Megatrends
Above is a daily chart of the SP500 cash index along with several significant moving averages, channel lines, and yearly highs and lows. For a comprehensive technical analytical view of this chart please click on the following link (SP500 Long Term Views)
Let's start with the fact that the (Iraqi) victory rally didn't make a higher high and SARS is spreading around the globe. These negatives only highlight why the market can't make higher highs. The annual cycles are losing strength and still portend lower prices. And finally, the rallies off the bottoms since July 2002 are losing power and still haven't made a higher high. Now, add in the macro economic environment; like global trade; employment; monetary and fiscal policies; energy; credit markets; politics; and demographics, and ask yourself are opportunities becoming more or less frequent. If opportunities abound then optimism will win the day, if not, then ask yourself, where will the stock market get its next jolt?
During the 1980s and 1990s, first came mass merchandising and national chains. So long to "Mom and Pop". This core change throughout America yielded an unprecedented bull-market that was quickly copied around the globe. These changing business practices from thinking locally to selling nationally came at the right time as America's demographic changed. The baby boomers were in the market for a house and with that came the retail surge. They bought not only one item but 5 of each item ( TVs, electronics, cars, houses, etc.). This was another fundamental shift in the consumer's behavior because there was no precedent for this. The previous generation that lived through the depression were prudent and frugal and buying more than one of anything just wasn't done. Think about living at the turn of the century. Their treat was fresh fruit and jam. So they didn't have two three cars; two or three houses; a TV and stereo in every room. They were trying to survive. So this new generation changed their buying habits and this caused their parents to modify their buying habits, and they too started to loosen their purse-strings - more consumers. Add to this the mentality that bigger is better and there was no stopping the buying binge because better products and new innovations were coming to market in record time. Next add in the psychological imperative to provide more for your children and the drive to give more to your children than what you had set the stage for acquiring all that is new and different.
While consumer behaviors were changing, the business world experienced a few financial shocks. First, Japan rose out of the ashes of Hiroshima and Nagasaki and beat Detroit at their own game. Then the US had a dollar crisis in 1987 which then gave us the first 500 (only 4 in history of Dow) point drop in the Dow in history. Then in 1990, Wall Street heros like Micheal Milken "the junk bond king" went to jail. Capitalists discovered hidden value in America's largest companies and bought them only to break them apart. They split these turkeys by selling off all of their assets which were worth more than the company. All those years of depreciating properties, plant and equipment, and other tangibles proved to be a "sure thing" in making millions. The financier was king and the age of the golden parachutes began. The Federal Government bailed out banks as they sustained heavy losses for making huge bad loans to South America causing wide spreads so that the banks could recover from this catastrophy. Spreads have never been the same and they're still too wide compared to historical standards which still costs consumers billions. This is the beginning of the transfer of wealth from individuals to banks and other financial institutions. The American taxpayer not only paid for the bailout in taxes but also paid in the form of higher borrowing costs or interest rates. Later merger mania hit Wall Street. Lawyers, bankers, Venture Capitalists all got in on the action and the thing to do was to gobble up companies. This was no problem for a small fee of 1/4% of a billion dollars! So off they went making news every day with bigger and bigger deals. Mergers meant that companies had value and if that one company was valuable than maybe one of the other companies in that sector would also be a candidate for a takeover. So Wall Street fed on this like piranhas. This primed the pump for what would be the "baby boomers" get rich quick scheme - buy stocks.
Then America had another explosive immigration wave that has fundamentally changed America. The influx of Latin Americans, Asians, Eurasians, Indians, and Pakistanis was greater than the European migration during and after World War I and II. This phenomenal resource fueled the growth into so many markets simultaneously that the speed of change created too many opportunities. The world opened its doors to democracy and with it came globalization. The information age came and the re-cabling of America began in earnest. Telecommunication quickly became the quintessential tool for the computer industry and the need for computers came at the right time to process the trillions of transactions that were to come. Without computers, business would have been so severely limited that opportunities would have died. Then having computers talking to other computers caught on like wildfire. The internet phenomenon created another round of seemingly limitless opportunities. As America worked hard, it played hard. So entertainment grew at a dizzying pace. Hollywood and Las Vegas grew with reckless abandon and you can now golf on a beach, hill, two floors up, or indoors. With globalization came the demand for transportation and that industry flourished too - more planes, flights, seats, connections, and destinations. Software was the rage as the clock ticked closer to the end of the Millennium. The question on everyone's mind was who's computer would fail? The surge in programming was immense. Businesses needed to fix their legacy systems and build a new these new things called web sites at the same time. The race was on, but who could program? Can you? Here's a $100K. There wasn't any industry that didn't benefit from the great bull market. The world was buzzing. Even the Federal Government slowed the growth of its deficit for the first time in 20 years because more citizens and businesses than ever were making money. Then the darling of Wall Street, technology, got punched. The dual threat of holding a desktop computer in your hand and the "internet-only" computer changed the technology sector and crushed investor confidence in the leaders of the old paradigm - desktops out; new little things in. Investors had bet on the old paradigm and they left the table. The NASDAQ went down the tubes. No longer would the world work the same way, but the new technological opportunities didn't sell and the traders punished these companies' stocks. Internet stores that promised a more efficient buiness model of selling goods to consumers proved that were nothing more than electronic catalogs. There expenses were higher than investors were promised and if was discovered that the "King had no cloths". Optimism slowly waned as investors saw their fortunes dwindle away, but hey, there's always real estate. So the loss was tempered by rising home values. No problem.
