WALL STREET'S CRYSTAL BALL
by Mark Scheinbaum
American Reporter Correspondent
Boca Raton, Fla.
BOCA RATON, Fla., Aug. 1, 2002 -- Fundamental and technical realities are now in place on Wall Street and Main Street for an economic recovery in the remainder of 2002 which recoups much of the earlier year's losses.
I just smile politely when people parrot, "Well, of course nobody can predict the market... ." That's because in a world of rocket scientists, practitioners, and savvy veteran traders and floor specialists, the macro-trends can be - and have been repeatedly, for many decades - predicted by the brave few who are contrarians.
At the end of January 2002 my forecast was for the broad, investment-grade, equity market to be down single digits for the year, later refined to down 6 percent to 9 percent. A look at the S&P 500 averages this week leads me to this further prediction:
After a few detours, a strong year-end rally will boost the Dow, S&P 100 and S&P 500 up another 20 percent or more from current levels. The S&P 500 should finish Year 2002 around 1080, which would be 90 points off of highs of 1170 at the start of this year. This would put the conservative, investment-grade, middle America, growth and equity-income mutual fund type of investor down just 7.7 percent for the year. After the roller coaster of the past 36 months, a -7.70 percent ending to 2002 will be refreshing to many investors.
You will notice I leave the NASDAQ Composite out of my calculations. Reiterating a thread in many of my columns, I feel that NASDAQ is a two-tiered or bifurcated market. At the top are a handful of institutional core holdings - a very few - which include Microsoft, Dell, and Intel. The rest are too-often artificially manipulated by news touts, foolish amateur day traders, and unscrupulous boiler room market makers. Homie don't play that game.
Here's my theoretical calendar and the rationale for each scenario.
Dow Rally - with corporate and personal bankruptcies still at monthly, and year-over-year high levels, a new Dow supporter above 8,500 will move slowly up, but involve plenty of trading range profit-taking.
September Fears - The long Labor Day weekend, the early Jewish High Holy Days this year, and the observance of the first anniversary of the September 11th, 2001 attacks will dampen optimism on Wall Street. It will be a good month to stay on the sidelines or take a vacation (which I'll do). Historically, back to school obligations, college tuition bills, and return from summer vacations, makes it a tough rally month.
October Surprise - Every October the financial news media feels the need to replay the mandatory "stock market crash" stories of 1929 and 1987. This year the stories will be augmented by a reminder that the would-be "recovery" can be wiped out by a cataclysmic event. Individual investors who have no stomach for volatility will again be frightened away.
International Events - Saber-rattling over Iraq, and other international events will either prop up the global view of the United States leadership as a "safe haven" for money, or send the dollar tanking again as the Euro, Swiss franc, yen and other currencies are favored by overseas investors and speculators. By year's end conventional wisdom will show that the United States and its equity markets have a remarkable resiliency.
Interest Rates - Last autumn we speculated that in a year mortgage rates could very well be exactly where they were in October of 2001. It now looks as if rates in August of 2003 could be very close to where they are right now, in August of 2002. If anything, perhaps a 100 basis point (1 percent) rise in long-term bond and mortgage rates is probably already "in the market."
Such interest rate stability helps long-term corporate and government infrastructure expansion plans (municipal bonds), but it also helps financial institutions whose interest rate hedges can stay in place with no adverse development to portfolio returns. Recent hints of a "real estate bubble" include numbers showing the prime areas of Atlanta and Phoenix were not as positive as first thought.
In these cities, and I suspect elsewhere, the housing boom has been predominantly in the upscale and super-upscale market. Lower and middle-income financing and refinancing has slowed, and construction for all but the fanciest homes of former Worldcom executives here in Boca seems to be easing up as well.
The final step in helping the stock and bond markets will be a flight from overpriced REITs (real estate investment trusts) which historically pay too much for property in boom cycles, and cut dividends and lose principal value in down cycles.
The long-term investor (5 to 20 years or more) should keep in mind that the Great Depression might have been triggered by the Crash of '29 but the market didn't bottom until 30 months later, in 1932.
In August 1982, after a decade of doldrums, the biggest bull market in history got started. Briefly interrupted by the Crash of 1987, the investors who did not panic saw their annual total returns actually in the plus column by the end of 1987.
All of this points to the final stages of a bear market, which in a declining NASDAQ environment worsened - triggered by a bad announcement by Proctor & Gamble (NYSE) in March of 2000 - almost 30 months ago. A three-to-four year pullback in every 12 to 16 year time frame weeds out lots of Wall Street garbage. This time some of that garbage might end up in the Federal prison system. But at the end of the year, I look for a modest negative result, and a firm catapult for a 2003 Raging Bull.
Mark Scheinbaum is chief investment strategist for Kaplan & Co. Securities, Boca Raton, Fla., which handles more than $600 million in institutional, corporate, and private investments, and runs two government agency bond hedge funds in New York.