The Contrarian's View 
** COMPUTER WARMLINE **

Last updated on: Thursday September 20, 2001 at DJIA: 8482.77 (at noon)

Summary

Current intermediate-term expectation: Bullish
Current long-term expectation: A major deflationary (multiyear) bear market in stocks is in progress, but it will now be interrupted by an interlude of bullishness as "war fever" provides the trigger for the Federal Reserve's interest-rate easing to finally take hold and drive prices higher.

TIMER'S TREND: Last NYSE BUY signal was on July 26, 2001, at DJIA 10,455.63
Last NYSE SELL signal was on September 5, 2001, at DJIA 10,033.27
Last NASDAQ BUY signal was on June 1, 2001 at COMPX 2149.44
Last NASDAQ SELL signal was on June 12, 2001, at COMPX 2169.95
Current signals: SELL
Overbought/Oversold Indicators: neutral

Market Outlook

I am reminded of the January 1991 issue of The Contrarian's View, "Victory Is Bullish", which I wrote after the bombing of Baghdad had begun. Though victory against the terrorists and their safe-harbor nation(s) is not yet assured, we can be assured that the psychological impact of our response will be similar to that of the Gulf war. People are not going to obsess over the state of the economy when there's a war to be won; and certainly, money will be (borrowed and) spent to obtain victory. Whether we consume the goods and services we produce ourselves, or whether they disappear into the maw of a Mideast war, their production will be bullish for both the economy and stocks.

It's not wise to be bearish when the sleeping giant awakes.

With the attacks on the World Trade Center and the Pentagon, the recession is over. When the U.S. stock markets reopen, they might take an initial hit of about 5%, but are likely to right themselves within a few days, if not the same day. You were expecting a crash? Crashes are accidents. They don't happen when everybody is watching for one, and when the Fed stands ready to manipulate stock futures higher to avert one.

The bond market is another matter. Though the Fed may continue to force short-term rates lower, the increased need for cash to finance the war will likely halt the decline in long-term bond rates for at least the next few months. I now rate the bond market intermediate-term neutral, and long-term bullish. Bonds can continue to be held for their yield. Oh, and you can kiss the mythical Social Security "lockbox" goodbye.

My condolences go to all those people who have family, relatives or friends dead or missing as a result of these acts of war. My wife and I have friends who live in Brooklyn and work in Manhattan, and we've not been able to get through to them to see if they survived because the phone lines are still tied up. The number of Americans like us whose lives have not been personally touched in some way by these tragedies must surely be in the minority.

On Monday, September 17, I committed the remaining cash in the Phoenix portfolio to an initial investment in the ICON Information Technology Fund at $8.69. There were signs of capitulation-selling in stocks before the acts of war; so I decided to take advantage of the adjustment in stock prices to those of world markets, on the theory that the selloff is likely to be brief and that we are close to the "final bottom" (at least in this leg of the bear). But don't worry, if you decide to follow me, I'm probably much too early again, as usual.

By the way, our friends in New York City are safe.

On Thursday, September 20, in my TIAA-CREF retirement I shifted approximately 9.7% of the funds in the CREF Bond Fund to the CREF Equity Index Fund. This has the effect of rebalancing my overall TIAA-CREF retirement portfolio to approximately 2.44% less in (non-inflation-indexed) bonds and 2.44% more in equities which are supposed to mimic the Russell 3000.

They say that you should buy stocks when "blood is running in the streets". Sadly, it is the blood of our own citizens in the streets of lower Manhattan, but the principle remains, nevertheless. Forget the financial commentary on TV, which is perpetually bullish, especially now that is infected with war fever. The reality is, people are quietly panicking, because stocks have been dropping like rocks this week.... and justifiably so, because the illusion of not being in a recession has vanished as surely as the World Trade Center did.

But from a historical point of view, odds are that stocks will be sharply higher a few months down the road. The most pessimistic outcome following a crisis/shock to the country was after Pearl Harbor, where stocks drifted lower for a few months in the dark days of World War II. In all of the post-WWII shocks, stocks were higher to sharply higher weeks later. Added to this is our knowledge that short-term, stocks were very oversold before the terrorist attack, and that attack has likely compressed the remaining capitulation into a much shorter time period. In fact, investors' mood is so dark that I suspect we'll see a monster rally at some poiint, though probably not before our military reprisal is underway. Now this is war, after all, and it is certainly possible that another terrorist action will continue to darken the mood; but I'll go with the historical odds.

In my retirement funds, I have been careful in my rebalancing to commit only (less than) the year's profits in the bond market to "averaging down" in stocks, leaving the principal intact (as long as bonds don't suddenly tank). Averaging down in individual stocks can turn into disaster.... as Webvan.com, now disappeared, amply demonstrates.... but in index funds, it's a good idea as long as stocks move higher a year or two out, or at any rate are higher within your long-term time frame.