Dollar, stocks rallies pose great risks
Counter-trend crowd says rebound destined to fail
By Thom Calandra, CBS.MarketWatch.com
Last Update: 10:15 AM ET Mar 19, 2003
SAN FRANCISCO (CBS.MW) -- Not everyone believes stocks and the dollar can only gain from a war in Iraq.
The highest profile comments come from Richard Bernstein, the Merrill Lynch strategist.
"We continue to believe that equity investors should be selling into market rallies," he told his firm's clients. Bernstein calls the overall market's so-called "trailing price-earnings ratio," based on earnings already reported by S&P 500 companies, "extraordinarily high at 29, even when our models account for inflation and interest rates."
After the Federal Reserve said it did not have enough signals on the economy's direction to make any significant changes to interest rate policy, the Merrill Lynch strategist said, ""If the Federal Reserve has no view of the future, how do all these investors have such a certain view?"
Those who were looking for an Iraq-inspired sale of stocks and the dollar are having the wind taken from their sails. Before trading began Wednesday, the S&P 500 Index, representing America's largest companies, had gained 8.2 percent in five days. The Nasdaq was up more than 10 percent. Treasury bond yields, sensing an improved economy after the war dust settles, shot as high as 3.925 percent Wednesday morning from 3.58 percent last week.
The dollar has rebounded more than 4 percent against major currencies, including the Swiss franc, a currency seen as politically neutral in times of physical and fiscal conflict. Gold's price went into the dumper, losing about 4 percent of its value and making some wonder whether they should revise their definitions of safe-haven investments.
Still, lesser known strategists than Merrill Lynch's Bernstein are sticking to their views that the current rallies in stocks and the dollar are destined to poop out. (See: The Calandra Report for actionable commentary.)
Some fresh views:
-- Richard Williams, a strategist and senior software analyst at
Summit Analytic Partners, tells me the technology stocks may have run too far, too fast. One of the largest software stocks, Oracle Corp. (ORCL), had rebounded 13.5 percent from its lows of a week ago before slipping Wednesday morning after a lackluster February business update. Several of the largest percentage gainers in the S&P 500, meanwhile, are coming from technology companies, including Advanced Micro Devices (AMD). "I am very skeptical right now based on what we have been hearing out of a number of companies and industry contacts," says Williams. "The volume in the run-up has only become meaningful in the third up leg of the move. This is consistent with corrections within larger bear markets, but I do have to note that this move has gone further and faster than any expectation. The reason I am so skeptical is that we see no evidence to explain why the fundamentals are improving in the near term. So until we know what the war will bring, I see long investors as betting on a purely emotional basis with the main part of the bet being a successful war that ends quickly."
-- Stock-market technicians who see promising patterns in chart gains are nervous, too. Martin Pring of Pring Research notes Wednesday morning, "The problem is that virtually everyone is expecting a rally once the sound of cannon is heard. Usually the market does something to disappoint the majority. Perhaps it will continue to explode and then peak at the outbreak of war. Alternatively, it could turn out that there will not be a repeat of the quick and painless victories of Desert Storm and Afghanistan."
-- Longtime currency analyst Barbara Rockefeller of Rockefeller Treasury Services is concerned investors may not realize the brutal consequences of a real war. "Hussein will use bio-chem against invading troops, will almost certainly attack Israel, will fire the oil fields and may even have some attack on U.S. soil up his sleeve. Also, the Saudi interior minister said that Saudis may have gone over to Iraq to fight against the U.S. The implications of Saudis volunteering against the U.S. are mind-boggling. Setbacks to the U.S. and blunders by the U.S. could easily restore the primary downtrend (in the dollar). Does it really make sense to sell Swiss francs, the quintessential safe-haven currency, when a war is just starting?"
-- "The market is anticipating similar movements to the 1991 war and just trying to beat the next guy out in anticipation of a fall," says Barry Cooper, whose main job is as a gold equities analyst at CIBC World Markets in Toronto. He sees the gold rally resuming as economic issues, such as Washington's deficit spending, alarm investors later this year. |
