An open letter of concern about the stock market April 14, 1999 In Charles Allmon's newsletter, Growth Stock Outlook, he quotes some very interesting statistics. Merrill Lynch noted that 48% of all NYSE stocks last year declined 30% or more from their 1998 or 1997 highs. The Dow Transport topped out months ago, along with Amex and Value Line. Salmon Smith Barney reported that a mere 10 stocks accounted for 43% of the S&P gain (I guess it's the S&P 500), while 33 stocks contributed over 75% of the gain. Most mutual funds were clobbered in 1998 as two-thirds of all US stocks fell in price. NASDAQ gained 40% last year, with 90% of that gain contributed by the 25 large technology companies.
The bottom line is that the US stock market is already in a bear market. Only a few of the companies are responsible for the gains in the indices. When these high flyers come down, the damage already done in the broad market will be exposed and impact on investor sentiment could cause the market to decline to levels that are unimaginable to people right now.
Meanwhile, investors and capital funds worldwide believe that the US dollar is the safest place to put money. This is evidenced by the immediate increase in the value of the dollar, due to foreign capital investment, whenever investors get nervous. The tremendous amount of foreign capital investment is causing the US dollar to get stronger, increasing the illusion that the US dollar is safe and creating a self-fulfilling prophecy.
The rising dollar is what is keeping the US inflation rate down, because all our imports keep getting cheaper and every year we import more. What is being ignored, is that private debt has risen to record levels and much of this borrowing is going into real estate and the stock market. The fundamentals underlying the US economy are not strong at all. Bankruptcies are at record levels, private savings rates are zero, money supply is increasing exponentially and anyone that still believes we don't have inflation should look at the stock, bond and real estate markets. That's where the inflation is.
In these time it's tempting to follow the lemmings into the market. Why, they are all becoming millionaires, and why not? The US would be a wonderful place if all its residents were millionaires. Unfortunately that just isn't going to happen. I urge everyone to increase their cash balances, reduce stock market exposure and protect the buying power of your cash with selected natural resource investments. We are facing treacherous times; those that are not prepared could lose everything.
I don't know how long this market is going to hold together, but I am convinced that it cannot go up indefinitely. It is better to be conservative in this environment and not let greed influence otherwise rational decisions.
Paul van Eeden
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