Q: How do we know this is the lower high for the Nasdaq?
We know this is the high for a couple of reasons. No. 1 is that my good friend Ian McAvity of Deliberations Research has done some work comparing what he calls busted-bubble markets with the Nasdaq. The U.S. market in 1929, for instance, was a busted bubble, as was the gold market at the 1980 peak and the Tokyo market from the 1989 peak. His work shows the initial decline bottoms out approximately 2? years after the top. This time around that gave us a low in late 2002 and early 2003. Typically, there is a rally of 50% to 100% from that low. That rally usually lasts nine to 12 months. In terms of amplitude we are in line with the prior rallies and in terms of time we are a little long in the tooth. I lived through the Nifty-Fifty growth-stock era in the early ‘Seventies at Putnam Management. Big growth stocks topped out in 1973, went down tremendously in 1974, rebounded in 1975 and then went essentially nowhere for five to six years, even though in the vast majority of cases the growth in earnings still came through. One of my favorite charts is a long-term chart of McDonald’s from the ‘Seventies and early ‘Eighties. McDonald’s in 1973 peaked at approximately 75, went down to 22 in 1974, rebounded to 66 in early 1976 and then went sideways for the next five years. Interestingly, the earnings continued growing throughout that decade at a compounded rate of 25% a year and the company never missed a quarter. Despite all that, by its 1980 low, McDonald’s was selling at 10 times trailing 12-months’ earnings, compared with selling at 75 times trailing 12 months earnings in 1973.
Q: So has this been a sucker rally?
A: In the case of the Nasdaq. But then step back and look at other areas of the market. The mid-cap and small-cap indexes are making all-time highs. They are in secular bull markets. It is like a sailboat out in New York Harbor. The wind is pushing it one way and the tide is pushing it another way. The wind in this case is the technology stocks going south and the tide in this case is the rest of the market going north. And so the tug of war is between the two forces, and how much exposure they have to the wind versus the tide tells you which way they are going.
Q: How long, then, before a break in the Nasdaq occurs?
A: It could occur at any time. I turned negative on the Nasdaq in early November and it has gone up since then. I like to be early but not that early. The question is, if the Nasdaq goes down what will the rest of the market do? I prefer to observe what unfolds from other than a fully invested position, given the fact that when the Nasdaq goes down on a short-term basis of late, the rest of the market goes down in sympathy. The sectors that have done well — mid- and small-cap stocks have had sensational advances — could stage a 10% correction and not put a dent in their uptrends.
Trend Spotter: An Interview With Walter Deemer
Nasdaq, which has been pacing the current bull run, is poised to tumble, says technician
Barron’s, MONDAY, FEBRUARY 23, 2004
The economy slows, CD sales slow.
The economy recovers, CD sales recover.
If I am going too fast for you with this complex and sophisticated economic argument, please let me know. I can’t make this explanation any simpler, but perhaps I can find some crayons or blocks for you to play with.
The simple truism above is well known to everyone outside of the music industry. For unknown reasons, the music industry and the RIAA act as if they are exempt from the business cycle. Most sectors of the economy suffer during recessions — the exceptions are “interest-rate sensitive” groups, like Autos, Home, and Durable Goods, which benefit from the falling rates which usually accompany economic slow downs.
As we have been discussing for quite sometime now, sales of discretionary entertainment products like CDs are not an exception.
Despite the high, illegally price-fixed costs of a CD, you don’t yet need to take out a mortgage to buy one. So there is simply no reason to believe that CD sales have ever benefited from a broader economic slowdown. Yet judging strictly from the public statements of the recording industry over the past 3 years, one would never have even known that a post tech-bubble recession happened from 2000-2003. They simply never mention it. The New York Times, in an article about the continued uptick in music sales (“CD Sales Rise, but Industry Is Still Wary“), never reaches the issue of the economic weakness during the past three years.
As the economy weakened, so have CD sales:
Annual CD sales
Source: New York Times
Not surprisingly, industry sales are running parallel to the broader economy.
Indeed, in the aftermath of the world’s greatest speculative bubble, during a recession and a bear market which saw the Nasdaq lose 80% of its value, the sector only saw a 12% drop in sales during the same period. Its hard to undestand why music executives are wringing their hands over this; Most businesses would have been thrilled with “only” seeing their business off by 12% during this period.
Since then, we have seen an improving economy. Although consumer confidence remains shaky — mostly due to anemic job growth — we have seen a general improvement in spending. This has been especially true in the second half of 2003, as the hottest part of the Iraq war passed.
As the economy continued to gather strength, sales of CDs recovered. The last quarter of 2003 saw a marked marked uptick in total album sales.
In an apparent bid to completely confuse their readers, the NYTimes today has 3 separate stories on lagging job creation and the economic expansion.
The first one, in the Business section, answers the issue with a resounding No:
“Job growth is likely to remain tepid even as the economy moves ahead, according to a survey of professional forecasters by the Federal Reserve Bank of Philadelphia. Indeed, the bank said yesterday, the economists’ outlook for employment has grown gloomier even as their predictions of economic expansion are becoming more robust.
Economists have been puzzled for months by the sluggishness of the employment market. The new forecast suggests that they have come to terms with the pattern established in this recovery: fast economic growth being driven by even faster expansion in productivity, with businesses meeting demand by squeezing more output from their current employees instead of hiring more workers.”
The second article is decidely more rosy.