March 28, 2001

Don't Be Fooled: This Isn't The Bottom

Last month when there was a three-day rally, we told you that it wouldn't last -- and we were right. This time, the rally lasted for just as long and was crushed by earnings warnings once again. But the bottom hasn't arrived yet.

The bear has a way of deceiving investors and luring them into his lair. Bear market rallies rocket up and everybody races in because they think they've found the bottom -- only to be mauled again and the indexes plunge to lower lows.

This bear market will be here for some time to come. Earnings estimates continue to get slashed even after a company has warned once or even twice before in the same quarter. And there has not been any clear evidence of a turnaround in the economy that could begin to reverse these lousy earnings. In fact, a steep drop in new orders for capital equipment in February shows that businesses are looking to spend less money, not more.

Meanwhile, debt -- both corporate and private -- is skyrocketing. In the fourth quarter of 2000, corporate debt hit a record high of $4.74 trillion. Also in the fourth quarter, household debt grew more than 7 times faster than the gross domestic product -- 8.5% compared to only 1.1%.

Debt-laden consumers are cutting back on expenses, which hurts corporate bottom lines. And cash-poor companies obviously aren't buying from each other, either. That means earnings will only get worse, and it will be feeding time for the bear again -- soon!

And by the time the bear market gets through chewing up overpriced companies, there will be a major shakeout of industries. Companies you would never expect will file for bankruptcy. And their stock will be worth nothing. Just because the Dow has reversed all of its gains from yesterday doesn't mean that we've reached bottom. Our advice: watch the carnage from outside the protective plexiglass -- don't walk into the cage with the bear.

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