Zbigniew Piekarski on Boom or bust for the Dow?
"From initial estimates we can state that the profits will significantly exceed 40 percent of the financial results of the whole banking system in Poland and will be the highest in the sector,"
- PKO BP bank president, Andrzej Podsiadło, celebrating an increase of a paltry 17 percent in net profits in 2003 and adding that 2004 also seems promising.
One defining feature of a mania is that it generates an unnatural upward thrust in prices. From the outset, some recognize the movement as unsustainable but, as it pushes higher, they give in to calls for further advance. The reversal tends to come when a large body of those who held out finally decide that the advance can be sustained. For example, on March 10, 2000, the front page of The Wall Street Journal had the following headline: "Conservative Investors Finally Are Saying: Maybe Tech Isn't a Fad" on the day of the NASDAQ's all-time high.
As stocks reached a peak last month sentiment increased. The American Association of Individual Investors' bullish percentage hit 69.5 percent as the Dow Jones Industrial Average (DJIA) approached its January 26 high of 10,702.51. The figure is the third highest in the 16-year history of the poll. The second highest reading of 71 percent came as the current run of sustained bullishness was getting on track in June. The highest reading of 75 percent came on January 6, 2000, just eight days before the Dow's all-time peak.
The old record of eight straight weeks of better than 50 percent bullishness was also set as the Dow reached its all time peak in 2000. That record has now been shattered by 25 straight weeks of more than 50 percent bulls.
According to the Yale School of Management's measure of one-year confidence, 95 percent of individuals and 91.74 percent of institutions believe that the market will rise over the next year. Both figures are the highest in 15 years of polling.
In recent weeks a rush of articles has appeared about recalcitrant 'bears' who now forecast a continuation of the rally through at least the presidential election in November. One story cited a host of different indicators ranging from a record high 90 percent of stocks above their 10-week moving averages to the lowest CBOE Volatility Index readings in almost 10 years signaling that "stocks are extremely overbought" but then added that the technicians gathering these readings had all given up on their normally reliable gauges. The fact that many technicians are now dismissive toward their own tools is itself a sign that the decline will be bigger, and last longer, than almost anyone expects.
One of the key lessons of the all-time peak in 2000 is that the indicators didn't fail. By flashing longer and more brilliantly than ever, they simply broadcast the size of the reversal. The recent array of unheeded overbought readings is an extension of that display. The long-term trend is generally ready to change course only after consumers overreact and sentiment goes to a new extreme unaccompanied by stocks.
One of the most infallible indicators that a market is about to peak is the renewed confidence of the banking sector, for bankers have an uncanny ability of fully commiting to a trend once it is over. In November 1999, less than two months from the Dow Jones Industrial's peak, Congress officially repealed the Glass-Steagall Act, a depression-era law that split the banks from brokers. The DJIA topped 60 days later. Within a week of the next peak on September 6, 2000, J.P. Morgan and Chase Manhattan decided to join.
The principle at work here is simple: bear markets break things apart and bull markets bring them together. Now we see J.P. Morgan selling out to Chase Manhattan. Morgan was severed from its investment banking division by the government in the 1930s.
On January 14, 2004, Morgan-Chase announced another mega-merger with its purchase of Bank One Corp. The bearish overtones were revealed by analysis of the merger in The Wall Street Journal, which distinguished the deal as a victory for the once shunned strategy of building banks around consumers. The merger sets up a battle of financial titans for the little guy with Citicorp, the world's largest financial institution. The strategy of catering to the small fry is the equivalent of the brokerage firms' merger binge in the late 1990s, which was built around retail investors. Now that the banking industry has aligned itself along the same lines, look for consumers to pay down debt and act in ways that should make a conservative banker proud. They will also lay waste to the banker's grand plans.
In the USA total consumer credit surpassed zł.7.7 trillion ($2 trillion) in November; credit card debt hit a record high of zł.2,834 billion ($735 billion) in October, nearly zł.27,000 ($7,000) per household; and bankruptcies rose to a record high of 1.6 million households in 2003. The total consumer credit market debt as a percentage of GDP has risen to a record high of 82 percent. Although the alarming credit statistics have been around for some time there is good reason to suspect that the consumer debt bubble is ready to pop and, as it unfolds, borrowers and lenders will finally lose their nerve.
For followers of the Dow Theory, the Dow Jones Transportation Average has indicated what is to come. On Friday January 30, after three days of sustained selling, it lost three months of gains bottoming at 2880.89 which was reached on Friday October 14 in the rally. If three days down equates to three months up in liquid markets I just wonder what timescale will rule in markets that are illiquid when the sellers want out and the buyers go on strike. Three hours? Go to www.gpmanagement.com for the latest predictions.
