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Flights of Fancy - Money Matters for 10/12/05 Don Bravo | 10/12/05
With the Dow outperforming the Nasdaq, investors may be fleeing to Blue Chips, but are they only delaying the inevitable?
Today, the Nasdaq lost over 1% of its value, the NYSE Composite 0.,80%, but the 30 blue chips comprising the Dow Jones Industrials dropped by only 0.35%. This is what the talking nabobs on CNBC, FoxNews and elsewhere often like to call a "flight to quality."
What they mean by this is that investors, selling out of risky positions in tech and possibly small-cap issues, reinvest in safer, more reliable (and dividend yielding) stocks on the Dow and S & P 500. It's an interesting concept, but hardly quantifiable and almost certainly, in the long run, a foolish maneuver.
Over the past two years and one year, both the NYSE Composite and Nasdaq have outperformed the Dow. In the past two years, the NYSE beat the Dow by roughly 20%. And over the past 12 month period, the Dow is up only 3% compared to 7% gains on the Nasdaq and nearly 12% on the NYSE.
The markets move around and churn constantly and there's plenty of sentiment and noise to make even the most disciplined trader think twice. But dumping tech and small-caps in favor of blue chips in the midst of a bear market is not such a grand idea, dividends or no dividends.
What usually happens is that the smaller, more lightly traded stocks feel the pain initially, but the stocks with enormous market caps eventually get hit as well, and often much worse, when the ravaging bear becomes obvious and even the institutions and funds seek to pare losses.
Today's market action is prime evidence that we are now in the early stages of a serious bear market and it is likely to get worse - far worse - before it gets any better.
The advance-decline line widened again today, with the margin of losers to gainers at nearly 4-1 on the NYSE and more than 3-1 on the Nasdaq. The new lows expanded the gap over new highs and is about to max out (see below). That gap is enormous and portends that the indices are about ready to bust to the downside.
There were few bright spots, and virtually none to be found in stocks, and even the precious metals and bonds were hammered lower as all asset classes were depreciated with the notable exceptions of crude oil and natural gas, the twin catalysts which may indeed be the main culprits for the collapse of everything else.
Oil and natural gas, being essential to nearly all wealth creation instruments, are inimical to everything at the same time when their prices rise. Energy, the stuff that fuels the world, is pricing everything else out of the market. That's a recipe for not only recession, but worldwide despair. And while the supply-demand element of the energy equation may well be overstated and manipulated, it is still there, and it's putting the kibosh not only on industry, but it's reaching into the daily life of just about everyone on the planet.
Rising energy prices are unsustainable. Either the cost will price out so many industries that entire economies will collapse like a row of dominoes, or the demand end of the equation will simply dry up and force prices lower. If indeed, prices are being manipulated - and there's little doubt that there's at least some degree of that - the manipulators have to beware that they do not destroy the entire world economy in the process. These kinds of things have happened before and they most certainly can and will happen again.
The US is not alone as it faces another economic crisis. what happens in the United States is felt in economies around the world and it also has a boomerang effect in the global economy in which we are engaged. Energy prices must abate, either by fiat or market forces, or else we're going to see a market crash the likes of which few of us have ever seen or even dared to imagine.
Sorry to be such a doom and gloomer, but I call them as I see them. Ask yourself whether higher gas prices and paying more to heat your home, your office, or your place of business is or isn't going to have a dramatic impact on the quality of your life. Then tell me how you feel.
BY THE NUMBERS
Dow Jones: -36.26; 10,216.91 close
NYSE Advancers: 692
Nasdaq Advancers: 739
NYSE New Highs: 19
Nasdaq New Highs: 25
Gold: -3.20; 476.60 close
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