock Exchange was $278.5 billion in March 2000. By February 2001, it was down to $186 billion. It wouldn't surprise me to see this figure drop to around $30 billion before this bear market is over.
We're also seeing the beginning of the end of the cult of "buy the dip." Come hell or high water, in a major bear market, stocks head for levels that I call "great values." And the dreaded secret is: We're not there yet.
Q: Any final thoughts for our readers?
A: Take this bear market seriously. It's never too late to do the right thing. In a primary bear market, the right thing is to play it safe. That means getting out of almost all common stocks and into U.S. government paper. With cash in hand, you boost your buying power at the eventual bottom.
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