Along the way, there were some that took advantage of these opportunities and marked how excessive the times had become. The criminal acts of Enron, Tyco, Arthur Anderson Consulting, and others showed investors how unscrupulous Wall Street is and soured their grapes. Our parents knew this, but you know kids, what do parents know? Terrorism struck home and forever changed the minds of Americans. Materialism and money are no longer the prime directives and Wall Street was demoted. The Federal Government is bailing out our Airline industry and it stands ready to print more money if the credit system bursts from the mighty debt bubble in real estate. Bankruptcies are rising, and Japan is in crisis. Europe’s powerhouse, Germany, stands ready to default and fall for a second time this century because their financial system tried to copy what only Americans can do, borrow more. Latin America still is broke, but no one seems to be asking how many times can the IMF bail them out? The next "New Deal" is in the offing to rebuild Iraq. But the last time our Federal Government decided to save America it crushed it. It used up so much money that there wasn't any left for private industry and the robber barron's of the day only got richer. The rest is history - the great depression. This time the money is not even staying in our own country!
So what else is out there in the mega-trends to turn America around. Defense and security seem likely to become front runners, but if you look at their performance since Sep 2001, this isn't making people invest nor is it going inspire Americans with optimism. Another industry that has fallen flat is Biotechnology. Here you can truly get excited, but the looming moral questions and the nagging predisposition to leave mother nature alone has merit. We generally muck things up. Only after hundreds of years following the industrial age are we concerned enough to worry about our planet but we are not scared enough to limit our detrimental behaviors. Profits are primary, pollution is secondary. So while Biotech holds much promise, we as a species have a long way to go before we fully understand the scope of tampering with the master plan of evolution and how to apply it without annihilating ourselves. Our President's plan to use alternative fuels brings with it the rebuilding of an entirely new distribution system which will keep the energy sector and the construction sector busy. But what will "rev" up the rest of America?
The baby boomers are getting older and now are paying for college bills and are settling into what they have acquired. They're not inclined to borrow much more unless they see their wealth increase. Borrowing wasn't a problem so long as your financial investments rose and the value of your house rose. But the financial portfolio is dessimated and the house is mortgaged up to full value. So the philosophy of yore - buy today and pay tomorrow is out. That's why Zero financing is working and boosting sales. It's the only way for Americans to afford buying today. Inflation is still slowly at work robbing us of value and forcing many families to become two wage earning families. The debt on our houses is so high that any reduction in work or salary can be disastrous. Taxes are rising and health care is becoming a luxury. What money is left is spent on more utilities like digital cable, cellphones, and internet access. Transportation costs are now approaching $2 a gallon and $30,000 a car. These crushing effects will only temper future purchasing decisions while jobs are transferred to other countries. Until new opportunities spark some new enthusiasm, it looks as though were entering the "age of absorption". We're digesting the rapid pace of change and formulating new moralities as the world's cultures clash. Governments around the globe are trying to improve their citizens' lifestyle but America's on top of the chain and if we break so does the rest of the world. If India and China pick up the pieces, the question is how will it help Americans. We already have a pseudonym for China, Inc. - Wal-Mart. Right now China's purpose is to provide us with low cost products, but when will our Government see that transferring manufacturing jobs to those countries with the lowest labor costs only speed up the number of foreclosures in America. We need a new trend that will create more jobs here so that we can sustain our lifestyle. Second, China and India have nearly half of the world's population so when USA, Inc. goes there to assist them in starting up a venture, we will only be providing services to them. They have more than enough manpower and resources to go it alone. So the realization is that we are only assisting them. Americans, at home, need to be able to work in America. We live here and need to work here, so we have to ask what industries will carry us into the future. If we've already created it; built it; moved it; bought it; sold it; used it; resold it; and trashed it; what will invigorate us for the next 50 years. Buying and selling will always exist, but when will it again reach the fervor of the 1990s? I don't see the trends nor the evidence to swing the odds back in favor of another monstrous bull market to carry us to new all time highs unless we inflate, or devalue, our way there - SP1600?
created March 2003, © The Small Investor's Software Co. All Rights Reserved.