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November 08, 2004

Marveling At Mania Like Tendencies
by Brady Willett

Last week Mary Meeker said that an internet boom is underway, Harry Dent received more coverage on his latest 'I am a superbull' book, Joe Battipaglia quotes were picked up by newsgroups to help explain the aligning equity stars, and Al Goldman said the markets will trade higher through the end of the year. If a few more geniuses make fun of Buffett's latest blemish (he should have bought Google!) the mania will be back in full swing.

Altria Chairman and CEO, Louis C. Camilleri, said in a presentation at an annual investors' conference in New York last week that the board of directors was planning to break the company up. It was reported that Camilleri's comments propelled MO shares up by more than 8% last Thursday. What wasn't mentioned is that Camilleri expressed similar sentiments at the same conference last year to little fanfare...

Whether or not the lawsuit saddled Altria is worth more on the cutting board than it is whole is not the issue. Rather, the matter at hand is whether or not last weeks post-election action in the markets marked the reemergence of the mania or short term/unsustainable relief rally. Before trying to answer this question it is worth pointing out that Altria was only one of many examples of post-election euphoria in the marketplace.

The Break Outs Arrive, But Will The Fundamentals Follow?

Last week the International Council of Shopping Centers-UBS said that sales for of 71 retailers rose 4.0% in October, and RetailMetrics said that same store sales increased by 3.8% in October. Both of these tallies were higher than expected, and by the time Friday's better than expected jobs report arrived the S&P Retail Index was firmly trading in 'new highs' territory.

The "better than expected data", a Bush victory, and the fact that retail stocks have a tendency to rally into the Christmas spending season helps in explaiing last weeks rally in retail stocks. However, on the topic of crude and consumer confidence the rally in retail stocks makes little sense. To be sure, when the retail index was being pummeled in early August (circle in chart), crude was trading at $42 a barrel and consumer confidence had just registered 105.7 in July (its highest tally for 2004 ~ Conference Board). Since the August lows in retail crude has climbed to $50+ (versus $41.75 at the end of August) and consumer confidence has declined for three months in a row. In short, when it comes to retail stocks crude dropping below $50 and any potential post-election rebound in consumer confidence is, contextually speaking, irrelevant.

As for the bullish reports on retail sales from UBS, RetailMetrics and others, it is worth remembering that these statistics focus on stocks in the group, not on the health of the group as a whole. In other words, that a strong pickup in apparels and high end stores was not reflected in the discounters such as Wal-Mart is important. To appreciate how important consider the following: Wal-Mart is more than twice the size of all of the publicly traded 'apparel' companies in the U.S. and more than 3-times the size of J.C. Penny, Kohl's, and Target combined. Wal-Mart increased same store sales by 2.8% in October, versus First Call's 3% estimate.

Are retail stocks breaking out because investor's are astutely pricing in an excellent Christmas season and/or further gains in 2005, or a retail stocks overacting to a Bush win, declining oil, and mixed sales data? The latter seems most likely, although time will certainty tell.

"A 0.1 percent gain in retail receipts is expected after they rose 1.5 percent a month earlier, according to the median forecast in a survey by Bloomberg News. On average, sales rose 0.6 percent a month from January through September." Retail Sales Probably Rose at Slower Pace

Another group gaining some traction last week and threatening to take out former highs was bank stocks. Although rising interest rates have befallen countless rallies in the group historically, these stocks seem impervious to the threat of more Fed hikes and/or a possible spike in long-term interest rates (either because of inflation and/or the dollar issues). In fact, pay no attention to the yield curve because bank stocks, like retail stocks, are near a critical breakout area (sarcasm stressed).

Buy More On The Up & Up!

Last week's stock market rally was so strong that market gains are being prophesized into the future simply because of market gains. To be sure, along with the regular Street suspects Comstock - probably the most bearish managers around - also suggested that gains may beget gains:

"At its closing level today, the index is only within two points of equaling and subsequently surpassing its 2004 top, an accomplishment that could result in a further rally over the next few weeks." Comstock

For honest analysts arguing that the markets could rally because key price levels have been struck is a 1990s reflex (in the late 1990s the markets made no sense for so long that anything that could be regarded as bullish was). Is a 1990s mentality returning to the markets? Before answering consider how logical this theory sounds (at least so long as stocks are rising): the S&P 500 is above its former highs and the Dow/Nasdaq are within striking distance of their former highs. Confirmation from the Dow/Nasdaq could see further gains in the overall markets!

Tidbits: Beware of The Bull

In early 2000 Joe Battipaglia pulled off his best imitation of Irving Fisher when he argued "100% equities" (with a tech overweight). Mr. Battipaglia's flippant mania-driven advice could have cost an investor many years (decades?) of losses, and yet the man still holds down a job in the supposedly 'reformed' world that is Wall Street. Beware of the Battipaglia's -- the more the markets rally the more logical and prophetic these types sound.

Google fell by 16% last week after reaching the unbeatable $200 level. Apparently a UBS downgrade meant all the difference. Also last week, investor's reacted very optimistically to a vague break up plan announcement from Altria, they purchased retail stocks with unbridled enthusiasm, and bank stocks continued to be impervious to potentially dangerous interest rate trends.

The growth challenged behemoth that is Wal-Mart trades at more than 20 times fiscal 2005 earnings estimates, has a dividend yield of less than 1%, and has seen no stock price appreciation in more than 5-years. Forget about the fundamentals, WMT is a great buy because retail sales are picking up just before Christmas!

Don't forget to put more money into stocks before the landslide of Social Security capital flies into the markets!

On a more serious note, gold is up firmly from $250 an ounce and may go back to a 5% weighting in Wall Street's model portfolio should it rally another $450 an ounce. As it stands now, expect the commercials to hammer gold any second and buy more Wachovia.

Conclusions

A rally was to be expected after the U.S. elections ended cleanly. However, the extent of the rally in equities was unexpected and it was likely embellished by shorts that were caught off guard. The lack of upside in the U.S. dollar following the election was also unexpected. That the dollar did not gain ground following the payrolls report was, and is, alarming.

What does everything that has happened since last Tuesday mean for stocks going forward? Not much until the U.S. dollar/interest rate picture becomes clearer. I know, what could be clearer - the dollar is doomed! But alas, pay attention to the stationary men behind the curtain: while Japan and countless others are bighting their nails wondering where the dollar's slide will stop, U.S. policy makers have yet to say a discouraging word on the subject....

Rubin's time has come and gone: a weaker dollar - assuming the slide can be controlled and packaged to the world - is in the best interests of the American economy. Now let's wait and see how the world responds.

Brady Willett
FallStreet.com

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