Sentimentally: Stocks are Headed for a FALL

THE GURU'S CORNER

Sentimentally speaking

Commentary: Stocks are headed for a fall

By Irwin Yamamoto, The Yamamoto Forecast

Last Update: 10:54 AM ET Feb 21, 2007

KAHULUI, Hawaii (YF) -- Market wise, equities are in the midst of the second-longest rally since 1929. Yet there are some serious warning signs -- especially sentiment

The odds are high that the current advance won't be able to continue. Stocks remain stretched and trade above past market multiples. What goes up must come down.

On the economic front, we are overdue for a recession. The last one occurred in 2000 and 2001. Business expansions don't last forever. The boom-and-bust pattern of an economic cycle has not been repealed.

An inverted yield curve almost always points to a deep business slowdown. The Fed publicly claims there's a 40% chance of a recession. However, a model of the Federal Reserve Bank of New York is essentially forecasting an outright recession.

Double-digit corporate earnings growth will be a thing of the past. Companies should consider themselves fortunate to experience single-digit growth.

The housing industry remains on the verge of a massive collapse. In our estimation, this real estate debacle is only in the top half of the second inning of a nine-inning ballgame.

Sentimentally speaking, our indicators are flashing major warning signals. At extremes, sentiment can indicate a peak or an important low. This contrary indicator is presently at an extreme level. Unfortunately, it's a very bearish one.

You need not look far for the evidence of the euphoria in today's market:

1. Fox plans to launch a new business channel. Newsweek magazine recently had a write-up on the success of the CNBC Business Channel.
2. Based on surveys by Investors Intelligence, bullish investment advisers hover between the 50% to the 60% range. These are at the high end of the spectrum.
3. The Dow Jones Industrial Average achieved an all-time record high and the other indexes reached multiyear highs.
4. Small-cap stocks outperformed the other averages by a wide margin. Case in point, the Russell 2000 skyrocketed to a record high in early 2007. In addition, it enjoyed an 18.9% gain last year.
5. Wall Street expects to pay out $23.9 billion in bonuses. A startling increase of 17% over the previous year's record. The world's largest investment banker, Goldman Sachs, reported a whopping profit of $9.4 billion -- the most ever for a Wall Street company in a given year. And it has set aside $16.5 billion for salaries, bonuses and benefits for employees. Lehman Brothers Holdings  also produced record profits for the quarter and year. Bear Sterns experienced a record quarter.
6. In 2006, a combined total value of $1.6 trillion of mergers and acquisitions in the United States nearly beat the $1.7 trillion record for values in 2000 (the top of the high-tech bubble). Internationally, mergers and acquisitions of $3.8 trillion did overcome 2000's figures.
7. The utilization of derivatives surged to the quickest pace in eight years during the first half of 2006. According to the Bank for International Settlements, the face value of derivatives based on corporate bonds, currencies, interest rates, commodities and stocks leaped 24% to $370 trillion. It marked the biggest percentage increase since 1998.
8. On Feb. 9, Fortress Investment Group made history. It was the first hedge and private equity fund to go public, a $634 million initial public offering. In its first day of trading, Fortress shot up 89% in intraday trading.
9. In the United States, the number of hedge funds resumed its growth. There are in excess of 9,000 of these funds. Around the world it's 30,000 funds.

With all the frenzy, mania and froth, Wall Street failed to take note of how corporate insider selling has increased to its highest pace in 20 years. Furthermore, cash levels of mutual funds are near record lows. Without money for buying support, how do equities keep moving up?

Hence, our investing strategy: cash and go short.

We started the new year with 100% in cash, earning well over 5%, risk free. On Jan.17, we deployed 10% into the Rydex Ursa Fund. Ursa will rise when the Standard and Poor's 500 Index heads down in price. Another 10% is earmarked for RYURX if the S&P 500 moves higher in the coming weeks. The inverse action will provide us a lower cost-average price. The total return from cash and the short position should beat the market's performance for the new year.

The publicity shy Irwin Yamamoto has been managing money on the beautiful island of Maui for 30 years and is editor of the Yamamoto Forecast investment letter. He's as contrarian in his business as he is in his stock picks, choosing to forgo advertising, Web sites, e-mail or even a toll-free phone number. Investors interested in his monthly newsletter should write to P.O Box 573, Kahului, HI, 96733.

Content found in The Guru's Corner is subject to the terms and conditions found in the Disclaimer and does not represent a recommendation of investment advice. Investors should seek the advice of a qualified investment professional prior to making any investment decisions.

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1. Fox plans to launch a new business channel. Newsweek magazine recently had a write-up on the success of the CNBC Business Channel.
2. Based on surveys by Investors Intelligence, bullish investment advisers hover between the 50% to the 60% range. These are at the high end of the spectrum.
3. The Dow Jones Industrial Average achieved an all-time record high and the other indexes reached multiyear highs.
4. Small-cap stocks outperformed the other averages by a wide margin. Case in point, the Russell 2000 skyrocketed to a record high in early 2007. In addition, it enjoyed an 18.9% gain last year.
5. Wall Street expects to pay out $23.9 billion in bonuses. A startling increase of 17% over the previous year's record. The world's largest investment banker, Goldman Sachs, reported a whopping profit of $9.4 billion -- the most ever for a Wall Street company in a given year. And it has set aside $16.5 billion for salaries, bonuses and benefits for employees. Lehman Brothers Holdings  also produced record profits for the quarter and year. Bear Sterns experienced a record quarter.
6. In 2006, a combined total value of $1.6 trillion of mergers and acquisitions in the United States nearly beat the $1.7 trillion record for values in 2000 (the top of the high-tech bubble). Internationally, mergers and acquisitions of $3.8 trillion did overcome 2000's figures.
7. The utilization of derivatives surged to the quickest pace in eight years during the first half of 2006. According to the Bank for International Settlements, the face value of derivatives based on corporate bonds, currencies, interest rates, commodities and stocks leaped 24% to $370 trillion. It marked the biggest percentage increase since 1998.
8. On Feb. 9, Fortress Investment Group made history. It was the first hedge and private equity fund to go public, a $634 million initial public offering. In its first day of trading, Fortress shot up 89% in intraday trading.
9. In the United States, the number of hedge funds resumed its growth. There are in excess of 9,000 of these funds. Around the world it's 30,000 funds.

Content found in The Guru's Corner is subject to the terms and conditions found in the Disclaimer and does not represent a recommendation of investment advice. Investors should seek the advice of a qualified investment professional prior to making any investment decisions.