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Readers want to know: Rally or no?
Markman updates analyst Michael Belkins call for a fourth-quarter downturn and answers readers who think its all doom and gloom from here. Plus, he defends his defense of China.
By Jon D. Markman
Every six weeks or so, the author of the SuperModels column answers his mail as readers implore, Hey Modelman!
Hey Modelman: I thought Michael Belkins comments on the market were interesting (Market prophet is battening the hatches). As for the market dislocation he expects in the fourth quarter, does he see it as a temporary thing, or something nastier? Im reducing my positions, but every time I see the beginning of a serious downdraft, we end up having a huge day like Tuesday.
-- Marius K. Misiunas, White Plains, N.Y. Markman: We received a ton of mail on Belkin, a veteran independent analyst with many accurate big calls to his credit, who said in an interview that he foresees a significant decline in coming months. A couple of readers said they had liquidated large stock positions after reading Belkins views, only to feel chagrin on seeing the market turn up sharply the next week.
It should go without saying -- but Ill say it anyway -- that no one should make dramatic portfolio-allocation changes on the basis of a single forecast. I corresponded with Belkin this week about equities continuing strength, and he remains skeptical. The stock market is up (since we talked), but it was mostly just one day, Oct. 28," Belkin said. "Some big mutual fund managers get bonuses based on year-ending October performance, giving an incentive to paint the tape through end of month. The stuff I look at is still ominous. Key data that was down for the week included money supply, the ECRI Index, bank credit and Treasurys. A weird involuntary slowdown is still in force -- not massive, just steady.
Belkins argument rests in part on the notion that a de-leveraging process, a draining of debt and contraction of the money supply, will sap the economys 2003 strength going forward. Of the 7.2% third-quarter gross domestic product figure announced last week, he said Friday: The GDP number was obviously going to be big. Keep in mind that 7% is annualized. The real GDP annual rate (over previous year) is 3.2%. This quarter-to-quarter change doesn't particularly stand out of historical range. Not to minimize it, but that number is history. I was long GDP growth, but not anymore. The bulls cannot deny hes right. To track this data at home, visit the Federal Reserves FRED II database. GDP data is here. Download the numbers and plot it yourself on an Excel worksheet. (See mine here.) Youll see that 3.2% year-over-year (nonannualized) GDP growth in the third quarter was good but not great. The average year-over-year third-quarter change since 1987 is 2.9%, and there are many quarterly gains of better than 4%.
But heres a more bullish angle on the number to consider: Next year, third-quarter GDP will be announced a couple of weeks before the presidential election. Since the executive branch can control the pace of government spending to some extent, it would behoove the Bush administration to push as much money into the economy as possible next summer, e.g., via big defense or IT outlays, to ensure a strong GDP number to ride into election day.
One way to play this idea: Northrop Grumman (NOC, news, msgs) and Lockheed Martin (LMT, news, msgs) have outstanding technology-services businesses in addition to their military boats and planes. The stocks are down 10%-plus this year, and while defense valuations arent super cheap, theyre not nearly as rich as tech or retail. Even if the 2005 Pentagon budget is constrained by deficit pressures, an expected boost in its modernization accounts should disproportionately benefit Northrop and Lockheed. So you could see a bump in their shares both from sector rotation, as well as from expectation of higher fundamental growth.
Hey Modelman: I think if you were an IT analyst who just lost his job to offshore outsourcing you'd think twice about your article (defending China) (China is no job-stealing bully). Personally, I boycott Chinese-made products because they just don't play fair. I hope one day you lose your job to a Chinese worker.
-- Paul Iancu Markman: Response to my column about the Bush administrations passive-aggressive approach to the valuation of the Chinese currency blew me away with its intensity. Businessmen wrote long, aching, e-mails detailing personal experiences with crooked Chinese bureaucrats; factory workers complained a silver-spoon elitist like myself would never understand their pain; fathers wondered how their kids would ever find jobs; many observed that the road to perdition started with the export of jobs to Mexico under the North American Free Trade Agreement.
To paraphrase an old Ford (F, news, msgs) commercial, the loss of manufacturing and services jobs overseas is Fear 1 among workers today. You dont have to look far or wait long to feel it. During a break in a motorcycle-safety class I took last weekend near Seattle, a woman whose AT&T Wireless (AWE, news, msgs) division is being uprooted to India nearly wept as she explained the disruption in her colleagues middle-class lives.
