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Posted 10/22/2003
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Market prophet is battening the hatches
Analyst Michael Belkin called the bubble, the crash and the rally. Now he's telling his clients to bail. Here are his long and short strategies for a December downturn.
By Jon D. Markman
Rumors of the imminent death of the 2003 stock-market rally have been greatly exaggerated time and again in recent months. But according to one analyst with an enviable track record, the end days are finally here, and it’s time to prepare for a sickening plunge into December and beyond.
The doomsayer is Michael Belkin, one of the few investment analysts who has emerged from the recent boom, bust and re-boom markets with his reputation not just intact, but aglow.
Most independent researchers build careers as all-bull or all-bear, but not this guy. Operating out of a home office on Bainbridge Island in the Puget Sound near Seattle -- about as far from Wall Street as you can possibly get and stay in the continental United States -- Belkin writes a $36,000-per-year weekly report on equities, bonds and commodities for leading mutual-, pension- and hedge-fund managers worldwide. The report rises above the straitjacket of specialization to treat the global landscape holistically as an interlocking economic, political and social system.
Two weeks ago, Belkin abandoned his yearlong (and initially very lonely) bullish posture and put on the fur. He expects the broad market indexes to sink significantly through the end of the year, led by cyclical industrial stocks, and does not see much of a recovery on the horizon for 2004.
Belkin’s Street cred
Why take him seriously? He has caught the last few major swings exactly right.- In mid-1999, he advised clients to buy into the Nasdaq ($COMPX) bubble through the first quarter of 2000, noting that the Federal Reserve had printed so many billions of dollars to battle a non-existent Y2k problem that money would spill into stocks and fuel a boom. Check.
- On March 2, 2000, he turned around and advised clients to bail out of tech stocks and buy U.S. government bonds, contending big market indexes could get cut in half. Check.
- A month later, after the Nasdaq had plunged 1,000 points from its March 20 peak, he stunned clients who thought the worst damage had already been done by proclaiming the tech-heavy index would sink at least another 65%. Check.
- Flash forward to November 2002. After the Nasdaq had fallen about 70%, he turned full circle and advised clients to aggressively buy the most-volatile tech and gold stocks, sell low-volatility defensive stocks and sell bonds. Check, check, check and check.
In an interview last week, Belkin said that everything that made him bullish last November now makes him bearish. His forecasting model, which consists of a non-linear set of probability distributions, shows equity markets in every developed country around the world “wanting to turn down.” At the same time, he sees emerging markets such as Brazil, Chile and China, “turning up in parabolic fashion.”
The way Belkin sees it, we’re “at the end of a liquidity bubble.” Liquidity is analyst-speak for money, particularly dollars that the Federal Reserve prints and pushes into banks in a variety of ways for a variety of economic, political and social purposes. (“When the Fed makes new money, it’s like counterfeiting, only it’s legal,” he quips.) He long ago learned that it made sense to buy into a liquidity bubble while it’s happening, such as the one that preceded January 2000, but that you needed to be able to identify its final days and get out a little early.
Belkin’s bearish case
He defines major bubbles as excessive deviations from stocks’ 200-week trend, while major crashes entail reversion to their 200-month trend. That’s not information you can use to day-trade, but it helps with the big picture. And the big picture, in his view, amounts to this:- In March 2000, his prediction for a 65% decline for the Nasdaq was predicated on a belief that it would sink to its 200-month (or 16.5-year) average.
- In October 2002, the Nasdaq rebounded off that level, which was around 1,180.
- In November 2002, his belief in a Nasdaq rally to 2,280 was predicated on a belief that it would rise to its 200-week moving average at that level amid a business-cycle bounce.
- Now, he thinks the index will fall short of his predicted move because private-sector credit growth is declining sharply in spite of the Federal Reserve’s neutral-to-slightly-stimulative stance.
What’s with the number 200? Nothing magical, he says, except that it has worked to define levels of support and resistance in every major bubble and crash he has studied over the last 100 years. A bear-market bounce in a stock index or commodity from its 200-month average to its 200-week average, he says, is relentless, takes about a year and ends with low volatility -- all characteristic of the recent U.S. rally.
Belkin abandoned his Nasdaq 2,280 target because he noticed that money-supply growth had begun to contract as credit markets froze up -- an event that, in his words, has “drained the economy of bubble fuel”:- In July, the three-month annualized rate of growth of money had reached a peak of 14%. But money-supply growth two weeks ago had fallen to 1%, and last week, according to Federal Reserve data, it actually turned negative.
- Fed data shows that banks are dumping their holdings of government bonds right and left; their Treasury holdings have dropped $100 billion since July.
