Rally Faces Obstacles
By Mike Norman
Special to TheStreet.com
10/22/2003 03:00 PM EDT
URL: thestreet.com
Economic Analysis BEARISH
*Positive earnings news may have been discounted by the rally.
*Slower money growth won't be good for the market.
*China's slowing growth will hamper an economic recovery.
What have you done for me lately? That's the current attitude of investors, judging from the reaction to the
flow of earnings. Amazon.com's (AMZN:Nasdaq) stock is lower after reporting a first-ever,
non-holiday-season profit. But if the stock has already tripled this year, what's the big deal when you beat
estimates by a penny?
Moreover, Amazon added to its gloom by saying it expected slower sales growth next year. Is it any wonder,
then, that investors are suddenly stricken with a case of vertigo? A view may be emerging that much of the
positive earnings news has already been discounted as a result of the market rally.
Adding insult to injury are new worries from overseas. Minutes released from last month's Bank of England
meeting revealed that a surprising four of the nine central bank members wanted to raise rates at their last
meeting. U.S. Treasury Secretary John Snow threw fuel on that fire with his bizarre comment that he would
be "frustrated and disturbed" if rates didn't rise. This was later interpreted as a statement about long-term
rates, which are typically set by the market and not the Fed. Snow apparently expects those rates to rise as
a result of stronger economic growth.
But what if the Fed is already tightening rates and nobody knew it? That may not be as crazy as it sounds.
Look at the suspicious contraction in all money aggregates last month. All the M's (MZM, M2, M3) have
shrunk by more than $100 billion. Is the Fed conducting a stealth tightening? Is it looking at good earnings
news, improving economic data, the weaker dollar and maybe gold prices and deciding, quietly, to slow the
rate of money creation? I don't know if the Fed is behind it or not, but I do know that if it continues, it's not
good for the market. Money is the fuel that powers the rally -- less fuel, less rally.
Moreover, remember the old adage that went, "When the U.S. economy sneezes the world catches a cold?"
That may need to be restated, with China replacing the U.S. In a fascinating column by Marshall Auerback on
the PrudentBear.com Web site, the case is made that China is overtaking the U.S. as the growth engine of
the world. Auerback says that China has become the largest goods-producing economy in the world, with its
ratio of its goods production-to-GDP many times larger than the comparable rate in the U.S. economy.
Moreover, Auerback notes that China's consumption of basic commodities, such as copper, surpasses that
of the U.S.
This is significant because China has recently begun a campaign to cool runaway growth, and it may be
working. Look at how the Chinese stock market has been declining:
If China is tightening, then the rest of the world ought to pay heed, particularly in the U.S., where the growth
trajectory may be limited by what is happening in the world's most populous nation. A sharp slowdown in
Chinese growth coupled with the abrupt falloff in U.S. mortgage refinancing and the nonrecurring nature of
the recent tax-cut stimulus might act as a triple whammy on GDP gains in this country.
As Auerback says, "we could be on the threshold of a very important growth inflexion point, which could
decidedly change the complexion of today's markets." What makes it all the more scary is that there is little
hope for further fiscal stimulus in light of the heavy criticism being heaped on the current set of measures.
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