On the WSE: While most of the World's Indexes made fresh highs in January, the WIG20 stayed flat. The enslaved pension funds may have to prop up the system but they cannot be forced to buy when they don't want to.
- PKO BP bank president, Andrzej Podsiadło, celebrating an increase of a paltry 17 percent in net profits in 2003 and adding that 2004 also seems promising.
One defining feature of a mania is that it generates an unnatural upward thrust in prices. From the outset, some recognize the movement as unsustainable but, as it pushes higher, they give in to calls for further advance. The reversal tends to come when a large body of those who held out finally decide that the advance can be sustained. For example, on March 10, 2000, the front page of The Wall Street Journal had the following headline: "Conservative Investors Finally Are Saying: Maybe Tech Isn't a Fad" on the day of the NASDAQ's all-time high.
As stocks reached a peak last month sentiment increased. The American Association of Individual Investors' bullish percentage hit 69.5 percent as the Dow Jones Industrial Average (DJIA) approached its January 26 high of 10,702.51. The figure is the third highest in the 16-year history of the poll. The second highest reading of 71 percent came as the current run of sustained bullishness was getting on track in June. The highest reading of 75 percent came on January 6, 2000, just eight days before the Dow's all-time peak.
The old record of eight straight weeks of better than 50 percent bullishness was also set as the Dow reached its all time peak in 2000. That record has now been shattered by 25 straight weeks of more than 50 percent bulls.
According to the Yale School of Management's measure of one-year confidence, 95 percent of individuals and 91.74 percent of institutions believe that the market will rise over the next year. Both figures are the highest in 15 years of polling.
In recent weeks a rush of articles has appeared about recalcitrant 'bears' who now forecast a continuation of the rally through at least the presidential election in November. One story cited a host of different indicators ranging from a record high 90 percent of stocks above their 10-week moving averages to the lowest CBOE Volatility Index readings in almost 10 years signaling that "stocks are extremely overbought" but then added that the technicians gathering these readings had all given up on their normally reliable gauges. The fact that many technicians are now dismissive toward their own tools is itself a sign that the decline will be bigger, and last longer, than almost anyone expects.
One of the key lessons of the all-time peak in 2000 is that the indicators didn't fail. By flashing longer and more brilliantly than ever, they simply broadcast the size of the reversal. The recent array of unheeded overbought readings is an extension of that display. The long-term trend is generally ready to change course only after consumers overreact and sentiment goes to a new extreme unaccompanied by stocks.
One of the most infallible indicators that a market is about to peak is the renewed confidence of the banking sector, for bankers have an uncanny ability of fully commiting to a trend once it is over. In November 1999, less than two months from the Dow Jones Industrial's peak, Congress officially repealed the Glass-Steagall Act, a depression-era law that split the banks from brokers. The DJIA topped 60 days later. Within a week of the next peak on September 6, 2000, J.P. Morgan and Chase Manhattan decided to join.
The principle at work here is simple: bear markets break things apart and bull markets bring them together. Now we see J.P. Morgan selling out to Chase Manhattan. Morgan was severed from its investment banking division by the government in the 1930s.
On January 14, 2004, Morgan-Chase announced another mega-merger with its purchase of Bank One Corp. The bearish overtones were revealed by analysis of the merger in The Wall Street Journal, which distinguished the deal as a victory for the once shunned strategy of building banks around consumers. The merger sets up a battle of financial titans for the little guy with Citicorp, the world's largest financial institution. The strategy of catering to the small fry is the equivalent of the brokerage firms' merger binge in the late 1990s, which was built around retail investors. Now that the banking industry has aligned itself along the same lines, look for consumers to pay down debt and act in ways that should make a conservative banker proud. They will also lay waste to the banker's grand plans.
In the USA total consumer credit surpassed zł.7.7 trillion ($2 trillion) in November; credit card debt hit a record high of zł.2,834 billion ($735 billion) in October, nearly zł.27,000 ($7,000) per household; and bankruptcies rose to a record high of 1.6 million households in 2003. The total consumer credit market debt as a percentage of GDP has risen to a record high of 82 percent. Although the alarming credit statistics have been around for some time there is good reason to suspect that the consumer debt bubble is ready to pop and, as it unfolds, borrowers and lenders will finally lose their nerve.
For followers of the Dow Theory, the Dow Jones Transportation Average has indicated what is to come. On Friday January 30, after three days of sustained selling, it lost three months of gains bottoming at 2880.89 which was reached on Friday October 14 in the rally. If three days down equates to three months up in liquid markets I just wonder what timescale will rule in markets that are illiquid when the sellers want out and the buyers go on strike. Three hours? Go to www.gpmanagement.com for the latest predictions.
On the WSE: While most of the World's Indexes made fresh highs in January, the WIG20 stayed flat. The enslaved pension funds may have to prop up the system but they cannot be forced to buy when they don't want to.
