The Ghost of Christmas Past
By Jeff Clark
December 21, 2006

The Ghost of Christmas Past paid me a visit last night.

One minute, I was immersed in a conversation with friends at an annual holiday party. A moment later, I was standing outside the building peering in at the party through a frosted window.

The shrouded figure next to me wore a nametag that simply read, “Ghost C.P.” He gestured toward the window. I took another look and saw myself engaged in a conversation with several acquaintances... It was December 1999.

“Hey, Jeff, Yahoo! was up 40 points today, and it will be up 100 by the end of the week. You got any of that?”

Another voice chimed in: “Hey, Jeff, Commerce One made it to $300, and it’ll be $1,000 within a month or two. What do you think I should do with it?”

From outside the window, I watched myself take a sip of wine and nod politely in the direction of my inquisitors.

Just then, another acquaintance rushed forward, grabbed my arm, and said, “Hey, Jeff, my company just added the Munder Net Net fund to our 401(k) plan. The fund is up something like 200% this year, and I’m sure it’ll repeat next year. I’m going to put my whole retirement fund in it. What do you think?”

“I think I’ll have another glass of wine,” I said. I politely excused myself and walked over to the bar.

From outside the window, I lowered my head in shame as the shrouded figure waggled his bony finger at me and murmured, “Tsk tsk tsk.”

You see, in 1999, I knew what was coming. I knew that the move in Internet stocks was unsustainable. I knew that these people were about to make huge mistakes with their money. But I stayed quiet.

“You should have warned them,” said the Ghost of Christmas Past.

“But they didn’t want to hear the truth,” I argued. “They didn’t want my advice. They only wanted me to compliment them on the brilliance of their investing acumen. They were going to go ahead with their plans regardless of what I said. So who am I to tell them they’re wrong?”

“You should have warned them,” said the ghost. “And you’re making the same mistake today.”

Suddenly, I was whisked back inside to the present-day holiday party. I felt the nudge of my lovely wife’s elbow. “Jeff, Maria just asked you about the Santa Claus Rally. Are you going to respond?”

The hardest part of offering investment advice is telling people what they don’t want to hear. No one wants to hear that the stock market is vulnerable to a significant correction. No one wants to hear that stock prices look a bit frothy. No one wants to hear that the money market may be the best place to invest for the next few months.

I had a difficult year in 1999. I saw what was going on in the Internet sector. I didn’t understand it. So I avoided it and advised my clients to do the same.

Nonetheless, most of my clients earned more than 50% that year. But I still lost several clients because their friends made more than 100%. I was the one stubbornly sitting on the sidelines while everyone else was making money hand over fist in This.com and That.com.

So, at the 1999 Christmas party, I was uncharacteristically shy about offering investment advice. After all, I wanted to be invited back the next year.

That’s why the ghost of Christmas past waggled his finger at me.

So when Maria said, “The Santa Claus Rally is supposed to be huge this year. How high do you think the stock market will go?” I responded, “Santa has unpacked his bag, climbed back up the chimney, and is about to call it a night.”

I went on to explain that since the S&P 500 was already up about 12% since the July low, it seemed to me that Santa had already arrived. Andexpecting stocks to rally even further might be asking too much of jolly Saint Nick.

“But surely the Dow will make it to at least 13,000 before we see any meaningful correction,” argued my friend Jim.

I shook my head and admitted that he could be right. The market could indeed go higher. But for how long?

“More importantly,” I said, “there are multiple warning signs that suggest the intermediate and long-term trends for the market are about to head lower.”

The crowd around me began to dissipate. One by one my friends excused themselves until it was just me and my wife.

“I guess no one wants to hear bad news around Christmastime,” I said to her.

“Let me get you another glass of wine,” she replied.

Best regards and good trading,

Jeff Clark