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Is Wall St. Bear Out to Trap the Suckers?
By Pierre Belec
NEW YORK (Reuters) - After some horrific quarters in 2000, there may be a light at the end of the Wall Street tunnel in 2001. The stock market is no longer fumbling the ball as much as before and investors are having some good days. Not great days, just good days. And there's talk the market has reached a bottom.
Still, investors are unsure if the market's bounce is just a ''bear market trap''' the Street's lingo for a ``sucker's bet.''
``A question that we are wrestling with is whether or not we are fooling ourselves thinking that we are near bottom,'' says Kent Engelke, capital market strategist for Anderson & Strudwick Inc.
``Is the market lulling us into a false sense of security?'' he asks. ``Is the other shoe about to drop, as many former bears are now becoming bullish, believing that interest rates will trump valuations?''
The technology-dominated Nasdaq market is slowly rising from the ashes after crashing as much as 50 percent from last March's record high.
SIGNS OF BETTER TIMES FOR THE MARKET
Investors are willing to step up to the plate and buy whenever the market has another relapse. A week ago, the Nasdaq racked up three consecutive up days, which is something that hasn't happened in four months. For the year, it is now up 12 percent after finishing 2000 with a mega-loss of 39 percent. The Dow Jones industrial average is nearly flat for the year after sliding 6.2 percent in 2000.
The earnings news is still lousy but investors are now destroying only the stocks of companies that are underperforming, as opposed to the irrational habit of slamming entire neighborhoods of same-business stocks when one firm disappoints.
Despite the tremendous carnage in techs, Wall Street appears to be cautiously falling in love again with the New Economy.
For the first time in more than two years, more stocks are rising than falling.
Billions of dollars flowed back into stocks in December when Fidelity's Magellan Fund, the world's largest mutual fund with $93.07 billion in assets, cut its cash holding from 8.9 percent to 4.2 percent. Fidelity disclosed the move this week.
In another positive sign that investors are regaining confidence, defensive stocks in the Dow Jones industrial average -- which investors had viewed as bomb shelters when the market was under fire -- are not as popular as they used to be. Risk is back, though without the exuberance seen between 1995 and 1999.
``The demand for techs indicates a long-lacking willingness to take on risk, as well as improvement in a sector that embodies the 'New Economy' and is vital to resumption of the bull market,'' says Standard & Poor's.
'HUMPTY DUMPTY' TECH STOCKS
Investors are more willing to put the ``Humpty Dumpty'' tech sector back together after Federal Reserve Chairman Alan Greenspan on Jan. 3 called a halt to his damaging money policy and slashed interest rates by 50 basis points. The Fed had raised rate six times between June 1999 and May 2000 in a pre-emptive strike against inflation.
Before the Fed's unexpected rate cut, which jumped the gun on its scheduled policy-setting meeting on Jan. 30-31, the market's bearishness was intense as brokerage house analysts took a jackhammer to their earnings forecasts.
The crystal-ball readers cut the companies' earnings growth to only 3.9 percent for the fourth quarter after forecasting a gain of more than 10 percent.
The slump in earnings, which rammed the stock market, also sent Greenspan a message that his tight money policy was choking the world's strongest economy. Rising interest rates created a risk that the economic slowdown could deteriorate into a recession.
Now there are two views among the experts on where the economy stands.
Some say the economy's growth is simply slowing after a record 10-year string of expansion. The current numbers may look bad relative to last year but a ``growth recession'' is the worst thing that will be felt, according to the experts, including the pinstriped bankers at the Federal Reserve.
The economy's expansion will decelerate to about 3 percent after a spectacular gain of some 6 percent in recent quarters. Corporate earnings will be disappointing in fourth-quarter 2000 and possibly for another quarter in the New Year, then things will start to improve, they say.
The other side says the recession is already here, but even that camp agrees the slowdown will happen at Internet speed.
Richard Berner, chief U.S. economist for Morgan Stanley Dean Witter, sees a short and mild recession, which will give way to a ''muted and mild recovery.''
Berner's bet: The economy will contract at an annual rate of 1.25 percent in the first half of this year.
Looking at the bright side, investors' enthusiasm for stocks may resurface once they sense that all the negative stuff about the economy and corporate earnings is out of the way.
That light at the end of the tunnel, combined with a rush by mutual fund managers to flip a mother lode of cash back into stocks, could set off an explosive rally that may have the potential to last. There's an inverse correlation between the ratio of cash to stocks. When stocks are too risky, people switch into cash and move back into stocks when the waters are calmer.
Gun-shy mutual fund managers are sitting on more than $660 billion in cash, the biggest hoard since the mid-1990s, according to John Lloyd, Merrill Lynch's mutual funds analyst.
``This significant amount of cash on the sidelines is basically housed in money market CDs and savings accounts,'' he says. ``And the reason that people are holding cash is that the returns from CDs and savings accounts have exceeded stock mutual funds.''
Another big question is whether the hundreds of billions of sideline cash will be just a one-time shot for stocks or set the stage for the next bull market.
GREENSPAN THE BEST STOCK BROKER AMERICANS EVER HAD
``Wall Street is so convinced that Greenspan will bail them out, that they are inclined to take greater risk than they would otherwise,'' says Ray DeVoe, market strategist for Legg Mason. ''The assumption is that in the event of a market panic, Greenspan will cut interest rates or just do something to smooth out the problem.''
DeVoe said he has heard of a ``Plunge Protection Team,'' a sort of fiscal commando unit involving people from the Fed, Treasury, the Comptroller of the Currency and the White House, who would formulate what is needed to prevent a massive selloff in stocks.
After the 1987 crash, the Fed reassured Wall Street that it was there to keep the flow of cash going amid the crisis. And in 1998, the central bank cut interest rates to prevent a global run in financial markets amid the Russian debt default and the Asian economic meltdown. Both times, the central bank did the right thing and the market roared back.
DeVoe believes that the ``Plunge Protection Team'' probably had a hand in the Fed's surprise decision in January to cut interest rates as the stock market was getting clobbered.
``The fact that the Fed lowered interest rates while the stock market was opened for business looked like a sign of panic,'' he says. ``The economy's soft landing may be developing into a rocky one and they wanted to slow down the momentum.''
For the week, the Dow Jones industrial average was up 62.21 points at 10,587.59. The Nasdaq composite index gained 143.92 at 2,770.42 and the Standard & Poor's 500 index was up 23.73 at 1,342.55.
(Questions or comments can be addressed to Pierre.Belec(at)Reuters.Com.) |
