Zeev's Turnips Patch-No Politics (ZEEV)

[Ace Hanlon]

Zeev:

Latest comments by Alan Newman:



Our indicators of the market's internal dynamics are now at the same levels as they were at the March 2002 highs. "Internal Dynamics" measures the relative strength of price, volume and breadth and their relationships to each other component. Simply put, the indicators are as stretched as they were at the March 2002 highs of roughly Dow 10635, SPX 1170 and Nasdaq 1900. Those highs were followed by a period of slow pullback and consolidation until prices accelerated down from Dow 9900 at the end of May to a 7197 print low in October, thus far the bear market low.

Sentiment appears to be extremely optimistic. The Big Money poll in Barron's shows 60.1% bulls versus 11.3% bears, one very good reason why prices are rising. Money managers are all climbing on the bandwagon. Just how much larger the bullish contingent can grow from here represents the potential for price improvement from this point.

Wall St. strategist allocations are at near record levels for stocks, meaning upside potential should be quite limited.

We are now in the Dead Zone, meaning upside potential should be quite limited.

However, momentum is quite strong and as the most insane period of the mania conclusively proved, animal spirits can move mountains.... and prices.

One of our most valuable exercises is to construct scenarios for both the bull and bear cases in order to better determine the odds for each and the "fit" for current circumstances. Suffice it to say, the rationales for the bull case are anything but compelling. About the only factor that gives our bear slant considerable pause is the following - closet indexing.

Beating an S&P "bogey" when prices rise, especially from a dramatic bottom like 911 or March '03, is very difficult when an active money manager has any cash at all. Index funds have no cash and are fully invested. Thus, there is an imperative to invest, invest, and invest more for active money managers rather than be left behind by the index. We will cover the subject again soon at length in the newsletter, but this is the primary reason why the cash-to-assets ratio has been on the decline for so long and to such low levels. Although the ratio climbed from 4.3% to 4.8% at the end of March, it is easy to infer the ratio is again down to 4.3% or possibly down near the record low.

What if active portfolio managers carry the trend past extreme and below the all time low of 3.9% in December of 1972?

Although cash reserves are back to where they were in the summer of 1997, there is still some portion of the $122 billion in cash to play with. We have actually begun to play with the numbers on our spreadsheets to come up with just where prices will be if mutuals take cash levels to a record low. Our best guess at this point is Dow 9935 and the first week of August. We're not placing any odds on this scenario at this point - just examining the possibility and raising the flag for the sole rationale that excuses prices for rising.

On the flip side, there are no other fundamentals we can see for supporting price, just the mechanical influence of the need to beat the S&P "bogey."

We believe the threat from SARS is greatly misunderstood and is underreported. We pray we are wrong!

Another 207 cases were reported on Friday, an increase of 3.5% for the cumulative total in just one day. The rate of increase is about the norm for what has been reported thus far and is astonishing. At this rate, cases double in 20 days, triple in 32 days and rise 10-fold in 67 days (by July 8th). The notion of containment outside China does not buoy us tremendously since it is only conjecture at this point. China has a population of 1.6 billion , roughly 25% of the world's population, and is an integral player in the world economy. If China is quarantined, the world economy will be impacted.