Dow Jones Reprints: This copy is for your personal, non-commerical use only. To order presentation-ready copies for distribution to your colleagues, clients or customers, use the Order Reprints tool on any article or visit www.djreprints.com
IF MR. MARKET HELD OFFICE hours and invited students to off-the-cuff interrogatory sessions, how would the discussion go right now?
Student: Isn't the stock market, up 7% for July, ignoring the sobering message of pronounced economic slowdown? The 10-year Treasury yield has closed beneath 3% for 11 of the past 12 trading days, for Volcker's sake.
Mr. Market: Maybe, but I doubt it. When the 10-year yield traded around 4% on April 5, was it accurately predicting an acceleration of economic momentum, or simply reflecting the then-strong economic numbers and rising investor- risk appetites? Look, at the bottom end of the market's summer trading range, stocks were probably overanticipating the risks of a severe slowdown or economic contraction. The leading economic indicators haven't even declined to the extent they did in the 2004 mid-cycle slowdown. And let's remember that we printed a sub-1% gross-domestic-product figure in the U.S. in 1995, recalled as perhaps the easiest year to be long stocks, ever.
This rush to worry is understandable. Unlike prior slowdowns, there is no obvious, easily executed "plan B" for monetary or fiscal response, even if we're hearing more talk of further Federal Reserve asset purchases.
The Fed's rhetoric has responded to the obvious economic risks, and the bond market is telling us short rates at zero are here for a whileâ??and forget about inflation for now.
Sure, some defensive sectors such as utilities have caught a bid in the past few months, and the investor reaction to strong corporate earnings reports has sometimes been limp. But then, the Dow transports have outperformed the broad market since the July market low, as has the Morgan Stanley Cyclical stock index. Copper prices have held up. Corporate-bond spreads have been unflappable.
Q: What's the mood of most investors?
A: There is a bull market in self-doubt. Most of those who are very bullish are "vocationally bullish"â??analysts, strategists and fund managers who argue the market has upside because it's both professionally expedient and plausible.
Yet volume on rallies has been remarkably light. Over the long term this could lead to a positive setup, as stocks get "sold out" and too many become underinvested. But more immediately it's a worry, showing the positive days have been proceeding without a proper quorum.
Ask the bears what they're concerned about and, like Marlon Brando in The Wild One they'll answer, "What have you got?" The obvious debt, unemployment and deflationary concerns lead off a thousand PowerPoint decks. Yet they, too, aren't so sure the market will soon come to their way of thinking. A Friday Bloomberg piece on bearishness among hedge-fund managers who nailed the '07-'09 market cycle had them conceding they're making only smallish bets and using a short time horizon.
Perhaps the most persuasive reason to question the quite logical view that this summer's trading range will persist for a while is how many investment pros have now bought into the trading-range idea.
It's probably a positive that there is no grand Mega Bull Thesis out there, the way there is a doomsday bear case, aside from the idea stocks look cheap based on anticipated earnings and the old "Where else are you going to put your money?" argument. More people, it seems, would be surprised by a run to or beyond the April highs than would be taken aback by another leg lower toward the July lows.
Few in the game are focused on the longer term, even if that's where one might find some solace. The folks at Neon Liberty Capital Management examined market performance following decades in which the U.S. was in recession for 25% of the time, as we were the past decade. This happened only in 1955, 1958, 1975 and 1982. The subsequent average annual stock-market returns over three, five and 10 years were all above average, between 14% and 16% for each period.
Q: What do you want from the midterm elections?
A: Probably not the thing most people think. Sure, the typical investor is expecting and hoping for a Republican rout. And Washington gridlock does tend to please the forces of capital. Yet it's never easy to figure out what will happen in politics or what the market has already priced in about policy. (The January correction started the day a Republican won Ted Kennedy's old Senate seat, remember.) There's a real chance that if the Republicans win big in November and start rallying for gestures of fiscal austerity, that the market will throw a tantrum against the withdrawal of stimulus.
Republicans seem to want to make austerity points with short-term spending restrictions, without addressing the structural deficit factors such as entitlements and defense spending. (Have we ever gone from huge deficit to balance without massive defense-spending declines?) This is, arguably, the reverse of the approach the market would reward.
E-mail: michael.santoli@barrons.com
This copy is for your personal, non-commercial use only. Distribution and use of this material are governed by our Subscriber Agreement and by copyright law. For non-personal use or to order multiple copies, please contact Dow Jones Reprints at 1-800-843-0008 or visit www.djreprints.com
Yahoo! Buzz
MySpace
Digg
del.icio.us
NewsVine
StumbleUpon
Mixx
Insiders, including the CFO and COO, made significant recent sales.
Alcatel-Lucent, Geron and Power-One rose. MEMC fell.
Credit Suisse says lower interest rates are giving incremental pressure.
Caris & Co. downgraded the consumer-goods giant to Average.
Morgan Keegan says the news boosts Alcatel-Lucent and Juniper.
Merriman Curhan upgraded the large-screen movie firm to Neutral from Sell.
Shares of the discount retailer continue to be cheap despite outperforming shares of many of its rivals.
Thomas K. Whitford sold 30,000 shares of the bank.
With shares down after the cereal maker cut its earnings forecast, is it time to buy?
Avis has topped Hertz's bid but it likely won't be the final offer.
J.P. Morgan downgraded the graphics-chip maker to Underweight.
Lazard Capital says that despite selloffs near-term catalysts are elusive.
Sterne Agee raised estimates on glass and flat-panel screen giant Corning.
The merger of two power-tool powerhouses is generating large cost savings that should goose the newly minted stock.
Dividends remain high even as the stock prices rise. (At SmartMoney.com.)
If the market follows the usual script, it's in for some rough going. More Fed easing coming?
Mark Roberts, founder of Off Wall Street Consulting Group, discusses his short-sale research, and ideas including Strayer Education and Copart.
Technically, that is, but market jitters persist. Auto parts stocks look fully valued, but a meter maker looks bright.
The auto maker's strong results reflect a changed mindset and a new willingness to take risks. Sticking to the Mulally plan is paying off. Ahead: even better days.
While the trend for African stability is getting stronger, investors should still be aware of some caveats when investing in the continent.
Read Full Article »