Stockscom Report for Wednesday February 16, 2000

Subscribers continue to ask whether this is a good time to buy stocks and whether we are missing out on soaring stocks in the high tech sector that are still doing so well.

First, let’s say we are absolutely not infallible. We work with probabilities and the best judgment available after many years of research and also of personal experience. So we could be wrong, badly wrong.

In our view, however, the probabilities are overwhelmingly unfavorable for owning stocks now. Look at the Dow Jones Industrials, the Tansports and the Utilities. By almost every definition, they are now in a confirmed bear market. The decisive close in the Dow well under 10,000 suggests it has its back well and truly broken. Its action is the reciprocal of what it was doing in the long bull market. Then you bought every retracement and hung on for the rise to the next higher level. In a bear market, rallies fall short of previous highs but there is a succession of lower lows.

Now look at what is actually happening in the high tech sector. Yes, there are stocks still going up. But they are fewer and fewer while even within this sector more and more are falling by the wayside. Look at the charts for Microsoft which alone represents 15 percent of the NASDAQ 100. Yes, it could support here after coming off about 20 percent. But it could just as easily keep on going and fall another 20 percent. Then there are other prominent ND stocks like MCI Worldcom and Dell, which now have really poor charts.

During the big bull market, you could but almost anything and expect it to go up. You have to remember that in a bear market 90 percent of all stocks decline, but the probabilities are extremely unfavorable for finding stocks within that rising 10 percent. Ones that look promising often just keel over. We were looking recently at Global Crossing and Level Three but now they certainly no longer look like a buy.

You will recall that we used to own Wal-Mart. Not a high tech stock but still supposedly one of the great stocks of the age. It made a high around $70 and has now declined to the $45 level. Is it now cheap? In our view, no. Only less unreasonably expensive. With a Price/Earnings ratio of 36 and a growth rate of perhaps 18 percent in good times, the stock could halve from here just to bring its price in line with its current expected growth rate. Should growth falter, then it could decline a lot further. Consider that the mighty Sears now has a P/E of only 7 and it even has a dividend yield of 3.6 percent. But the stock has fallen out of favor with the public and that shows no sign of changing.

It is worth repeating that much of the buying coming into stocks has originated with daytraders and people using borrowed money. When these traders start seeing the tide turn, they will have to be sellers whether they want to or not. WE don’t want to hold the bag for them! Instead, we want to make an orderly exit while it is easy to do so. Remember that in a real bear market, assuming we may now be starting one, many, mammy great stocks fall by much more than 50 percent. Many decline by 90 percent or more. We expect that many of the dot-com stocks will go to zero.

In sum, we do not see this as a time to buy stocks.

New Recommendation

We were inadvertently stopped out of our short position in the SP 500 futures contract. We recommend that larger and more aggressive investors reinstate short positions at the market. You should have about $100,000 to sell a single contract short, or about $25,000 for the mini contract. In due course, we see the possibility of the SP falling back under 1000 and possibly going much lower than that if we are right in assuming the start of a real bear market.

This trade is recommended only for those who can truly take a bit of a flyer and who can take a loss if necessary. The only place for conservative investors is to put cash into the money market. Sure it earns only 5 percent or so, but we are only looking for a parking place. You never get a decent return on cash when cash is out of favor. But that’s the only place to conserve it so it’s available when stocks are out of favor and cash is again crowned King.