Analysts Debate Possible Market Correction
By Joseph Cabadas

Could the U.S. stock market be on the verge of the crash of 1999?

That may seem like heresy, with the economy having ridden high for so long, not to mention low unemployment, record profits and auto executives from Ford Motor Co. CEO Jac Nasser to General Motors Corp. CEO (and Chairman) Jack Smith predicting car sales of up to 17 million units in 2000.

"On Nov. 8 or the ninth or 10th, we are predicting the bottom will fall out of Internet stocks," said Myron Stokes, president of eMOTION! REPORTS.com. "Meanwhile, we are predicting the (Dow Jones & Co. industrial average) will begin falling to 8,800 points in near term and to 7,500 by spring. This shouldn’t be viewed as a Doomsday scenario, because the Dow should be at 8,800 right now."

The recent rally in stock prices, since the Dow index dropped temporarily below 10,000 in mid-October (1999), has been the result of stock analysts, financial gurus and major firms telling investors not to panic, what Stokes calls market manipulation.

"The Dow can be manipulated by increasing or decreasing investor confidence," he added, pointing to the way investors react to statements by Federal Reserve Chairman Alan Greenspan as an example of market manipulation.

According to Stokes, an example of stock market manipulation is in South Korea, where three Hyundai executives were recently convicted in one of the worst cases in South Korea’s history of market manipulation.

There are four factors that will lead to the Dow’s drop, according to eMOTION! REPORTS.com consultants and key economic indicators, Stokes said.

"In late September, we had projected that the stage was set for the Dow to drop to 8,800 points in two weeks," Stokes said. "While it did not drop to 8,800 at that time, it did dip below 10,000 and sent shockwaves around the world."

Plus, there is an expectation that the Federal Reserve will raise interest rates by a half point in the very near future and, if Greenspan isn’t satisfied with the results, the Fed will probably hike interest rates by a total of 1.5 points by spring 2000.

"The next factor is that the Dow’s level cannot be sustained anywhere near 11,000 points to begin with," Stokes continued. "And last, this rally in the market began two years ago due to the artificial manipulation of the Japanese yen to undervalue it. This undervaluation is what caused Japanese investors and investors dealing in yen to come into this market, and boosted it well beyond 7,000; contrary to all previous market analyst predictions."

Stokes’ view, however, runs counter to the views of many in the auto industry.

G. Mustafa Mohatarem, General Motors chief economist, said: "In my first year at (Denison University in Ohio) I took a course on economist Milton Freeman who said, ‘Show me an economist that is forecasting what the stock market will do and I will show you a quack.’ It is only after the fact (of any downturn) that we will know if the stock valuations are justified or not. There is no way to know whether they are correct beforehand. Clearly, a lot of people feel they are appropriately valued."

Meanwhile, Steve Collins, president of the Washington D.C.-based Automotive Trade Policy Council, said: "Those who are predicting the market with certainty are making lots of money on Wall Street, but few predicted that this year (1999) would be as strong as it was."

Still, Collins added: "All bets are off when it comes to predicting the direction of the U.S. economy in the future."

The Automotive Trade Policy Council represents General Motors Corp., Ford Motor Co., and DaimlerChrysler AG.

In the past, the U.S. economy has been more cyclical, but it has remained strong and stable for six or seven years, and Collins said no one sees signs of that changing.

"The auto industry always parallels the U.S. general economic performance because cars are such a big ticket item and this relates to consumer confidence,’ Collins said. "When times are good, people purchase. When they have anxieties, they stop purchasing big ticket items."

Mohatarem also thought the connection between the devaluation of the yen in February 1997 an the rise of the U.S. stock market is ‘I think, a spurious relationship. The Dow is doing well because the U.S. economy is doing well.

Still, both Collins and Mohatarem agreed that the yen’s value had been artificially manipulated in 1997 by the Bank of Japan and the Japanese government - the yen-to-dollar ration went from 105 yen to one U.S. dollar to a 140:1 value.

"As an economist at GM (the yen’s drop in value) has been frustrating," Mohatarem said. "We wanted to negotiate a trade agreement with Japan in 1995 to open the Japanese market to car sales and parts exports. We did this deal when the yen was trading around 95 yen per dollar and, subsequent to that, the yen weakened substantially (by about 30 percent."

The weaker yen allowed the Japanese car manufacturers, for instance, to sell cars at a higher profit in the U.S., which is economics 101, Collins said.

Japan had a serious recession, so it was understandable that the value of the yen would drop, Mohatarem said, adding that it has returned back to the level it should be at vs. the dollar - roughly at a 104:1 exchange rate.

Yet, for Japan, "the second largest economy in the world, for it to manipulate its currency to promote exports is simply inappropriate," Mohatarem said.

Although Mohatarem said that there was a specious relationship between the U.S. stock market and the yen’s value, Stokes said that the GM economist’s and Collins’ statements clearly show there is a real relationship. So, as the yen’s value rises, it will prompt Japanese investors to pull out because their investment incentives in the U.S. will no longer exist.

Next, there have been several announcement of e-commerce initiatives within the past several weeks (in October and November 1999) that certainly have bolstered investors’ confidence in Internet stocks, such as Ford’s and GM’s announcements during the Specialty Equipment Manufacturers Association (SEMA) show in Las Vegas the week of Nov. 1, Stokes observed.

“Practically everyone acknowledges that there is nothing to sustain the momentum of Internet stock values.”

Wall Street is doing everything in its power to prevent a correction of the market from occurring, but at some point it will reach critical mass, Stokes said. "But, would you rather have the market go down in a predictable and controlled descent or in an uncontrolled descent?" he asked rhetorically.

Internet and technology companies are the future, but the fall in their stock value is a self-fulfilling prophecy, Stokes said.

"The word from Silicon Valley has been to expect a significant drop in Internet/tech stocks in early November (1999)," he said. "Practically everyone acknowledges that there is nothing to sustain the momentum of Internet stock values. The Internet stocks are the modern-day version of the emperor’s new clothes and soon everyone will realize that the emperor has nothing on."

An indicator of the weakness of Internet stocks’ value is that the Magellan Fund dumped all of its Internet stocks a couple months ago and replaced them with more traditional communications stocks, Stokes noted.

Regarding all of the glowing predictions of rosy car sales in 2000, if the market goes down by spring, it will have a chilling effect on all sales, Stokes said.

Mohatarem does, however, expect a slowdown in the American economy in 2000, but it will still be a good year.”