Investment Outlook

June 2000

Go Away in May, come back in September...

In hindsight, this may have been good advice for many market participants in this year’s version of “Who wants to stay a millionaire.” For months, pundits including us have mused about absurd valuations, questionable earnings forecasts and dubious business models. Smarter players than us have literally thrown in the towel in the face of an increasingly absurd valuation environment. Suddenly, fuzzy faced analysts were vaulted to rock star status based on wildly optimistic forecasts of market penetration by many of the new generation e-commerce businesses.

To be sure, the landscape had changed and many, notably the venerable Barton Biggs of Morgan Stanley fame failed miserably to consider the significant changes that the e-commerce wave had wrought upon the investment and business landscape. Even with the sharp markdowns of stock prices in the past few months, sage words from these wizened minds ring hollow when you miss the greatest bull market in the history of man. In fact, many of these sages can only say “I told you so!” if the Dow hits 2700 again. By then, no one will care what they think. On the other hand, the newer generation of e-commerce analysts practicing what can only be termed “duelling forecasts” projections are eating their share of humble pie. So where does all of this leave us average folk now that we have been seduced by the action of the markets? Who we gonna listen to?

Well I guess we’re forced to listen to whomever is presented by CNBC, but what we can do is rely a little more on ourselves rather than jump at every pronouncement by the stock preachers of the churches of Goldman, Merrill, Morgan etc. One of the most fundamental things to have in place when embarking upon a business is to have a plan. Investing is a business and it needs a plan. You’ve got to decide whether you’re an investor or a trader. Most of us start off as traders and wind up as investors…especially recently. In either case, you would be foolish not to arm yourself with the best information available and as we know, that information has never been more accessible. Research not only companies but also industry groups to find out where the growth companies really are. Secondly, and I cannot emphasize this point enough, you must expose yourself to some basic knowledge of technical analysis. It is not necessary to know all the arcane methods of divining stock prices, only to become familiar with the basic things such as trendlines, moving averages, areas of support and resistance and relative strength. Knowledge of these basic tools, although not 100% foolproof will keep you on the right side of major trends and will give structure to your investing adventures. If this interests you, use us a resource and we’d be happy to recommend suitable material for study.

In the meantime, our tea leaves tell us that after a long and spectacular run-up in stock prices, the next few months will offer substantial volatility and therefore a rich trading environment. After this period of consolidation, we expect the Nasdaq index in particular to make new all time highs. We expect this to be very sharp and to last only a limited time. We expect this to be a very narrowly focused market and those holding losers over the next few months should sell them to recover what they can, for when the next rally starts, it will not be the laggards that will participate. Look to buy only the strong relative strength issues. We will try to illuminate those issues in the market letters to follow.