O.T. Don Hays New Letter

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January 12, 2000

Was yesterday the seminal day? I think there is a good chance that it was. The similarities with the major top that was made in January 1973 continue, as the massive disparity in the typical stock from the last 21 months continues. We've had that last little blip in the cyclical stocks, but still in general far below their major tops made in recent years. The bulls are once again displaying their undying faith in Intel to meet their expectations. The bond market continues to tank and the bulls totally ignore this increasing burden on the economy. And the herd is totally dismissing the next Fed's meeting, and the box that Alan Greenspan has put himself in. It is not just 1973 that gives us good comparative illustrations. In 1990 when the Japanese market was on fire, and at price/earnings ratios in the 100's, their monetary authorities had raised interest rates three times (just like current US policy), but the word went out that you couldn't stop this machine. It was somewhat symbolic to me yesterday that someone sent me a copy of Ruykeyser's market letter in which he interviewed John Templeton. His view of the US in particular, and the world's stock market in general was that it should be avoided the most of any time in his investing life-time (that covers a lot of market history.) The symbolism came from Ruykeyser's obvious covering for poor old Mr. Templeton's bearishness by explaining that he had been bearish on US stocks in the last two January's interviews-Obviously wrong, right? Yeah, wrong like he was on Japanese stocks in 1988, and 1989 while they continued to skyrocket. Mr. Templeton is one of my heroes, and his wisdom at valuation of the world's markets has withstood so many decades that we believe this interview is almost exactly like the ones he was giving in 1990 about the Japanese stock market. I want to remind you of several key factors in the economy/stock market in the last few months that have set the stage. The first one, and the one that has had such an amazing record at predicting major tops in the market is still the "3 Steps and a Stumble" rule that was activated on November 16, 1999. To repeat this rule states that major trouble lies ahead for the stock market after the Federal Reserve restricts monetary policy for the third time. It does not say that the market turns negative the next day, in fact it is almost never the next day. Usually it takes a few more months for the herd to really accept the fact that the Fed is serious. With Mr. Gradualism Greenspan, it seems like the market keeps hoping that this time he will pull off the perfect "soft-landing." But the evidence is overwhelming, you don't fight tighter monetary policy, regardless of who is enforcing it. (Quite often the Fed is just tagging along with messages being enforced by the bond market.) With the leverage in the economy/stock market, the risks to the world's economy is that much greater. Margin debt, corporate debt, government agency debt, corporate debt, derivative risks are all based so much upon the perpetual bull market machine. And once that machine takes a hit, the dominoes will fall that much faster on the downside than they were put up even on the magnificent (?) upside. Bear markets are always faster than bull markets when the rug is jerked out from under the unsuspecting lemmings. We are seeing the tip of the iceberg in the drop in AOL and AMZN's stock in recent months. In fact the stock market under the surface is telling a lot of stories that the herd refuses to listen to. Yesterday, I looked at the basket of benchmark stocks that I randomly selected a few months ago to help me "see" the real stock market. I didn't just look at the last three months, but the last three years. This may put you to sleep, but I measured how yesterday's performance compares with prices in recent years. Of the 19 stocks, only two were making new highs--Cisco and surprisingly Intel. But the other stocks had done some wild oscillations, but had shown no gains from levels reached in the months behind. Most were far below their previous peaks. Let me list them. AMZN, down 39% from peak in early 12/99, which was just barely above the 4/99 peak. The stock is about equal to where it was in 12/98 AOL back to 4/99 levels-no gain AMR back to 12/97 levels-no gain BNI back to 4th quarter 1995 levels-no gain C back to 11/98 levels-no gain DH back to 2/99 levels-no gain DUK back to 12/98 levels-no gain F back to 2/98 levels-no gain FDX back to 1/99 levels-no gain FTN back to 9/97 levels-no gain GE made a new high on 12/99-huge gain INTC made a new high, but gain lethargic since 9/99 IP back to 7/97 levels-no gain KO back to 2/97 levels-no gain MER back to 9/97 levels-no gain WCOM back to 12/98 levels-no gain XOM back to 4/98 levels-no gain

