SuperModels Community Join the discussion in the MSN Money SuperModels Community. SuperModels Recent articles: • Going against the crowd really paid in 2002, 12/18/2002 • How to play latest hotspot: the wireless Web, 12/11/2002 • Ready for a nasty reversal of fortune?, 12/4/2002 More... | SuperModels 6 predictions from the smart money The market pros and prognosticators I trust have varying takes on 2003, but no one's exactly optimistic. Here are their calls on what will drive stocks in the months to come. By Jon D. Markman The year ahead is an unknown land. What lies a minute beyond the stroke of midnight tonight, the first year to follow three straight down years since the Depression? It could be a garden, a raging sea, a desert, an asphalt yard, a cemetery. Or it could be a lovely, rolling rural road -- a shady, uplifting deliverance into cooler, calmer times. No one truly has a clue, least not me, and chances are that even when the bowl games are done and trading begins on Jan. 2, it will still be weeks or even months before the real complexion of 2003 becomes clear. After all, if the year starts poorly for investors, bulls will say its bound to get better -- cant possibly get worse. And if it starts off well, bears will complain that its just a structural effect caused by fund flows and asset allocators; nothing to celebrate. Even as we step into 2003, in other words, it will remain terra incognita -- unsettling and strange. The true nature of the year were concluding, after all, was a bit of a mystery to many, right up until about two weeks ago -- those down-down-down days before Christmas when even diehard optimists were forced to conclude that Santa Claus probably wasnt going to deliver the market from another double-digit debacle.
And yet its in our nature to fantasize that we can foretell the future, as it distinguishes us from beasts. Said composer Maurice Ravel of his Mother Goose suite masterpiece in 1937: The imaginary, the false, if you please, used to create an illusion, is mankind's one superiority over the animals -- and, when he undertakes to create a work of art, the artist's one point of superiority over the rest of mankind." The trouble with much of the past few years, however, is that illusions have been all too common, and far from artful. Investors were just trying to turn a hard-earned buck into a dollar and 10 cents when they put their faith in corporate leaders at WorldCom So, shall we try to imagine what next year brings anyway? Of course we must, for serious success in the markets is only available to those who coldly combine experience and logic to see the future before it happens -- and act on their calculations with confidence. But we will try to avoid divinations that lack proven forecasting power, or we will end up like the boy in the fairy tale who thought he was safe as he hiked deep into a forest because he dropped bread crumbs behind. A good idea, perhaps, but not well thought through, as learned when he was unable to find a single crumb on the way back; birds had consumed them all. Columbus: Lackluster insider buying One proven augur of the future in recent years has been patterns of buying and selling of shares by corporate insiders. You know the pitch: High-level executives, board directors and founding families are supposed to have the best possible view of the future success of their business. Countless academic papers have shown that, in aggregate, they do a very good job of buying in bulk at lows when business prospects are better than the market believes -- and disposing in bulk when prospects are worse than consensus. Going into 2003, insiders are not at all bullish as a group, says Craig Columbus, president of Thomson Wealth Management and one of the nations leading experts on insider trading. Theyre not overtly bearish, either. But after three years of languor in the market, youd think buying would be at a high level. It is not. Columbus says the five-year average of insider buying is $280 million per month in the United States. At peaks in times of extreme panic that preceded real bull-market surges -- e.g., August 1998 through November 1998 -- the monthly total of insider buying has hit $350 million to $730 million several months in a row. Yet even in September last year, with the market plunging, insider buying peaked at just $264 million per month, or $20 million less than the five-year average. Monthly insider buying fell as low as $121 million in April last year. The December numbers arent complete yet, but Novembers total was just $183 million. Insider buying is just anemic -- theres been a buyers strike, Columbus said. Theres a total lack of conviction to buy stock among people who have proven repeatedly to be the smartest buyers. Kahn: Good values hard to find Now lets turn to Thomas Kahn. As longtime readers know, I like to hear from the smart-money investors who have for decades plied the trade well off the mossy track of mutual funds, brokerages and the financial television punditry machine. Kahn, whose roots in value investing go back to his apprenticeship with Benjamin Graham, has compounded returns for managed-account investors at 21% annually over the past 10 years with no setbacks -- including an 8% gain this year. Looking over that brick wall of the future, he declares that the past few years of decline have not yet created compelling values for long-term investors. A lot of people say the market is cheap and there are a lot of values out there, but we dont see it that way, he said. The tide has gone out and there are a few interesting shells on the beach, but not a lot. Kahn says he doesnt care much for studying big macroeconomic factors, as he considers the daily analysis of the number du jour out of Washington uninformed chitchat and a 100% waste of time. You have no control over the economy, he says, so you should instead spend that time focusing on the prospects of individual companies and their management, and determining which you can buy for 50 cents to 60 cents on the dollar at a high margin of safety. On further weakness, hell be buying the same names he mentioned last year in this column: Medical device maker Hologic Mr. P: A modest bull market No look to the future should be without a mystery guest, and ours is the ineffable "Mr. P." Readers will recall that Mr. P, an East Coast macro hedge fund trader who declines to be named, made a series of several accurate calls on market direction in this column over the past two years, including the then-gutsy assertion in January 2001 that the Fed would cut interest rates by more than 300 basis points. Today, first of all, he thinks you should know that Norway and Panama are in the middle of terrible droughts. Why thats important, I have no idea; maybe well find out. (Their economies are said to be 100% dependent on hydropower). Second, he thinks that the Republicans will start the year in a mad rush to complete a fiscal stimulus package in record time, about six months, so that theyre done by the time campaigning for president begins in the summer. That would be good for the investor class. However, he believes that the Democrats will do all they can to impede the progress of the economic plan so that the Republicans wont be able to use it as a 2004 campaign issue -- and that would be bad. The world has come to the conclusion that because the Republicans own the Senate, an economic package and dividend-tax cuts will get done. But we think nothing will get done, as the Democrats pull every trick in the book to block the GOP progress, he said. More predictions from Mr. P for 2003:
Rhodes: Weaker consumers The economy is the big question mark, obviously, and since it seldom does what the majority believes, we need an out-of-consensus view. The pundit class thinks that the economic recovery is on track -- though currently in a soft spot -- and U.S. gross domestic product will advance at an annualized rate of around 3.25%. That would be fine for stocks, and not unreasonable. But my research suggests it will come in a little lower, around 2%, which would be less accommodating for bulls, particularly if there is a negative quarter thrown in to counterbalance a couple of higher-than-average quarters. Since the consumer accounts for two thirds of the economy, you need to envision higher employment and decent wage growth to get to the higher end of the prediction range. However Richard Rhodes, a newsletter publisher whose economic views are well-grounded in his work as a strategic planner for a large telecommunications company, told me he thinks next year will be worse for wage growth than any year in recent memory. Employers have the upper hand, and with basic materials costs rising and profit margins falling, theyre going to cut costs everywhere they can, he said. They dont have to worry so much about keeping workers; most feel lucky just to have a job. So theyll push more health-care costs to the employee and hold down bonuses and merit increases to the point that 2003 will go down as a year of paycheck shock. The bottom line, in Rhodes view -- which has been accurate ever since I began talking to him three years ago -- is that chastened consumers will finally slow down their spending in 2003, sending retail sales below consensus and putting a lid on overall economic growth. The consumer is the fuel that fed the fire, and that fire is slowing burning down, he said. The Chicago-based trader predicts another flat to down 2003 for the stock market, punctuated at this time next year with estimates of a much-improved 2004. Erlanger: Investors still too bullish Hell get no argument from another of my proven sources, Phil Erlanger, a specialist in developing scientific views of investor sentiment. Erlanger says sentiment and price action could not be worse at this time. He says that three years of declining markets have failed to put the level of fear into investors that he believes is required to create healthy bull markets. Theres still too much bullishness, too much call option buying and every time I turn on the television, I hear someone say that the October low was the low, he said. I havent heard too many people say the Dow Jones Industrial Average ($INDU) could go to 6,000 or 7,000 -- but thats where I see the market heading unless something happens that creates a lot of fear. Erlanger said he believes the market needed to do much better in the fourth quarter to put bears on their heels; rising to around S&P 500 Index ($INX) 980 and coming back to test its breakdown level at 965 would have done it. But now he thinks the same pernicious trends that Rhodes foresees, anemic employment and wage growth, will hamper spending and thus the fortunes of the many companies that make consumer goods and services. Fiscal stimulus like a dividend-tax cut will be too little too late -- helping stock prices, perhaps, but not the economy. And the rest of the world isnt helping, with Japan and Germany both stuck in their own recessions. We are on the edge of a cliff -- and time is working against the market, he says. Indeed, his research suggests that if the S&P doesnt rise above 965 and stay there by April, it may not get back to that level for as long as six years. The one area he sees strength is energy, particularly contract oil and gas drillers and marine transportation, which tend to be non-correlated with the broad stock market. Achuthan: Pricey oil would mean recession If higher energy prices are truly in the cards for next year, that presents the doomsday scenario for resident SuperModels economist Lakshman Achuthan of the Economic Cycle Research Institute. Achuthan, who accurately called both the 2001 recession and 2002 recovery, said oil at $40 a barrel would almost certainly cause the U.S. economy to plunge back into recession. If that does not occur, he says his out-of-consensus view is that the surprise of 2003 could be a global synchronized recovery -- lead by a profit recovery and improved pricing, or inflation -- that takes U.S. economic growth above the widely expected range, to around 3.75% to 4%. Ill update all of their views regularly as the year comes more into focus. Until then, I hope you keep your feet on the ground while you pursue your dreams in 2003. Id like to wish all readers a happy and healthy New Year. Fine Print You may recall that in my Dec. 4 column, Ready for a nasty reversal of fortune?, I described the unusual phenomenon of the outside reversal day in the major market averages on Dec. 2. I suggested that it could lead to an outside reversal week and significantly lower prices for the remainder of the year. Now that both have occurred, whats next? Unfortunately, we can now see that December shaped up as a bearish outside reversal month for the S&P 500 Index; that is, the high of the month was higher than the previous months highs and the lows were lower than the previous months lows, and the close was near the low. Bulls have to hope that history does not repeat itself, as the most recent bearish reversal month was September 2000, which pretty much kicked off the end of the bull market in the big-cap index. Sorry to offer one more worrisome view, but I checked in Monday with Paul Desmond, publisher of Lowrys Reports -- the institutional service that studies upside and downside volume to determine whether buyers or sellers have the upper hand. (See this column and this one.) Desmonds work correctly led him to issue a buy signal to clients a couple days after the October low, and a sell signal in early December near the recent top. He says both buying pressure and selling pressure are stalemated near six-month lows, a condition that is usually resolved to the downside. He points out that if the October lows did not cut the valuations of stocks low enough to attract sustained, high-volume buying interest -- i.e., more than a quick 30-day rally -- then they probably wont hold. He speculates that sellers will soon grow weary of waiting for higher prices, and in a rush to the exits theyll push the broad indexes considerably lower than the October levels. We believe the first part of 2003 will not be a pleasant experience, he said. Jon D. Markman is senior investment strategist and portfolio manager at Pinnacle Investment Advisors. While he cannot provide personalized investment advice or recommendations, he welcomes column critiques and comments at supermodels@jonmark.com. At the time of publication, his fund owned 3Com, but positions can change at any time. | ||||
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