|The new wave of stock traders have ignored all practical advice and ridden a wave of internet stocks to enormous returns. They sneered at old valuation models and bought stocks that took the E out of P/E ratios. It all seemed so easy just a few weeks ago: Buy a stock, it goes up. Pretty simple really. How quickly things change.|
It is these same new investors who are now at sea without a rudder. The Wall Street Journal is running a few too many articles that quote "man on the street" investors saying things will get back to normal any day now. This is eerily reminiscent to similar articles written years ago quoting seasoned stockbrokers claiming that the market was overdone in 1996, 1997, 1998 and 1999. The new investors appear to be just as out of touch with market reality now as the established stock theorists were then.
So, what exactly is normal for the markets these days? Where are interest rates going? Will commodities ever rally? Well, glad you asked. I thought I'd take this opportunity to air some ideas and make a few salient points.
|Stocks: Personally, I am not a doom-and-gloomer when it comes to the stock market. I do not subscribe to the opinion that the market has to be in either a boom or a bust mode. History proves that markets will tend to consolidate for a period of time after substantial gains (from 1966 through 1980 the Dow's gains were meager at best). I don't believe the bloodletting will be that excruciating, but we may very well be at these same levels a year from now. Remember the last time the Federal Reserve raised rates aggressively throughout the year? That's right, it was 1994, the last flat year in the stock market. We are currently in the same party-crashing environment, as the Fed throws the wet blanket of interest hikes on a red-hot market. Mr. Greenspan has also warned investors not to count on the Federal Reserve to bail out the market (cut interest rates), if extreme volatility continues. As the new and old economies continue to merge, the rapid pace of stock price inflation will subside. The days of technology and e-commerce stocks are not nearly over, but the initial growth stage that was fueled by inertia and industry realignment are.|
|Interest rates: I believe history will prove this to be a low point in interest rates. This is the time to be locking in your mortgage or borrowing money if you're a business owner. Productivity has slowed and cannot negate inflation in our current expansion. The rise in the price of most hard assets (commodities) will put a floor beneath rates in the coming years. |
I also want to make some long-term predictions on the effects of the US government's plan to buy back our debt. While buying back our long-term debt will initially limit debt supply and drive down interest rates, the long-term effects may be more intriguing. Excessive debt is not an attractive option, but no debt can also be dangerous. The Federal Reserve's ability to tap the brakes on an accelerating economy is tied directly to the bond market. We're in trouble when the Fed loses the ability to curb inflation. If we succeed in eliminating our long-term debt, currency markets will seek the next best thing: Eurobonds. As currencies flow offshore, our dollar inherently becomes weaker and will result in the US dollar being replaced as the world's currency of choice. A weaker currency makes our goods cheaper internationally. The increase in demand will drive up prices and speed up the economy at a time when the Fed's ability to slow the market (as deftly as it does today) will be dramatically curtailed.
|Commodity Prices: As you may have guessed, I believe the low in commodity prices is in for some time as well. A look at the chart of the CRB index shows the index of commodity prices is on the rise. It is interesting to note that similar to the stock market's rally, the CRB has been lead by different sectors at various times. On a rotation basis, the Energies began the rally and handed off to the Meats, who turned the lead over to the Grains last month. We can't count on our unprecedented string of perfect growing seasons to produce bumper crops forever. And the increase in worldwide demand is only expected to continue as world trade continues to open up (despite the opposition rallies in Seattle). Manias can be contagious %97 look at the e-commerce stocks. If commodities begin to move, this may be the only investment that can yield the triple-digit returns new investors expect. A large influx of new investor capital will have the same effect on futures prices as it did on stock prices. I seem to remember something I learned in college about what happens to prices when too many dollars chase too few goods. What in the world was that again?|
|Kevin Riordan is the publisher of the Riordan report, a bi-monthly newsletter with a nightly hotline. Kevin is also a registered broker with Fox Investments where he provides his research free to his clients.|
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