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As I was sitting in a Starbucks one morning last week and revisiting George Kennan's classic 1947 dispatch, "The Sources of Soviet Conduct," the article that framed early Cold War thinking, three Russian tourists sat nearby, one pawing an iPad. Another asked me whether the Statue of Liberty is "visible from the shore." Yes, I said, but it's even better to view it while riding the Staten Island ferry (which, in good democratic-socialist fashion, is free).
Aside from confirming the preconception that all former history majors who work in media spend their mornings re-reading old diplomatic cables at an Upper West Side Starbucks after dropping their kids at school, this serendipitous encounter is a reminder that bold forecasts on the political economy sometimes prove stunningly prescient.
Though widely misconstrued, especially among the most rabid postwar hawks, Kennan's piece described a dictatorship that used socialism as a shield and sat atop a malformed economy that would most likely rot from the core. Not bad.
In recent years, we've witnessed some bold history-rich books that almost read as shooting scripts for how things would turn out. Nassim Nicholas Taleb's The Black Swan, about how dramatic financial and societal events occur far more often than our feeble human brains readily accept, arrived in April 2007, offering a fine guide to the ensuing two years. Then, two years ago, Carmen Reinhart and Kenneth Rogoff published This Time Is Different: Eight Centuries of Financial Folly, which documented with impressive rigor the pattern of national financial crises and, most salient to today's situation, government debt defaults.
To oversimplify only a bit, global financial markets since July have been a daily referendum on Reinhart and Rogoff's point: that when a nation's debt relative to its economic output surpasses a certain threshold, financial distress and some version of default are nearly inevitable. The real-time test of their theory, obviously, is Europe.
Last week, as several central banks, including the Federal Reserve, pledged U.S. dollars to the European Central Bank, stocks and other risk assets rebounded a bit, as if the fact that the officials have all read Reinhart and Rogoff motivated them to become a bit proactive. That the Fed is meeting this week over two days also provided a handhold for those inclined to believe that Chairman Bernanke would conjure even more money.
Of course, timely and appropriately sized central-bank action is like simultaneous orgasm—anticipated far more often than it occurs. Maybe the stock market, with the Wilshire 5000 index up 5.3% last week, reflects the sentiment that even imperfect Fed stimulation is usually still pretty good.
Setting the stage was a market overstretched to the downside in a short period, and a resulting bulge in bearish sentiment and behavior that made a rally the thing that would confound the most players, as the market likes to do.
The modifier "since 2009" has become popular coming into recent trading sessions. The Nasdaq had its best weekly gain since July 2009. Strategist Binky Chadha of Deutsche Bank said outflows from stock mutual funds in recent weeks were "comparable to those around March 2009," the market bottom, and short interest relative to market capitalization exceeded any level going back to 2009. The monthly Bank of America Merrill Lynch fund manager survey revealed the lowest risk appetite since early 2009. The ratio of corporate-insider stock sales to purchases has been at or below 10 for six straight weeks, for the first time since January to March of 2009. And Citi global equity strategist Robert Buckland notes global cuts in corporate earnings forecasts "have had their weakest five weeks since 2009."
All else being equal, these items offer some encouragement for stock owners who subscribe to contrarian thinking, and the fact that the latest Europe-fueled scare didn't knock the indexes back to their August lows is encouraging. Trouble is that, taken together, they provide only context, not a catalyst, and several things must get better before we can conclude this bounce is a pardon rather than a mere reprieve.
Most important, credit conditions (sovereign and corporate bond spreads, measures of bank funding stress) have soured appreciably, and it will be hard to bank on much further upside in stock prices until they get better. Citi's Buckland points out that previous market skids tend not to end until the profit forecasts of the "problem child" sector—today the European banks—stop sliding. That hasn't happened, but could soon.
THE WIDELY TOUTED "cheapness" of large stocks isn't a good market-timing factor. But it is making companies more aggressive about buying back shares, in many cases quite appropriately. Last week, Intel (ticker: INTC), Staples (SPLS) and Coca-Cola Enterprises (CCE) announced buybacks. There soon will be a direct way to play such corporate action: the TrimTabs Float Shrink exchange-traded fund (TTFS), which starts trading Oct. 5. It will hold 100 stocks that meet criteria on corporate buybacks, free cash flow and net debt issuance.
E-mail: editors@barrons.com
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