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The Equity Culture Revisited

by The Elliot Wave Theorist -- March 5, 1999


On March 9, the NYSE will present one more symbol of the stock market's complete integration into every corner of American life. Barbie will celebrate her 40th birthday by ringing the bell to start trading. Wall Street will be renamed Barbie Street for the day and traders will sport pink vests. Read this item from the real-life fashion world: "When models, photographers, hair and make-up artists and Sports Illustrated editorial staffers were on location in the British Virgin Islands to shoot the 1999 swimsuit issue, it seems most of them had at least one thing in common. CNBC says everyone gathered around the TV each day so they could watch satellite feeds of Power Lunch and Market Watch." It has now been one full year since EWT observed that "the investment craze has infiltrated the culture" of the U.S. and Europe. Like an immense wall of white noise, this flood of financial images and information has grown stronger even though the global and broader U.S. markets have been declining for much of this time. The stock market's ascendant pop status was captured nicely in this report from New York magazine:

The triumph of stock-market culture is visible everywhere you look in the city. A decade ago, Times Square was an archaic neon jumble of small business peddling sex and novelties. Walking through Times Square now feels like stepping inside a spreadsheet: The famous news zipper at 1 Times Square is sponsored by Dow Jones. NASDAQ will soon have its own mammoth stock-quote screen directly across the street, rising three stories high on the face of the Condé Nast building; there will also be a gallery, a lá the Today Show, that's part TV backdrop and part tourist attraction, featuring live traders. Five blocks north, on Morgan Stanley's headquarters, huge glowing orange stock fractions and corporate symbols move so fast they're unreadable. The unavoidable New York conversation has been about the stock market, exposing just how obsessed and market-savvy this city has become.

But it is not just a New York thing. In many circles, the stock market has replaced the weather as the No. 1 topic of conversation. It hardly even makes our ears ring anymore when the local weatherman says, "Temperatures are going up as fast as some of those Internet stocks." A Melbourne McDonald's has installed a stock ticker. In Germany, where a short time ago individual investors were considered too cautious for equity investment of any kind, the Neuer Markt, one of four new European stock markets for start up firms, is red hot even though the blue chips have been flat since last March. "Anything that's listed there these days seems to go really crazy. No one pays attention to any fundamentals. They just get carried away." A major breakfast cereal has sponsored a contest in which the winner gets to invest $5000 in "stocks/mutual funds." "A bull market in old tunes is slowly emerging" as a wave of rockers ranging from Crosby, Stills & Nash to Michael Jackson line up to sell rock-and-roll investments secured by royalties from their hit songs.

A subscriber and investment planner from Australia tells us he was "audited" by that country's Investment and Securities Commission because too many of his clients were following his instructions and withdrawing cash. "As a result of the audit, I was advised to refrain from such advice. If our clients are still in this position in 12 months, it will be suggested that I be counseled."

Advisors' incredible and expanding comfort level with the stock market was illustrated by a personal finance reporter who grew concerned when she found out her mother had 100% of her assets in stocks. She was "aiming for retirement in seven years." "Mom, I can't believe this," said the reporter. On her mom's behalf, the reporter called in the experts who said "I would want 100% in stocks. Today, you have to protect your buying power at (retirement) age." A second opinion also produced "no shrieks of concern." "So, Mom, it looks like you could be in the clear," concluded the reporter.

What Investors Know Can Hurt Them

One of the biggest hazards of the mania is that it has instilled in investors what James Grant calls "a sense of mastery... They believe that, in partnership with Alan Greenspan, they control events."

A housewares merchant says, "being involved in the stock market has absolutely changed the way I think. It's given me a feeling of control over my life." The day-trading explosion (see last month's EWT) epitomizes the danger. "Watch Out!" says a Forbes teaser, "Five million ordinary investors are empowered with new trading tools." Watch out is right. The central component of these bull-market belief systems is apparent in a recent CNNfn Internet survey of 9000 investors. When asked "If a familiar stock dips, do you buy it?" more than 80 percent answered "Yes."

It is not just what investors believe, it is what they know or think they know. Schooled in a mania, they have no idea that the trading patterns of the last three years are not permanent truths. A typical strategy is to buy shares of firms that announce stock splits. The Elliott Wave Theorist has been tracking the success of this approach since it was popularized by a cabbie-turned-stock-market-author in 1996. As we have pointed out before, in ordinary times, stock splits are an expression of high prices and corporate optimism, and are thus fairly reliable signals of imminent reversal. From 1996 through 1998, however, a lot of people have actually made money buying stocks that announce splits. The latest university study documents that "stocks that split return about 8 percentage points more than their peers the year after the split." In recent weeks, the practice has been more popular than ever. January was a record month. "The Math of Stock Splits: 1+1=2, or Maybe More," says a headline. But a close look at recent splits shows that the strategy has suddenly stopped working. A list of 37 splits announced between January 6 and February 1 and posted on the Silicon Investor bulletin board were down an average of more than 6% from their opening on the day the splits were announced. This change may signal a return to normal behavior.