This shows that for even these prominent stocks, in general they have not enjoyed this New Era economy that is living off of stock market Internet cash nearly as much as the consumer sentiment is telling us. Even poor old "Stuart" of Ameritrade advertisement fame has got to be feeling the heat. I'm afraid he has been fired, and no-body knows it. After all, it was Stuart who talked his boss, with pulsating pelvises and wild gyrations to up his purchase of K-Mart from 100 shares to 500 shares when the stock was 18. Uh Oh! Stuart you better have another wild dose of gyrations to explain the recent drop in the stock to 9. The boss is not quite as enthralled with those cheap commissions as he was. I wonder how many others chose to increase their investment as the "New Era" boogie caught their imagination. Now, let's get back to other evolving factors in the last few months that set this stage. I am indebted to one of my new Internet friends, Wally Hert, for bringing a study to my attention, that I remember seeing back in Barron's in early 1988, of a chart the author had named the Smart Money Index. This index works under the premise that the first 30 minutes of market action is fluff, based upon hot news, and emotions. It subtracts the first 30 minutes of action from each day, but then adds the gains/losses made in the last one hour, believing that the real pro's use this calmer period to make their investments. The confirmation of the cumulative Smart Money Index with the Dow, or even more appropriately the significant non-confirmations have led to huge declines in the market. They foretold the 1987 crash, the 1990 debacle, some lead on the 1994 wash-out, tremendous signal leading up to the August 1998 crisis, and now has spoken loudly again. It gave probably its sharpest decline (non-confirmation) in Mr. Hert's observation (since he read the article in Barron's 13 years ago). The latest huge non-confirmation occurred on October 27, 1999. In the 1998 period, the previous signal of impending trouble, the non-confirmation came 81 days prior to the top, this one has now been 68 days, and I believe that the top to the 1982-2000 bull market in the NASDAQ Composite has been made. If not in the last couple of days, in the next few weeks. A few months ago, I mentioned the extreme low level reached by the Arms index (MKDS or TRIN), as the 10-day moving average dropped under 0.70. This is not as record shattering as some of the other indicators such as the "3-Steps and A Tumble" rule, but in the past it has often led to major problems for the stock market in the following 90 days. The calculation of this daily statistic compares the number of advancing stocks to declining stocks, and then compares that to the volume it takes to generate each of those. In other words, the formula is (A/D divided by A vol/ D vol.) When the number drops to extreme lows it means that it is taking an abnormally high volume to push the market up, and in danger of running out of energy. It usually takes a few months for the bull's momentum to roll to a stop, but typically when it does it spells trouble. I could go on to many other obvious signs that the momentum of the bull market has continued to dissipate. And as the Fed's next meeting draws closer, and as the fragile economy is already showing signs of growing weary, as the stock market tends to devalue the Internet cash that has fueled much of this economy, we believe a momentous top is being forged. It was interesting that Ed Yardeni, who I believe is a very far-thinking Economist, blinked. After the Y2K deadline did not produce any major bottlenecks, he repented, said he would never go on another Crusade, and turned bullish (I think that is what he said.) Mr. Yardeni might turn out to be the sacrificial lamb to turn this economy and market around. Too bad Ed, but somebody had to do it. Last but not least, the bond market. Nothing could look worse. It has been absolutely horrendous, reaching a yield of 6.68% yesterday. It has moved higher than I ever thought possible, but even so, I'm not giving up the belief that the top in yields is momentary. This is similar to 1994, when the yields actually moved back above 7% in the hysteria of the moment, even with the Fed moving fed funds rate up to the 5.5% range where they are currently. The economy looked unstoppable, and the bond bears were running wild, but that low bullishness was met with a huge rally in the months ahead as time proved that the economy had already started to slow. So I'm holding my bonds, and looking for another buying juncture on any reversal on the charts.

The Hays Advisory Group does not guarantee the accuracy or completeness of this report, nor does the Hays Advisory Group assume any liability for any loss that may result from reliance by any person upon any such information or opinions. Such information and opinions are subject to change without notice and are for general information only. Hays Advisory Group, P.O. Box 50436, Nashville, TN 37205.

(1999 Hays Advisory Group, LLC. All rights reserved. The information contained in this report may not be published, broadcast, rewritten or otherwise distributed without prior written consent from Hays Advisory Group.

-- VICTOR (victor@inthevally.com), January 12, 2000


Somebody ought to go buy a couple of paragraph breaks. This is unreadable.

-- JoseMiami (caris@prodigy.net), January 12, 2000.

Have Hays and Comeau reached the same conclusion by different means?

-- dinosaur (dinosaur@williams-net.com), January 12, 2000.

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