Summary:
This will be my last research missive of 2004, a brief one at that. It's something of an addendum to the two short pieces I published on 12/20.
The two pieces published on 12/20 were: "A Quick Look at 2005," as well as "The Stock Market's 'Front-Run' Top?" An excerpt from the former:
"Real GDP growth in the second half will come in at a rate of 3.5%, give or take, well below the 5% or even higher rate many continue to project." [This repeated a point made on 7/20, in the "Midyear Economic & Market Review..."].
"I repeat [this] here, since as I currently see the prospective landscape, [this theme] will remain importantly in play in the year ahead.
"...This consideration may be especially critical as it relates to the stock market, since during the post-election period, equities have behaved as if the 5% or higher level of growth had come to pass. If you believe that fundamentals eventually catch up to market behavior, this is not a particularly good portent for stocks going forward.
"Which by no means gives short shrift to the dollar's poor behavior. If the greenback's on-balance decline continues in the months ahead, as appears probable, it will likely have an increasingly negative impact on the behavior of US interest rates and stock prices in the months ahead."
And an excerpt from the other 12/20 offering ("The Stock Market's 'Front-Run' Top?"):
"I'll soon have an initial outlook for 2005 in place. However, one of the elements it will contain is the view that some of the bad things not happening to the equity market in 2004 have merely been postponed, not canceled. It is becoming easier to envision an early year 2005 sell-off that could be rather pronounced.
"....There are only nine trading days left in 2004... thus, the stock market sell-off that approaches will probably await 2005. (It certainly will, if CNBC and the other outlets in the regular propaganda loop have any say over the situation.)
"...I probably wouldn't raise this topic now if the decline I was thinking about was likely to be a reasonably modest one, say, something in the 3% to 5% range. But I think it will probably be something a good deal worse, something of the double-digit variety."
Now let's take some of the above thoughts within the context of the following table. Values were through last week's close, but they have not changed appreciably.
| SELECTED STOCK-MARKET RETURNS TO 12/23/04 FROM 11/02/04 (ELECTION DAY) AND FROM 12/31/03 (Excluding Dividends and Ranked in Order from 12/31/03) | ||||
| A | B | |||
| 11/02 To 12/23 | 12/31 To 11/02 | 12/31 To 12/23 | A/B | |
| Russell 2000 | 10.9% | 5.0% | 16.5% | 66% |
| NYSE Comp. | 7.6% | 4.0% | 11.9% | 64% |
| Value Line (G) | 9.6% | 0.8% | 10.5% | 91% |
| Wilshire 5000 | 7.8% | 2.5% | 10.5% | 74% |
| NASDAQ 100 | 8.0% | 1.8% | 9.9% | 81% |
| S&P 500 | 7.0% | 1.7% | 8.8% | 80% |
| DJIA | 7.9% | -4.0% | 3.6% | 119% |
| Average | 8.4% | 1.7% | 10.2% | 82% |
| Median | 7.9% | 1.8% | 10.5% | 80% |
Something very prominent in the above array is that an average 82% of this group's 2004 returns have come since the Presidential election on 11/2, not even two months ago. That much changed on 11/2? I hardly think so.
(Nor do I think President Bush won anything like the "mandate" people like Rush Limbaugh and Sean Hannity keep incessantly insisting upon. And I am a conservative talk-radio junkie who voted for Bush. Nevertheless -- no mandate!)
And as you will recall, on the eve of the election, Wall Street's leading spin surgeons had assured us that the markets would accept a Kerry victory very nicely. So if this was a correct, intellectually honest assessment, you cannot attribute the above group's 8.4% average gain since 11/2 to a Bush "relief rally."
Something I think you can attribute it to, at least partially, is the creed of greed that is driving many of the thousands of hedge funds that are trying desperately to recoup some lousy performance in a mere couple months. The thousands of hedge funds that do exist but shouldn't. And, in due course, many of which likely will no longer exist.
There's certainly nothing wrong with hedge funds. Actually, there is plenty right with them, just not in the numbers to which they have grown. As was the case with too many mutual funds a few years back, the time of a substantial contraction in the number of hedge funds draws ever closer.
Of course, the huge difference between the two vehicles -- hedge funds and mutual funds -- is hedge-fund leverage and the danger it poses to the financial system. If according to none other than Alan Greenspan the failure of Long-Term Capital Management a few years back posed a "systemic risk," what, in the aggregate, does today's plethora of hedge funds pose? Ironically, a plethora that has put in place some very serious systemic risk that not only been hugely encouraged but also enabled by none other than -- "Maestro" Greenspan!
Which I believe creates a couple more themes for next year and going forward, to wit:
(1) Are the large number of abhorrent (as opposed to the far smaller number of totally responsible) hedge funds going to be allowed to further jeopardize the functioning of US and world capital markets?
(2) When the hedge-fund debacle begins to unfold in earnest, will more people finally come to realize that this guy Greenspan simply is not and never was all that his sycophants cracked him up to be?
Stay tuned! In the meantime, my best wishes to all for 2005 -- a year I suspect will contain more than an occasional tough moment for the economy and the financial markets.