- Commercial lending has gone nowhere since July, and real-estate lending has slowed dramatically. (A newsworthy example of the latter was a report last week that the New York Times had put off building its new headquarters tower in Manhattan for a couple of years because its development partner was unable to obtain financing.)
Belkin believes that the Bush administration essentially “rented the 2003 recovery from Wal-Mart (WMT, news, msgs)” by cutting taxes and mailing out rebate checks, and now faces an “involuntary deleveraging process” that will feed into weaker corporate results, softer economic statistics, worsening unemployment and, eventually, a sharp decline in real-estate values. In his Oct. 12 report to clients, he warned that “deleveragings are not low-volatility events -- a financial market dislocation in the fourth quarter is likely.” And in his Oct. 19 report he upped the ante, stating that “the contrast between bullish equity-market psychology and deteriorating private-sector credit conditions is bizarre,” concluding: “The point of a bear-market rally is to make everyone bullish again just before the market does its next swan dive.”
Control the damage with ‘chicken longs’
How will you know if he’s right and not just another dour crank? Until now, every 5% decline in the broad averages this year has been met with buying at some identifiable level of support. Back in August, it was the 960 area for the S&P 500 Index ($INX), while in September it was the 1,000 area. The next time that the market sinks below an area of supposed support, e.g., the 1,015 area for the S&P 500, and stays below for more than a couple of days, it could be lights out for the “buy the dips” crowd. And then a real liquidation could ensue.
It’s worth noting for the record that while the Nasdaq hasn’t quite reached its 200-week moving average yet, other indexes and stocks are very close: For the Dow Jones Industrial Average ($INDU), the 200-week moving average is at 9,789; for chip giant Intel (INTC, news, msgs) it’s at $32.81; for Exxon Mobil (XOM, news, msgs) it’s at $38.44. Meanwhile, stocks that are the most extended above their 200-week moving averages after a year of rally, and thus most ripe for a reversion to the mean, are all the major home builders, such as Centex (CTX, news, msgs), Toll Bros. (TOL, news, msgs) and Pulte Homes (PHM, news, msgs); gold miners such as Newmont Mining (NEM, news, msgs); casino supplier International Game Tech (IGT, news, msgs); and security software maker Symantec (SYMC, news, msgs).
In his latest report, Belkin told clients to shift from buying dips to selling strength to “avoid having egg on their faces during a fourth-quarter downturn.” For mutual fund managers obligated to be long, he recommended they overweight defensive consumer stocks such as Colgate-Palmolive (CL, news, msgs) and Procter & Gamble (PG, news, msgs). He calls these “chicken longs,” because he believes they will fall less than market benchmarks in a broad downturn -- though they probably won’t provide positive returns.
Among his top shorts are the home builders, which he called “so overowned, overvalued and undershorted they’re like Yahoo! (YHOO, news, msgs) at the top, but with fundamentals that are deteriorating every second under your eyes.” Others on his list for short-sellers are cyclicals such as machinery makers Ingersoll Rand (IR, news, msgs), Cummins (CUM, news, msgs) and chemicals makers Eastman Chemical (EMN, news, msgs) and Hercules (HPC, news, msgs); semiconductor makers such as Micron Technology (MU, news, msgs) and LSI Logic (LSI, news, msgs); Internet service or hardware providers such as eBay (EBAY, news, msgs) and Cisco Systems (CSCO, news, msgs); IT consulting-services providers such as Computer Sciences (CSC, news, msgs) and Electronic Data Systems (EDS, news, msgs); biotechs such as MedImmune (MEDI, news, msgs); and retailers such as Kohl’s (KSS, news, msgs) and Sears (S, news, msgs).
Naturally, one hopes that Belkin has it wrong this time. But you have to admit, he does have the hot hand. I’ll check in with him later in the year as we learn whether his guidance was right, wrong . . . or, perhaps, just early.
| Belkin's long picks for damage control* | | Stocks | 10/20/03 Price | Volume | | Procter & Gamble (PG, news, msgs) | $95.98 | 2,973,000 | | Colgate-Palmolive (CL, news, msgs) | $57.37 | 1,900,100 | | Church & Dwight (CHD, news, msgs) | $35.20 | 65,700 | | Dial (DL, news, msgs) | $22.00 | 501,100 | | PepsiCo (PEP, news, msgs) | $48.15 | 2,759,700 | | Coca-Cola (KO, news, msgs) | $45.61 | 4,271,800 | | Nike (NKE, news, msgs) | $63.85 | 1,386,200 | | Ashland (ASH, news, msgs) | $36.74 | 212,000 | | Amerada Hess (AHC, news, msgs) | $52.78 | 353,200 | | William Wrigley Jr. (WWY, news, msgs) | $55.97 | 423,300 | | Unilever N.V. (UN, news, msgs) | $57.25 | 3,763,700 | | Hershey Foods (HSY, news, msgs) | $75.84 | 305,400 | | ConAgra Foods (CAG, news, msgs) | $23.49 | 2,404,700 | | McDermott International (MDR, news, msgs) | $7.00 | 769,600 | | Hospitality Properties (HPT, news, msgs) | $37.01 | 191,000 | | TECO Energy (TE, news, msgs) | $14.05 | 948,900 | | AES Corp. (AES, news, msgs) | $8.25 | 1,103,900 | | FedEx (FDX, news, msgs) | $72.59 | 1,415,400 | | United Parcel Service (UPS, news, msgs) | $68.75 | 2,470,400 |
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*Longs are expected to outperform the S&P 500 over the next one to three months, but are not expected to generate absolute positive returns.
