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Goodbye 2004, Hello Bubble!
by Mark M. Rostenko
Editor, The Sovereign Strategist
December 20, 2004

Welcome to the final TSS weekly commentary of the year.  I’m taking a couple of weeks off for the holidays because repeating myself week after week fifty times a year is tiresome, and not just for the reader.

For those of you figuring that with it being the last issue of the year, I’ll make a special effort to go out of 2004 with a bang and finally say something of great insight, go figure some more.  I considered doing so, but then I’d have too tough an act to follow in 2005.  So welcome to more of the same repetitive drivel you’ve come to love and expect.

Stocks posted some marginal gains last week but went out on a sour note.  The major indices closed mixed and not much changed overall.  The dollar continued its attempt to eke out a temporary bottom while gold struggled to stay awake.  I don’t know what crude oil did but I know it didn’t make a new bull market high because I didn’t hear Alan Greenspan prattling on about how record high oil prices aren’t any cause for alarm.

The major indices have been struggling with new rally highs in recent sessions.  The Nasdaq Composite probed into new rally high territory last Wednesday but failed dismally to follow through and ended the week lower.  The S&P 500 has made more substantial progress but it too lacks momentum.  Signs that the rally has run its course?  Perhaps, but this late in the year I wouldn’t read too much into anything.  We’ll see if the rally has any real legs when everyone gets over the “get in early on the January effect” effect.

If history is any guide, the rally may be nowhere near complete.  As recently mentioned by a couple of other commentators, years ending in five have historically been very good for the market, ever since 1885, without exception.  Aside from the relatively small gains in 1895 and 1965, every other year ending in five has seen a gain of more than 20% with six of those years coming in at 30% and over.

Pretty good track record, I must say.  Perhaps it has something to do with the “presidential cycle.”  Maybe the year after an election everyone is so relieved that they don’t have to deal with the lies, absurd claims and mud-slinging for another three years that everyone goes out and buys stocks.

Maybe it’s just random.  A coincidence.  Or perhaps a self-fulfilling prophecy, as everyone buys stocks in anticipation of another banner “5” year.  But one thing’s for sure:  the fact that every other year ending in five was a good year for stocks tells us absolutely NOTHING about 2005.

Blasphemy?  Only if you mistakenly believe that there is some causal relationship between the date and stock market gains.  I like to think the stock market is a little more complicated than that.  Correlation does not imply causation and the number “5” doesn’t push stocks higher any more so than a preponderance of cows makes Nebraska flat.

Anyway, there are two ways of thinking about this.  You can be in the “every other year ending in five was good so this one will be too” camp.  Or you can be in the TSS Cynical Bastard camp which says “every five year that results in a gain brings us that much closer to the year when the correlation fails and this year we’re waaay overdue for a horrible five year.”  Take your pick.

I don’t know where 2005 will close out.  Heck, I don’t even know where it’s going to open.  What I do know is that the trend is up, stocks have been moving higher for a couple of years and that we’re in the midst of another finely Fed-orchestrated asset bubble.  Until someone devises a methodology for accurately measuring lunacy, there’s no way to forecast how high this bubble can go.  The “trend is your friend” and for now, the trend is upward.

Yes stocks are overpriced.  Yes the dollar is in trouble.  Yes the budget deficit is huge.  Yes the current account deficit is a gaping chasm.  But all of those factors have been with us for years.  The stock market decoupled from economic reality some time ago and why should we believe that’s going to change anytime soon?

Have I grown horns and become a raging bull?  Hardly.  I’m not bullish.  I’m merely acknowledging the obvious: stocks are in an uptrend.  When stocks are going up, the way to make money is in buying them.  Being long.

But there are times when buying stocks is less risky and then there are times like today when buying stocks is very risky.  The nature of a bubble is such that no one knows when it’s going to end.  Sometimes, ok often, they end abruptly.  That makes bubbles very risky.  And that makes “investing” in the stock market anything but.  At this point it’s all about speculation and grabbing the last chair before the music is turned off.

In the early stages there’s nothing that differentiates an imploding bubble from a simple correction.  Those who figure out the bubble is over take their profits, sit back, count their money and wait for the next Greenspan bubble.  Those who don’t figure it out as quickly take their losses, sit back, count their remaining money, and wait for the next Greenspan bubble.

What I’m getting at is this: it’s an up market.  Call it a bull, call it a huge bear market rally, call it Ronal McDonald,  but it’s going up.  It’s a bubble and the day traders are beginning to make headlines again.  Speculation is back in vogue.  There’s money to be made, but only those who hit the exit doors first will walk out unscathed.  While there’s no telling how high stocks can go, at some point the overwhelming disparity between fundamental economic conditions and stock valuations WILL come back into focus and the party will end, most likely rather abruptly.

Until then keep an eye on the exits and have a good holiday.

© 2004 Mark M. Rostenko
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