To print article, click
Print on your browser's File menu.
Go back
Go back
Posted 6/30/2000
Kenner & Niederhoffer
What's next for
Wall Street
|
Extra!
After six market months, a climactic equilibrium
American stocks have shrugged off the year's ups and downs -- and the Federal Reserve has finally shown the good sense to leave the nation's industrious investors alone.
By Laurel Kenner and Victor Niederhoffer
The market ended the first half of the year in equilibrium, as is appropriate for the holiday period. Each day's change was a reversal in direction from the previous day's change. The Nasdaq ($COMPX) ended the week up 4%, the S&P 500 ($INX) rose 1% and the Dow industrials ($INDU) managed just a 0.4% gain.
 Money Plus. Easy online tools and free Bill Pay, too. |
After the spectacular rallies in the first week after Memorial Day, all the averages have in the main marked time, with small 1% changes between days and much negative correlation between consecutive days.
Biologists call such an orderly equilibrium in nature a "climax stage." The state is self-perpetuating and in equilibrium with the light and nutrients of the environment. Stocks have reached their climax stage in part due to equilibrium with their counterparts in the world of debt, characterized by long-term bond yields firmly below 6%, at 5.9%.
Kenner & Niederhoffer
Victor Niederhoffer has traded stocks, currencies and futures worldwide for the past 40 years; he is the author of "The Education of a Speculator." Laurel Kenner is a trader and former Bloomberg markets editor. In a special series of weekend columns for MoneyCentral, they'll assess the past week's Wall Street performance and next week's prospects. Let us know what you think in the Start Investing Community.
Each climax community in nature is different, depending on the climate and initial condition of the soil when it is initially denuded. Perhaps the most common path of succession seen is from abandoned farmland to horseweed to aster to sedge to pine to oaks. The most familiar one seen in the stock market is a wildfire in the Nasdaq that burns all stocks to their nubs, succeeded by halting rises in financial stocks, a rotation to the cyclicals, a sympathetic rally in the consumer and drug companies, finally giving way to equilibrium in strong upward movements all around in the high techs.
| The Week Ahead | |||
|
Such beautiful climaxes generally occur during periods of falling and low long-term interest rates, such as we see today. Celebrating the Independence Day holiday, the Federal Reserve and the bond market vigilantes have created that favorable environment for stocks in which all companies, especially techs, can flourish. The last time the long bond yields stayed below 6% for a sustained period, from Dec. 10, 1997, to June 8, 1999, the Morgan Stanley High Tech Index ($MSH.X) scored a gain of 135%, versus 22% for cyclical stocks and 12% for financials.
| Details
|
We applaud them on the eve of this Independence Day holiday, and encourage them to think of the American way of growth and change as good and to stop irrationally repressive efforts to stifle it for the foreseeable future. Too many ordinary Americans, those 100 million or so who own stocks directly or indirectly, are hurt by their throwbacks to the primitivism that Americans came to the New World to escape.
Investment seer of humble origins
Indeed, we're accustomed to thinking of Americans as self-reliant, proud, mobile and courageous. While traditionally these virtues have been expressed in town meetings, churches, schools and immigrant success stories, today more than ever they are manifesting themselves in the pursuit of wealth by individual investors weary of their historical disenfranchisement from stock trading.
Fortuitously, the nascent online brokerage industry has developed the means for individuals to take control of their financial destinies. One of these hardy folks is a reader of humble origins who acquired her investment skills in an unusual way. But her wisdom and track record is superior to most we know from the usual agencies, planning authorities, brokerage houses and institutional sources.
The reader is Carol Potts, who spent most of the last 20 years designing stained-glass picture frames and selling them at the Santa Barbara Arts and Crafts Show. She traded her stained glass for tech stocks in 1996, and since that time has recorded a 40%-per-year appreciation that admits her to the Valhalla of investments seers.
Carol's method is to look for companies with high profit margins, high revenue growth, low debt, high free cash flow and a good business model. "I never look at analysts' reports, and use their stupid upgrades and downgrades as buying opportunities," she said. Instead, she looks for new areas of technology, surfing the Internet six hours a day to find information on what's coming.
Right now, she expects the new areas in power technology and voice recognition to grow whether there's a recession or not. The stocks she's buying are Cree (CREE, news, msgs), Network Appliance (NTAP, news, msgs) and Siebel Systems (SEBL, news, msgs), and Redback Networks (RBAK, news, msgs) on any future correction. Some of the "baggers" in her portfolio from purchases in the last three years, she said, are Ciena (CIEN, news, msgs), an eight-bagger; Rambus (RMBS, news, msgs), a six-bagger; and a trio of four-baggers: ARM Holdings (ARMHY, news, msgs), Cisco Systems (CSCO, news, msgs) and Softbank.
Carol didn't learn stock investing at her parents' knees, although she draws wisdom from her early experiences of growing up in New York. "My father was a wine salesman and loved the horses," she told us. "Luckily, his job allowed him to hit the Aqueduct (Racetrack) on the way home from work many times during the season. He never brought the family to ruin, but certainly my mother would have been happier if there had been more money for the luxuries in life that were so important to her. She was a wonder in figuring out whether the best price per pound of chicken was at Waldbaum's or Grand Union. So maybe my stock-picking does have some roots between her and my father's handicapping."
Recent articles:
• Perfect storm leaves markets swamped , 6/23/00
• On baseball, strategy and the technology revolution, 6/16/00
• The calm between market storms, 6/9/00
more...
We think Carol is an original who is ideally suited to profit from the rapid technological changes occurring at a pace unlike any before in our history. She inspires us on Independence Day with proof that there is an American Way in the stock market -- that people who are courageous, independent, non-servile and willing to work hard to pursue their goals can achieve great success. No one put it better than Ayn Rand, who in 1947 wrote in "Plain Talk": "America is the land of the uncommon man. It is the land where man is free to develop his genius -- and to get its just rewards."
In 1776, a very good year to remember as we celebrate Independence Day, Adam Smith wrote in "The Wealth of Nations" that every individual judges much better than can any statesman or lawgiver which industry can best employ his capital and which products are likely to be of the greatest value." That Carol Potts and others like her can employ their capital the way they think best, finding the information they need and being able to trade without large commissions, is a tribute to how much the technological revolution has contributed to individual freedom.
At the time of publication, Victor Niederhoffer maintained long and short positions in index futures and options. His position changes regularly from net long to net short as the market fluctuates in the short term, but remains highly bullish for all time periods forward. Laurel Kenner does not own any stocks named in this column. Mail Laurel and Victor at lkvn@hotmail.com.>
MSN Money's editorial goal is to provide a forum for personal finance and investment ideas. Our articles, columns, message board posts and other features should not be construed as investment advice, nor does their appearance imply an endorsement by Microsoft of any specific security or trading strategy. An investor's best course of action must be based on individual circumstances.