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Clients and Friends Newsletter for April 27, 2002 "Making investment decisions is and will always be the art of exercising judgement under the conditions of uncertainty." William Jahnke, "Getting a Grip", I am writing to let you know that I have become more bearish on the US equity market over the short and intermediate term. I am not changing my long-range bullishness on the American market; however, for long-term accounts I am "sitting tight" on current positions and only putting new equity money that is to be invested for at least a three-year time period (and hopefully much longer) into a few favorites in the financial and utility sectors, generally stocks with mid-teens or lower PE's and 2.5-4.5% dividend yields. I have become more bearish at what seems like a late inning of the ballgame (indeed, after a two year bear market in the NASDAQ); however, I have drawn the conclusion that the U.S. equity market will be, at best, drifting sideways/downward for the next leg of the economic cycle. We might have a slight summer rally, but unless there's a robust increase in capital expenditures I think it will be short-lived. We might ultimately drop to retest the September market lows (which may actually be helpful long-term by creating a technically strong "double bottom" pattern for the market to try to use as a base going forward.) I base my position on my perception of the current market, including (but not limited to) the following items: 1. Weak Corporate Profits--As the famous line goes, "It's all about earnings". Although most companies ( I think I remember hearing 61%) that have reported have made their quarterly earnings, a goodly number have warned about the dim prospects for robust corporate profits going forward. Some of the companies that are in the worst position are capital-intensive or debt-ridden former growth stories, perhaps victims of the telecom/technology implosion, whose debt is not very liquid in the current brutally tight corporate lending market. The stock of these companies is being devalued by the market on almost a daily basis. This negatively impacts everything from lowered corporate debt ratings, to corporate buying power in acquisitions paid for with stock, to employee stock options. In addition, many companies' earnings have been been impaired by a variety of corporate restructuring charges, goodwill write-downs, expenses related to closing plants, laying off workers, and other impairments that are still being announced. These all have negative affects on corporate profits, and the much-anticipated upturn in business has not yet arrived. 2. Seasonal Factors--May to October is typically a worse performing time period in the stock markets than October to May--and there's currently no sense of urgency on the part of buyers. What looks like a good deal one day is a better deal the next, and the next, etc. 3. Trend continuation--until we receive some iron-clad evidence from the market that things are getting better--the trend is down. Stocks and indexes continue to make new lows, undercutting support and prolonging the healing process. The chance of a sharp V recovery from these levels is highly improbable. Bear markets tend to drop further, faster, as fear takes control over greed. This bear market's greatest identifying trait, however, has been (aside from the week after Sept. 11) a downward-sloping drift evidenced by a lack of buyers. We will not have a change in market character until the buyers return, and aside from a few sectors that have been shouldering the load and are IMHO in danger of being overextended (retail, homebuilders, defense, small and mid-cap indexes, and some financials) the buyers simply aren't there--and probably won't be--for a while. Factors that could change this scenario include an end to the Middle East tension, a "victory" in the global war on terrorism, better economic data, news of greatly increased capital expenditure (Cap Ex) spending, great improvements in Japan and Argentina, or some event that caused buyers to feel the need to reenter the equity markets in large numbers. Of course, the publishing of this viewpoint, in and of itself, can cause the rally of the century, if for no other reason than to prove me wrong. Until next time, from "the investing center of the Universe, southern Kill Devil Hills, NC", Will Will W. Woodard, III, CFP® "Clients and Friends Newsletter" is published monthly by Dare Capital Management and is free of charge. To subscribe, send your email address to will@darecapital.com and put "subscribe newsletter" in the subject line. All of the foregoing is commentary for informational purposes only. All statements and expressions are the opinion of Will W. Woodard, III and Dare Capital Management and Advisory, and are not meant to be a solicitation or recommendation to buy, sell, or hold securities. Dare Capital Management and Advisory is registered in the State of North Carolina as a Registered Investment Advisor Firm. The information presented herein and the company's web site has been obtained from sources believed to be reliable, but its accuracy is not guaranteed. The security portfolio of Dare Capital Management and Advisory may, in some instances, include securities mentioned herein and/or on the company's web site. Positions in securities mentioned will be disclosed at the time of publication and may be subject to change at any time without further notice. Estimates, assumptions and other forward-looking information are subject to the limits of forecasting. Actual future results may vary for many reasons. |