Does all this bullishness make anyone else bearish besides me? <g>
The Stage Is Set
By Doug Kass
Special to TheStreet.com
Originally posted at 6:29 PM ET 5/16/01 on RealMoney.com
Wednesday's ebulliant market action shows the bulls are back. The action underscores the comments I posted on the RealMoney.com Columnist Conversation late Tuesday night. I think the observations are worth re-posting in column format:
Orderly: Tuesday's market did not gap higher on the announcement at 2:15 p.m. as it did the day of the other recent surprise cut. This is healthy. By contrast, stocks like Morgan Stanley Dean Witter (MWD:NYSE - news) and Goldman Sachs (GS:NYSE - news) rose by between $6 and $8 the day of the April 18 rate cut. This was not healthy and not sustainable. My sense is that the backing-and-filling process is getting rid of the renters of stocks, allowing investors to buy at attractive prices.
More interest-rate cuts to come: Based on its own commentary, the Fed clearly sees itself as a promoter of growth and mollified bond bears by stating that it does not see inflation as a threat. The Fed's policy statement signaled that if things don't get better -- and fast -- it will do whatever is necessary to promote economic growth.
Widening breadth: Nearly 2-to-1 to the upside. Perfecto.
More positively sloping yield curve: With this interest-rate cut, federal funds now yield less than two-year Treasuries. Positively sloped yield curves are typically synonymous with healthy markets and especially strength in financial stocks (as they borrow short and lend longer). Lower interest rates will likely begin to have a positive effect on consumption and on the Old Economy.
A slew of good earnings reports and continued evidence that tech fundamentals are bottoming: After Tuesday's close, Abercrombie & Fitch (ANF:NYSE - news), BEA Systems (BEAS:Nasdaq - news) and Brocade (BRCD:Nasdaq - news) released numbers that were either in line or better than expected. And the latter two techs suggested that fundamentals are bottoming out. Another rate cut or two will have a positive effect on investment and on the New Economy.
The bears' glib confidence that interest-rate cuts won't do the trick: That is at odds with almost every economic cycle of the past, when rate cuts have promoted growth (to say nothing of an imminent tax cut). As I mentioned in Tuesday's column, the bulls have the advantage of history on their side. Except for the 1930s, a series of five interest-rate cuts has had a profoundly positive influence on stocks.
In conclusion, we have in the past 12 months said goodbye to idealistic illusions (like the Internet being at the cutting edge of history and everyone else being road kill) and ludicrous valuations.
Stocks have retreated and adjusted to reduced expectations. Now markets must base, setting the stage for what I believe might be a period of excellent, albeit more reasonable and orderly, returns.
Six months from now, we will probably be in the midst of an economic revival, and stock prices will likely be higher -- maybe considerably higher.
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