SuperModels Community
Join the discussion in the MSN Money SuperModels Community.
Purchase
Jon's new book.
SuperModels
Recent articles:
• The best momentum picks for a bull run, 9/24/2003
• No, it is not too late to buy stocks, 9/17/2003
• 12 contrarian picks, and 8 ways to catch more, 9/10/2003
More...
| | SuperModels
The Devil wears pink: A grim financial fairy tale
Analyst Jim Williams sees a great chasm: on one side, the millions who've lost jobs. And on the other, investors wearing rose-colored glasses and dancing very close to the edge.
By Jon D. Markman
For investors, the market is fading from black to pink. Not to red; that would be too obvious, since red is the color of danger and stop signs. Pink, on the other hand, is mythically the color of delusion and denial, the color of rose-colored glasses, the color of juvenile wistfulness.
That is the view, at least, of Jim Williams, a veteran psychocultural analyst retained by major financial institutions for his keen scrutiny of incipient trends and news anomalies. Speaking from his redoubt in southern Massachusetts last week, he said the dark season of excess fear and anger generated by the bear markets two-year reign of terror has, in the past six months, given way to a precariously season of excess hope and denial.
His observation stems largely from his discovery that pink has made a comeback among the fashion forward, spearheaded by influential designer Isaac Mizrahis new line; that angels have replaced gargoyles in sales at antique boutiques and Hallmark card racks; that childrens playthings have made a comeback as collectibles among 20-somethings; that the musical Peter Pan has regained popularity; and that margin and credit-card debt are near record highs. These are the scattered clues, or down cards, from which he draws broad judgments -- just as a pollster forecasts a presidential election by surveying just 1,700 people.
We seek what we lack
Drawing on the lessons of psychoanalyst Carl Jung that people grasp consciously for symbols that are the reverse of their subconscious, Williams proposes that the publics attraction to pink and nostalgia reflects their deep inner fears. The public has turned to speculation in stocks precisely because they do not have hope, he says. They are piling up debt in total denial of their eroding liquidity. Outside they are partying because inside they are glum; they are grasping at straws, he says.
The dangerous implication for the market, he says, is that any new data or event that would throw irrefutably cold water on the positive consensus view could have an unexpectedly harsh effect. When you take off your rose-colored classes, the world looks even gloomier than it really is, he says.
Quick anecdote: A couple of months ago, Williams says, he was paying his quarterly visit to a client, mutual fund giant Fidelity Investments in Boston, and the 16 money managers in the room all preened as bulls as the market hit new highs. There was too much bravado, Williams said. If they had told me its possible that the economy is improving, or that they werent 100% sure, I would have felt more comfortable. But they were so strong, it was a throwback to the late 90s.
When Williams first explained his theory of anomalies and down cards back in mid-March (see my column, Little clues can lead to big profit, he was urging clients to buy stocks because he anticipated a reversal of the extreme risk aversion pervasive at the time, just prior to the start of the Iraq conflict. Now he is urging clients to sell stocks as he anticipates fretfully overleveraged individual investors reversing back toward a revulsion for risk.
He was particularly exasperated by the nature of the stocks that rallied hardest in the past six months. Among stocks focused on the emerging trend toward the widespread use of wi-fi -- a trend, by the way, he first highlighted for clients years before it hit the mainstream -- he noted that tiny, profitless component maker Proxim (PROX, news, msgs) advanced 120% since March 15 while profitable competitors PCTEL (PCTI, news, msgs), Intersil (ISIL, news, msgs) and Cisco Systems (CSCO, news, msgs) have advanced just 33%, 54% and 42%. Whats going on here? The worst stocks had the best moves. It shows the public binged on speculation at the expense of prudence. They denied reality. Its something that can persist for a while, but its something that can never last.
Investors will open their eyes, but when?
In Williams judgment, the days of pink are numbered -- he just doesnt know how many. When people get more in touch with their inner selves, the market will go down, he forecasts. I dont know when, probably within a month to six months, but I know that it will.