The Bush administration has responded to angst over Asia primarily by pleading with Beijing to revalue its currency upward, claiming its current level makes Chinese goods artificially cheap, to the disadvantage of U.S. manufacturers. Yet when Treasury Secretary John Snow appeared before the Senate Banking Committee on Thursday in a hearing on trading partners currency practices, he raised the ire of his hosts by refusing to term China a currency manipulator -- a label that would have required the United States to enter into formal negotiations with Beijing.
What gives? It seems that the Bush team is balancing the economic good sense of applying gentle pressure behind the scenes with its political instinct to use China as a scapegoat for the loss of U.S. jobs. Last week, diplomacy won a round, but the next date to watch in this drama is Nov. 17, the deadline for an administration decision on whether to limit three categories of Chinese textile imports. If the administration follows through with this sort of protectionism -- and theres little doubt it will -- then Congress will be emboldened to push through any number of new tariffs on Chinese goods, as well. Neither is likely to save many U.S. jobs, but they will definitely score points with voters.
The outcome most commonly referred to by readers is the possibility that the only jobs left in America will be burger-flipping and Wal-Mart (WMT, news, msgs) clerking. That is, of course, an exaggeration. Yet while there are many valuable jobs that could never be lost -- police work, insurance adjusting, property management and road-building come to mind -- the number is certainly shrinking. An America without plenty of jobs paying in the double-digits per hour will be an America ripe for a Ross Perot-type America First presidential candidacy in 2008 that would close the borders and hunker down for a long winter of isolationism.
While the path out of this mess isnt clear, one might still prefer to let the free market, rather than politicians, figure it out. In the 1980s, the spectacular emergence of the personal computer and telecommunications industry came out of nowhere to rescue this country from its last serious bout with self-doubt. Seeds of our next revival are probably all around us, unrecognized at the moment but sprouting nonetheless.
For a look at some of many eloquent e-mails received on the China question, visit my personal Web site and click the Nov. 5 link. In the meantime, it is my crass duty to try to make a buck on whatever morbid state the world is in. Usually, investors focus on shares of Chinese companies for the if you cant beat em, join em trade. But another angle to consider is the third-party shipping and logistics companies, as all those goods made by U.S. manufacturers in Asia are sent here by boat and plane in a complex dance of time, space and quantity. These stocks have been rising for some time, but they recently were hit hard as air-freight margins compressed temporarily. Consider UTi Worldwide (UTIW, news, msgs) and Expeditors International (EXPD, news, msgs).
Hey Modelman: Put all your money in cash or gold and gold stocks -- the rally is over and we are gonna go down big-time (No, it is not too late to buy stocks). Luv your articles, but this time it's all over but the screaming. Good luck.
-- S. Ellis Markman: A lot of readers thought I had lost my mind when I wrote on Sept. 17 that it wasnt too late to buy into the rally that began in October 2002. But stocks have continued to levitate, at least for now. The 30 companies recommended are up 6.3% on average since, about half again as good as the 4% advance in the S&P 500 Index ($INX). Leaders are Harman International (HAR, news, msgs), up 28%, SCP Pool (POOL, news, msgs), up 25% and Oshkosh Truck (OSK, news, msgs), up 16%. Im struck by the diversity of success embodied in three mid-cap names: Harman makes almost all of its home and commercial audio/visual electronics in Asia; SCP Pool is a very U.S.-focused wholesale distributor of swimming pool products; Oshkosh is a major U.S. manufacturer of large specialty vehicles such as fire trucks and concrete mixers. Look for well-managed niche companies like these to continue to find ways to thrive in years to come, no matter whether this years rally is over or not. For the whole list, go here and click the Sept. 17 link.
The worst-performing stock in the group, by the way, is Gilead Sciences (GILD, news, msgs). Hammered last week after an earnings miss, the big biotech focused on infectious diseases looks poised to regain its composure.
Fine Print
Mike Belkins research is available to institutional investors only through the Web site of his representatives at Mondiale Partners. On this page, you can read more of his past pronouncements and interviews and view a recent report. . . . Sirius Satellite Radio (SIRI, news, msgs) reported earnings last week that were disappointing both in terms of subscriber growth and the cost of acquiring new subscribers. Three brokerage analysts weighed in with their unease and lowered ratings. And yet shares rose a bit. Action like that often suggests that the bottom is in for a stock.
Jon D. Markman is publisher of StockTactics Advisor, an independent weekly investment newsletter, as well as senior strategist and portfolio manager at Pinnacle Investment Advisors. While he cannot provide personalized investment advice or recommendations, he welcomes column critiques and comments at jdm@oddpost.com. At the time of publication, Markman was long the following equities mentioned in this column: Sirius Satellite Radio.
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