How High
is High
by James Turk
Freemarket Gold & Money Report
Ever
since the Dow Industrials Average made a new record high in early February,
I have been warning that one should play the market from the long side,
or don't play it at all. It is now very apparent what I meant and why
I was making this warning. The Dow has surged higher, and though there have
been some scattered pockets of weakness over the last couple of months,
and 1000 Dow points, the short sellers have, for the most part, been massacred.
Even
though it seemed clear to me that stocks were headed higher once they broke
into new record territory earlier this year, I have not recommended any
trades to buy stocks during this surge. I didn't think it prudent to do
so. And, though stocks are probably headed higher still, it still isn't
prudent to jump aboard, in my view. The opportunity to participate in this
advance is one best left for traders, not investors.
Given
the outrageous valuations on stocks (as measured by book-to-market, high
P/E's, low dividend yield, and all of the other valuation methods that have
proven their worth time and again), stocks have little fundamental reason
to be trading at the prices they have reached. Therefore, the market is
a high-risk proposition at the moment.
Consequently,
the stock market is highly vulnerable, which means that this recent uptrend
clearly has the potential to turn on a dime into a nasty downtrend. Therefore,
because I like to sleep peacefully and without worry at night I prefer the
safety of the sidelines. I'll leave the high-wire act to the nimble and
fearless traders, and put my trading capital in the safer play -- like buying
the precious metals. Nevertheless, even though I have chosen not to play
this latest rally in the Dow, it will be useful to share some of my thoughts
on where the stock market is headed from here, particularly because some
of you may be surprised to learn how much higher I think the Dow has to
travel.
My
conclusion about the heights yet to be reached by the Dow have little to
do with American economic prowess. But it does depend upon the manipulation
and debasement of the U.S. Dollar.
I
have discussed this point many times before in Freemarket Gold &
Money Report. I noted that because of the loss of Dollar purchasing
power, it may prove to be beneficial to own stocks rather than Dollar denominated
instruments like T-Bonds, bank time deposits, T-Bills and the like. And,
in recent years. it has indeed proven beneficial -- stocks have clearly
outperformed bonds. But, there is also another factor at work, causing the
Dow to plow ever higher, and it is one point I have not yet discussed in
my newsletter.
The Use of Leverage In
The Stock Market Is Dangerous
The
Dow has become commoditized. Stocks
are trading more and more like commodities trade, and this result is the
direct consequence of one element introduced into the stock market in recent
years -- the use of leverage. It is leverage that explains why commodities
are viewed to be such a dangerous game. For example, it was a very big deal
for crude oil to have moved from $18 to $13 earlier this year, a decline
of 28%. However, it is a frequent and regular occurrence for any one stock
to move from $18 to $13 or vice versa. In reality, stocks regularly demonstrate
much greater volatility than commodities but, until recently, stocks did
not offer the leverage available when trading commodities. Consequently,
stocks were viewed to be the safe play, while commodities, even though they
exhibit less price volatility when compared to stocks on a non-leveraged
basis, have been considered the risky play. These labels need to be switched
because of the leverage now being regularly used in stocks.
The
leverage has slowly crept into the stock market in a number of ways. These
include the increasing use of: options on stocks, futures contracts on stock
indices, and options on stock index futures contracts.
Leverage
is also coming into the stock market in more traditional ways -- through
debt. Reports show that home equity loans are being used to finance stock
purchases. There are even reports that some wild-eyed individuals, who do
not understand the risks, are using credit card debt to purchase stocks.
Regardless
how this leverage manifests itself, the result is dangerous. The result
is too much money chasing stocks.
What
is worse is that these conditions are being fueled by an ever docile Federal
Reserve, which has apparently turned a blind eye to the obvious speculation
going on around it. The Fed continues to open wide the monetary spigots.
I estimate that the 12-month growth in M3 ending March 31st is 9.8%, the
highest rate of growth in money since 1985! In contrast to the 1970's,
when newly created money was used to chase ever higher the prices of tangible
assets, today's newly created money is going into the stock market, chasing
ever higher the prices of stocks.
The
result is that the stock market mania will end much like the mania in a
commodity market ends -- with a 'blow-off' top. A good example of a blow-off
top was Gold's memorable climb from $430 in September 1979 to $850 in January
1980, nearly a 100% advance in less than five months.
Am
I suggesting that stocks are about to repeat Gold's performance and nearly
double within the next five months? Well, I won't say it will happen, but
then again, I surely won't say that it will not happen. My point is that
anything is possible from here!
Stocks
are entering a blow-off stage. There is a lot of momentum behind the stock
market. Money is being created at a blistering pace, and this money is fueling
the stock market advance.
Dow Has the Potential To
Reach 12,000-14,000
It's
outrageous. It's insane. It's high risk. But it is a blow-off, and crazy
things happen when a blow-off occurs. Just think back to Gold and those
last few months in 1979 as an example of what may lie ahead for the stock
market.
So
how high do I think the stock market is headed? My best guess is that the
Dow has the potential to reach 12,000 to 14,000, and to get there sometime
within the next six to nine months. Thereafter comes the bust, and the inevitable
reality.
Stocks
don't go up forever. Just like every other market, and particularly leveraged
commodity markets, the stock market is not a one-way street. It never has
been, and it never will be.
Metals Becoming Exciting
The
precious metals picture is becoming very exciting. Gold has sprung back
to life, with the result that it has become as vibrant as Silver. That is
a phenomenon we have not seen for a very long time. Look for both of the
metals to move higher over the next couple of months. The fundamentals for
Silver remain very positive. It seems like only a matter of time before
Silver touches $10.
Editor's Note: James Turk is editor of the Freemarket Gold &
Money Report,, P.O. Box 5002, North Conway, NH 03860, 1 year, 20 issues,
$220. Mr. Turk provides a commentary on precious metals and monetary matters.
Included is detailed buy and sell recommendations on gold, silver, options,
currencies, interest rates, bonds and the stock market.
The Bull & Bear Financial Report
Copyright 1999 | All Rights Reserved
Reproduction in whole or part is strictly prohibited
without prior written permision
NOTE:
The Bull & Bear Financial Report does not itself endorse
or guarantee the accuracy or reliability of information,
statements or opinionsexpressed by any individuals or
organizations posted on this site
PLEASE READ DISCLAIMER |
Web Site Designed & Maintained by
Estrada Design & Communications
in association with
THE BULL & BEAR INTERNET DIVISION
1-800-336-BULL |