Why is the timing part hard? Consider another anecdote. I mentioned to Williams that my 8 -year-old daughter had recently seemed to engage in her own pink period. At bedtime lately she wants to be read kindergarten-level books like the Berenstain Bears rather than more challenging chapter books. I initially found this puzzling, but soon realized she seemed to want to return to an earlier time in her childhood, to be a carefree preschooler rather than a third-grader responsible for homework, soccer and piano. Williams said the timing for investors decision to grow up was similar to my daughters: You dont know when and she doesnt know when. The catalyst is a mystery. But at some point, she will want to read more at her level, and at some point, investors will stop denying the present.
Williams theory goes a long way toward reconciling conflicts among current economic data.
The Weekly Leading Index of the Economic Cycle Research Institute has hit 55-year highs in recent weeks. According to ECRI chief Lakshman Achuthan, that indicates U.S. gross domestic product is expanding at an above-trend growth rate of around 4% to 5%, and that there is no downturn on the six-month horizon.
Bulls believe that jobs -- which should be expanding at a pace of 250,000 per month at this point, yet instead are contracting -- will rebound sharply as economic growth accelerates in the next two quarters. But bears argue that due to the stunning lack of jobs in the recovery -- 3 million have disappeared -- there arent enough well-paid new workers to buy stuff, thus the growth cannot be sustained and another recession within a year is inevitable.
Achuthan thinks both sides are wrong, conjecturing that the United States will see stronger industrial production through next year, but increases in productivity and an acceleration of overseas outsourcing has structurally put a cap on U.S. manufacturing jobs forever. Making up the difference, he says, is higher income for the remaining workers that will tide the economy over until factory workers are retrained into service, distribution, consulting or entrepreneurial roles. Those who would say jobs are a lagging indicator and will snap back are in Fantasyland, he says. But the people who do have jobs are not afraid to continue consuming, and they have more money. Personal income is hanging in there. As GDP strengthens, income will rise with it.
The economist, who has done a very good job of calling the twists and turns over the past few years, concludes by suggesting that bears are prone to the error of pessimism if they underestimate the durability of the recovery.
Can the Pink Divide be bridged?
The rub, however, is that the people most responsible for grinding out that growth dont see it coming. Chief Executive magazine reported this month in their monthly survey of CEOs that nearly half of respondents, or 46%, said the economy would grow at 2% or less in the fourth quarter of this year, and another 39% predicted less than 3% growth. Moreover, sales of stock by corporate insiders is at an all-time high, peaking last month at levels higher than those that pre-dated major market swoons of the past several years.
The gap between what Achuthan sees and what the CEOs see could be called the Pink Divide. As people have seen their neighbors jobs fall by the wayside -- apparel icon Levi Strauss last week announced it would close all its remaining North American plants -- they have gone on a feel-good shopping spree financed by mortgage refinancing, credit cards and brokerage margin.
Their over-the-top spending on cars and trucks and houses and stocks can go on only for so long. And then the bills must be paid. In green, and not in pink. And if Williams is right, the ending wont be a happy-go-lucky childrens story, but a fairy tale very grim indeed.
Fine Print
You dont have to look far to see pink cropping up everywhere. Heres an article from the Washington Post about Mizrahis new collection for Target. Heres an article this week from a Las Vegas newspaper, and one from South Korea. Heres one from Massachusetts and another from Oregon. And from Denver, perhaps the best. . . . Bob Drach, who writes the influential Drach Market Report, has also turned quite negative, urging readers to have no more than 17% of their money in stocks. You may recall my Feb. 19 column, when I reported he had presciently urged investors to start moving two-thirds of their investable cash into stocks amid that months big decline. Like Williams, he points to the extreme level of Nasdaq margin debt and insider selling as major concerns. Drach is anticipating a 5% decline from here in high-quality Dow Industrials stocks, and a 7%-to-10% pullback in Nasdaq stocks into the middle of October -- they could get whacked pretty good, he says in a Tallahassee twang -- at which point he would shovel money back into stocks for a mild rally into the end of the year. If people are in denial, they wont be much longer, he said in a phone interview. I dont know why they went back to the speculative stocks right away. They never seem to learn. . . . Heres the Chief Executive magazine survey story.
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, Jon D. Markman owned or controlled shares in the following equities mentioned in this column: Cisco Systems.
|
