There is a Greek myth about a young boy named Icarus who receives a pair of magic wings. These wings will allow him to fly like a bird. Before Icarus takes off on his first flight, his father warns him not to fly too high and close to the sun for his wings will catch fire from the sun and he will crash and die. The boy lets the warning go in one ear and out the other and takes off. He soars higher and higher paying no attention to the warning his father gave him. All of a sudden his wings catch fire and the boy crashes and burns.
This past month I received a large and spirited response to an article I wrote in the November Markowski Monthly, an article pertaining to the stormy direction I feel the market could be taking. (I apologize if I have yet to respond to anyone’s letter, bear with me, I will as soon as possible.) Many of the letters and e-mails I received were written with a tone of such disappointment and non-belief; it was if I had just told them that their dog died. Investors are unfortunately paying no attention to signs of danger in the world economy that could adversely affect the stock market and their portfolios. The main reason for writing the article was not to disappoint anyone, it was to inform and warn. Facts are facts and unfortunately it is usually quite costly to ignore them. Many investors have this false sense of security that it is impossible to lose money in the stock market if you just hang in during the tough times. Unfortunately many individual investors have yet to understand and realize that the stock market is not the only game in town. If the market does crash and we enter a serious bear market that is no reason to tuck money under your mattress. There are many arenas to make money in. Investors must realize that asset allocation accounts for at least eighty percent of portfolio results. The actual “stock picks” account for twenty percent. Making money does not end with bear markets. Investors with the internal fortitude to break away from the herd and restructure assets in an intelligent manner will empower themselves not to be simply spectators waiting for stocks to come back during tough times, but an active participant with the ability and freedom to create wealth.
The Dow Jones Industrial Average recently hit an all time high coming around full circle. From being down 19% August 31st from a previous all time high on July 17th, the round-trip was officially completed on Monday November 23rd. Thank you Mr. Greenspan, those three separate interest rate cuts totaling three-quarters of a percentage point was just the adrenaline shot investors needed to begin dumping money back into the markets. Michael Belkin, president of his own advisory service summed up investor’s interpretation of events in this sarcastic manner: “The worse things get, the more Greenspan will cut rates, and the more bullish that will be for stocks. A catastrophic global depression is the most bullish thing imaginable because the Fed will keep cutting rates and that is always bullish.” According to George Ip of The Wall Street Journal, of all the catalysts with the critical exception of lower interest rates, most economic data since our last market high in July has been for the worse. Wall Street strategists have cut their estimated profits for companies in the S&P 500 by 7%. Now the S&P stands at 25 times earnings which is a record multiple. Now compare that with 23 times earnings on July 17th the last market high. Standard & Poors Outlook newsletter stated recently that, “it’s difficult to be comfortable with a market that is so optimistically priced.”
Another interesting fact investors ignore is the record amount of bankruptcies claimed by Americans this past year with that number expected to rise in 1999. Credit Card defaults have also risen to record levels as well. America is leveraged to the max and the market looks to be as well. Bullish sentiment, which is measured by the bullish percentage of advisory services surveyed by Investors Intelligence, is higher now than in July. The markets recent advance was centered on a handful of large-capitalization stocks, while thousands of smaller and mid-cap issues fell. On July 17th the average stock with a market value of more than $150 million was 19% below it’s 52-week high; it is now down more than 27% according to Donaldson, Lufkin & Jenrette. These facts suggest that buying power could be exhausted. For the first time in 60 years individuals have saved less than ever in safe bank products. This cushion is a barometer for funds that could be spent in stocks. The cushion is being exhausted.
I could continue to go on and on citing various experts and examples of why the market is overpriced and warn people to be careful but for some reason many people have to learn the hard way. By no means what so ever am I suggesting that selling off all one’s stock positions. What I am suggesting is a serious look at asset allocation and diversifying assets into other arenas. For example, if you got lucky and made some money in those “King for a Day” Internet stocks it might be a good idea to take some profits off the table. I talk to investors all the time that have over 90% of their assets in stocks, and that is simply too much exposure. Richard Zeckhauser a professor of political economy at Harvard University’s Kennedy School explains this never say die phenomenon quite eloquently. He states, “The stock market is like a good friend who you simply can’t imagine would turn on you. If your best friend double-crosses you, you say, no way, there is a good explanation for that. But suddenly, he or she does it again, but worse, then you figure out that your friend was snake.” Zeckhauser feels that the scare the markets gave individual investors this past August was the first double-cross. Reason to pause but not enough to turn bulls into bears. People please…do yourself a favor and don’t fly too close to the sun…or else.