Freedom Lawyers of America

CBS.MarketWatch.com



11:01 am ET Jul 8, 2002
Hard-bottom stock-market blues
Currency crisis may provide a crushing blow

By Thom Calandra, CBS.MarketWatch.com
Last Update: 10:29 AM ET Jul 8, 2002
SAN FRANCISCO (CBS.MW) -- The market is a voting machine, financial authors Benjamin Graham and David Dodd once said.

Graham and Dodd, authors of "Security Analysis," went on to say investors register their choices in the market partly because of reason and partly because of emotion. The two authors are best known for their search for companies whose shares trade below a reasonable and theoretical price, based on multiyear earnings-growth rates, dividends and other factors.

Graham and Dodd, and all bargain seekers, benefit by exploiting investors' emotions. At few times in the past 100 years have those emotions raged so furiously, bared for all the world to see. After 28 months of relentless losses, stock-market investors are pulling out their hair -- but not, it seems, plucking their portfolios.

For the most part, individuals have refused to dispatch their losers in a bout of panic selling. Market technicians, led by Paul Desmond of Lowry's Reports, say the stock market has yet this year -- or last -- to register total-surrender levels of selling.

Still, much of what makes up a market's jumbled prices comes from hormones, fed as they are by sweat, tears, fear and the cocktails of success: adrenaline, jangled nerves, euphoria. Anecdotal evidence of surrender is important to the Wall Street professionals whose job is to summarize market sentiment. So is a refusal to budge from portfolios that have gaping losses of 50 percent and more -- which is happening right now on Main Street.

"We have had so many 2 and 3 percent down days that investors are now getting used to them, meaning that it is harder to get them to truly capitulate," says Christopher Johnson, senior quantitative analyst at Schaeffer's Investment Research in Cincinnati.

The stock market conceivably could sidestep a rock-hard bottom, the kind marked by days, weeks and months of dreaded 90 percent downside volume and price days. See the latest on 90-90 downside days.

If it does, we will have, probably for the first time in a century, a saggy bottom that forms the ground upon which the next bull market takes shape.

This saggy talk is what Main Street wants to believe. "Your gold story is over, unfortunately or not," says one investor, Ed Pikman, about a metal that seems to gain ground as the stock market loses it. "The U.S. economy is already on track, and the stock market has no other way to go but up and running. Gold price will be back to $270 at the end of year, and gold miners will go Chapter 11."

This is what I call one side of bankruptcy jive talk. A lot like the ribbing in a neighborhood basketball game, this jive throws the specter of Chapter 11 and Chapter 7 liquidations in people's faces. Just who goes broke is the pivot point of the rap. Swish.

My vote on all this is in: I'll stick with the belief that a hard bottom is in store for this stock market (SPY), and with it the emotional and financial pain that comes from unraveled portfolios and heavy American household debt.

"Hong Kong has a record-high jobless rate, and their bankruptcies tripled in the first five months of this year. Americans' personal bankruptcy filings leaped more than 15 percent in the 12 months that ended March 31, having been irresponsibly lured into excessive loans by low-interest car and real-estate deals that added enormously to household debt," says James Dines, longtime newsletter editor and gold investor.

Dines is of the opinion that some event will trigger a crushing blow to financial markets in the not-so-distant future. Whether it is the act of militants or CEOs, a Latin American liquidity crisis or a collapse of the global currency system is anyone's guess.

Dines is leaning toward currency turmoil. He points out that the Mexican peso is at its lowest point in two years, an event that has gone largely unnoticed by American investors and financial advisers. Devaluations of South American currencies most likely will lead to a financial contagion -- basically a buyers' strike by the banks and large investors that lend to emerging-market countries -- in Uruguay, Brazil, Chile and Mexico, says Dines, editor of The Dines Letter.

"Roman citizens ignored the tremors of Mount Vesuvius until it blew on Aug. 24 in the year A.D. 79, obliterating Pompeii and Herculaneum," says Dines, who is sticking with the gold- and silver-mining companies through thick and thin. "A much bigger shock awaits the world in currencies, believe it or not."

Thom Calandra's StockWatch appears each trading day.