The company buyback has been another sturdy tenet in the bull case. Late last year, buyback announcements jumped to three times the average of the preceding two years. Corporations were so enthusiastic about their prospects they took back $158 billion of their own shares. In early 1999, the practice continues to run at a record pace, but suddenly there are second thoughts. "Was the Wave of Stock Buybacks a Bad Idea?" wonders The Wall Street Journal. It turns out that over the last two years, as corporate balance sheets have been quietly deteriorating, many companies have actually borrowed money to support their buyback programs. So, as the market turns, the same tactic that fueled bullish imaginations and pumped buying power into a rising market becomes visible as a vast hidden source of margin debt that can have an equal and opposite effect in a downtrend. The potential for reversal is what makes investors' sense of control so dangerous. It is based on lessons that the market simply reverses when the trend changes.

The new treatment of stock splits and buybacks indicates that the re-education of the average investor is underway. It still has a long way to go. The February issue of Ticker, a new magazine for individual investors, expresses how far the discipline of investing has strayed. The article is about a psychologist who invested his life savings in a stock based on a dream. "I was in Palm Springs and someone told me, 'Don't worry, ICOS is going to $36.'" The stock hit $24.50, and the psychologist has since "programmed his mind" to dream about stocks by meditating before bed, praying for guidance and asking his "dream mind" to send images that express a particular stock's potential. In a bear market, the average investor's mind will be filled with nightmares, all courtesy not of REM sleep but of reality.

The Bullish Imperative

At this point, everything rides on the continuation of America's collective dream state. As one observer put it, "There is really no alternative to keeping the American bubble bubbling along for at least 12 months. It's a matter of good international policy. The reality is there's no other growth locomotive in the world." Another columnist asks "Can government allow a bear market?" The answer: "Protecting stock prices is fast becoming a national imperative." The Time magazine cover below expresses the consensus view that Greenspan & Co. are up to the task.

The article includes a centerfold in which "The Three Marketeers," Greenspan and U.S. Treasury officials Robert Rubin and Lawrence Summers, are portrayed as "economist heroes" who have, in fact, prevented a global slide. A similar article in USA Today is even more fawning. It says that Greenspan is "extremely smart," "extremely fair," "a great patriot," a "human computer" and "extremely devoted to his mother." In neither article is it mentioned that none of the countries that have purportedly been saved with $180 billion in bailout funding have actually turned their economies around.

In Brazil, where the latest line in the sand was drawn, the word is that the economy has tumbled into recession "Amid Few Indications of Any Turnaround Soon." While the "committee to save the world" is still "putting its faith in the markets," the rest of the world "from Brazilia to Beijing to Tokyo" is talking "about how to get out of the globally integrated economy. Indonesian rickshaw drivers and Chinese steel makers are demanding that their governments take care of them. Suddenly, the market forces that were seen as the path to national salvation have become the enemy of national sovereignty." The difference between the new international tone and the American resolve to stick by the market is simply the difference between the end of a bull market and a developing bear. As Paul Montgomery (Universal Economics,600 Thimble Shoals Blvd., #110, Newport News VA 23606-2597), has shown, the cover of Time is in and of itself a reliable sign that the last line of defense has or will shortly succumb to the forces of reversal.

The chart below from Alan Abelson's Barron's column expresses everything there is to know about government and markets. The effort to save Social Security from default by putting the national nest egg in the stock market is another excellent example of what happens when extreme optimism meets fundamental shortcomings in a fifth wave. That is when the weakest hands with the most to lose climb on board rickety enterprises.

In this case, pensioners may actually get pushed on board by the U.S. government. The drive to get Social Security in the market is one of the few current political initiatives said to have a chance of making it through Congress because some form of stock market investment is the only thing Democrats, Republicans and the White House agree upon. In Capital Hill hearings, Richard Anderson Jr. became the youngest person ever to testify before Congress. "If you want to retire, you must save and invest," he said. When, after three generations of rising stock prices, a 6-year-old boy is brought in to do the bidding of politicians, what is really being testified to is the termination of the advance.

A Bubble Remembered

Few know that they are living through a mania when it is raging. Manias are obvious to the majority only in retrospect. Paul Montgomery recently published these graphs, using data from Bryan Taylor (Global Financial Data, 500 North Atlantic, Suite 208, Alhambra, CA 91801-2230). As you can see in the next two charts, in just a single decade, Japan's Nikkei index has returned to its 1950s-1960s value in terms of both the DJIA and Japan's own bonds. The two-decade bubble has been fully deflated relative to these measures.

Despite the surface implication of these graphs, Japan's share market deflation is not over, for two reasons. First, every manic advance in the price of an investment has been ultimately more than fully retraced. The Nikkei (not shown; see EWI's Global Market Perspective) has a long way down to go before that happens.

Second, the U.S. market is itself completing a historic mania, which means that when U.S. stock prices turn down, the Nikkei will have to fall just to keep these two graphs in equilibrium. The two stock markets need not rise and fall simultaneously, as they have already proved during the 1990s. Their multi-month trends may diverge. However, before the long global deflation is over, they will have achieved the same goal: a complete retracement of their manias.


by Pete Kendall
March 5, 1999

Reproduced with permission of Robert Prechter's Elliott Wave Theorist
P.O. Box 1618, Gainesville, GA 30503 770-536-1309
www.elliottwave.com

Copyright 1999. All Rights Reserved. No further reproduction without permission.

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