Professor Elam

Weekend Feb 1 2015

This is my newspaper column for this weekend. 

Return  of the Nifty Fifty

The Nifty Fifty were fifty large capitalization stocks popular in the   1960s bull market right up to the January 1972 top at Dow 1,051.

The long bear market of the 1970s that lasted until 1982 caused valuations of the nifty fifty to fall to low levels along with the rest of the market, with most of these stocks under-performing the broader market averages.

Wikipedia on Nifty Fifty

Our thesis has been that the equity markets would peak and then fall in the same fashion at 1973-74. Many of the same events then have parallels now. Finally, the puzzle pieces are aligning. The end of a bull market is a topping process. Various indexes top at different times.  The popularity of some stocks (every generation has its Nifty Fifty) masks the overall decline of the market. Like the  frog in slowly heating water, many investors will buy and hold , for too long.

‘Buy and hold good stocks’ is hardly a new idea. The Nifty Fifity contained some companies that were hot stocks then, and even today. Others went out of business.  Survivors include stalwarts like Coke, DuPont, and Halliburton. Some failed to see change coming like Kodak, Avon, Polaroid, and Sears.  Which stocks might constitute  that same vaunted rank today?

The obvious number one answer is Apple AAPL.  Apple just recorded the largest quarterly net profit of any public company ever- $18 billion.  This dwarfs Microsoft MSFTat $5.98 B or Netflix NFLX at a mere $.8 B. Gross profits (sales less cost of goods sold)  are 40% of sales.   The cash hoard totals $178 billion. AAPL sold 74.5 million iPhones during the last quarter.  But one headline asks, Can AAPL sustain this growth? Alternatively I would ask, can we really anchor the US economy to gizmo sales?

Facebook FB just earned $.7 B for the quarter, not bad for a company that really produces nothing at all. It merely acts as a host for its users.

Apple and MSFT are owned by nearly everyone who owns a mutual fund.  Our point is that AAPL, MSFT, FB, and until recently Amazon, are the rising tide that lifts all investor boats. This masks all sorts of other early warning signals.

The New York Stock Exchange Index has made a series of lower highs the last few months. And these important indexes have now turned their daily trends down.

As I write on January 29, there is only one trading day left in the month. I am guessing this, the result of a near 500 point Dow collapse over two days, has turned things to the downside.  Or as January goes, so goes the markets.

We strongly suspect this will parallel the collapse in 1973-74, 2000-2002, or 2008-2009.  The durable goods report was down 3.4% this week. Were it not for people simply dropping out of the labor force the unemployment would be 10%. The situation in Europe continues to crumble with Greece already shunning austerity and putting government employees back on the payroll without funds to pay them. Greece is a small economy of only 10 million people but Portugal, Spain, Italy, and perhaps France are certainly watching.

We began the year suggesting one word would typify the markets and economy-DEFLATION. That has been the case this month.  While the OPEC Secretary called a bottom in the oil price earlier this week, the markets did not listen. Spot West Texas Crude fell another 3% Wednesday, closing under $45. This literally means the next level of chart support is at the 2008 low around $35.  Why, well the Energy Information Administration reports US oil supplies are at an 80 year high.  Couple that with world wide over production, and, well, how long will it take to work off the overhead supply? As we noted last week, this does not happen with avocados but does with storable commodities like oil.

Natural gas is down 3.8% this week to $2.85 on Wednesday’s close. The previous low of $1.92 was recorded in 2012. And until we get a reversal, that becomes a target as with $35 oil.

The carnage continues in energy service stocks.  Patterson PTEN, Nabors NBR, and Transocean RIG are trading at 80%, 50%, and 40% of respective book values.

And so deflation continues to creep into the vocabulary, and the markets.