| Belkin’s short picks | | Stocks | 10/20/03 Price | Volume | | Kohl's (KSS, news, msgs) | $51.58 | 6,431,400 | | General Electric (GE, news, msgs) | $28.78 | 16,078,700 | | Amgen (AMGN, news, msgs) | $61.89 | 18,340,112 | | MedImmune (MEDI, news, msgs) | $28.64 | 9,029,221 | | W.W. Grainger (GWW, news, msgs) | $45.75 | 903,400 | | Weyerhaeuser (WY, news, msgs) | $59.32 | 540,400 | | International Paper (IP, news, msgs) | $39.65 | 1,585,600 | | Millipore (MIL, news, msgs) | $40.45 | 878,400 | | Waters (WAT, news, msgs) | $28.14 | 1,221,800 | | Computer Sciences (CSC, news, msgs) | $39.69 | 646,100 | | Electronic Data Systems (EDS, news, msgs) | $21.33 | 1,970,300 | | PACCAR (PCAR, news, msgs) | $78.30 | 712,500 | | Navistar International (NAV, news, msgs) | $41.30 | 748,000 | | Eastman Chemical (EMN, news, msgs) | $32.86 | 399,800 | | Hercules (HPC, news, msgs) | $10.23 | 588,500 | | Power-One (PWER, news, msgs) | $10.95 | 809,826 | | Toll Bros. (TOL, news, msgs) | $34.44 | 512,800 | | Omnicom Group (OMC, news, msgs) | $75.14 | 1,340,400 | | Monster Worldwide (MNST, news, msgs) | $25.28 | 1,195,286 | | Baxter International (BAX, news, msgs) | $29.43 | 1,890,000 | | Medtronic (MDT, news, msgs) | $46.17 | 3,740,200 | | Raytheon (RTN, news, msgs) | $28.15 | 1,719,000 | | Micron Technology (MU, news, msgs) | $12.85 | 11,466,100 | | LSI Logic (LSI, news, msgs) | $9.41 | 3,603,300 | | Cisco Systems (CSCO, news, msgs) | $21.08 | 31,688,559 | | eBay (EBAY, news, msgs) | $56.60 | 12,423,137 |
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Fine Print
To see long-term charts of the Nasdaq, Intel and the Dow through mid-October, visit this page at my personal Web site and click on the Oct. 22 link. . . . To view or download the sort of economic data that Belkin reviews, visit the Web site of the Federal Reserve Bank of St. Louis. . . . Check out the M2 money-supply growth information on a page that allows you to see a chart or download the data, or check out the Adobe Acrobat file that shows the recent data in more detail. (Main page or M2 page(PDF)). . . . The page showing the flattening of commercial and real-estate loans is here (PDF). . . . For even more data, check out the Federal Reserve Economic Data database, which is better known by its acronym, FRED. Numbers geeks could spend hours looking at things like employment data; GDP and income data. . . . Belkin’s reports are available only to institutional investors through Mondiale Partners. . . . The Marks & Spencer chain in Great Britain has launched a major new RFID initiative. Read about it here. . . . Shares of Sirius Satellite Radio (SIRI, news, msgs) and XM Satellite Radio Holdings (XMSR, news, msgs) have spiked to new highs in the past week as optimism has swelled that subscribers are coming on line faster than expected (see my May 21 column). I have become hooked on Sirius service, especially since its ESPN2 stream has been the only outlet in my area for all the baseball playoffs and World Series play-by-play, and its U.S. 1 stream is a great alternative to Radio Disney for my pre-teen kids. The stocks are still wildly expensive (Aug. 6 column) but they’ve got undeniable Next Big Thing mojo.
Jon D. Markman is senior investment 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 owned or controlled shares in the following equities mentioned in this column: Sirius Satellite Radio.
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Fund data provided by Morningstar, Inc. © 2003. All rights reserved.
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