Larry ,from Barron's:Negative Energy
April 9, 2001
Up and Down Wall Street
Negative Energy
By ALAN ABELSON
T hank you, Al. we needed that.
What we needed, desperately, of course, was a truly big
rally. And the Al to whom we're all so deeply indebted
is not, as you understandably might have assumed, Al
Greenspan, but the less renowned, but still the possessor
of a reasonably familiar name, Al Einstein.
Not, obviously, that Albert Einstein was a big buyer on
Thursday. Techs were out front of the rally and he never
invested in anything he didn't understand. Besides, he
took leave of this vale of tears some 45 years ago.
Nevertheless, it was Albert Einstein who provided the
startling diagnosis of what ailed the stock market these
many, many dismal months. And by so doing, he
dispelled some of the worst fears of the investment
masses -- the bear market was not, as widely rumored,
caused by an epidemic of mad cow disease among
millionaire analysts -- and encouraged them to make
fresh bets on equities with what few chips they had left.
On this last score, Einstein did not, in case you're
wondering, offer that vital insight, which had eluded the
best brains on Wall Street and even some intelligent
observers, via a happy medium (or, for that matter, an
unhappy one). Rather, it was a legacy, only recently
confirmed, from his days as a kid math whiz in the Old
Country, tossing off cosmic theories with the same kind
of effortless ease that his contemporary tykes hurled
spitballs.
More specifically, and we're grateful to a front-page
story in the New York Times for the revelation, Einstein
had identified a strange force in the universe known as
negative gravity -- or, as the more poetic among the gang
of young scientists he hung with called it, dark energy --
which is one powerful number and can cause all kind of
wild things to happen, like pushing galaxies around.
Well, just imagine what it could do to a bunch of stocks.
It was that mighty force, then, that starting back sometime
in the mid-'Nineties, overcame your ordinary,
plain-vanilla type of gravity, which keeps people and
markets with their feet planted firmly on the ground.
Result: Investors and the market were both weightlessly
borne aloft into the stratosphere.
But nature's a hanging judge and a little over a year ago,
something about the way Wall Street was whooping it up
truly irritated the old girl and -- just like that! -- gravity
reasserted itself, gave gentle boot to its opposite self and
the world and the stock market both turned upside down.
Last week, gravity got a little too cocksure and, in the
eternal wrestling match, dark energy gained the upper
hand, and the market indulged its yen to levitate once
more. It's that simple, but except for dear old Albert,
we'd never have had a clue.
There are, to be sure, other explanations for Thursday's
dramatic rebound. And gosh knows by this time you've
heard them all. Stuff like Dell announcing that its first
fiscal quarter, ending May 4, would meet the Street's
unexuberant forecasts but then slipping in a gentle
warning there was still a month to go and the rest of year
was too "uncertain" to call. On such lean fare doth our
bulls feed. Or Alcoa disclosing that it met Wall Street's
muted expectations for the first quarter, owing in no
small measure to the fact that it had switched a goodly
chunk of its business from drab old aluminum-making to
selling power on the spot market.
Too, there was a veritable flood of predictions by Fed
officials (not including Mr. G.), certified members of the
open-mouth committee, that the second half would see a
strengthening of the economy. As Ed Hyman wryly
commented, those are the very same Fed officials who
spent each year of the late 1990s incorrectly expecting
growth to slow in the second half and are now likely to
spend the next several years incorrectly expecting growth
to accelerate in the second half.
Finally, the sages served up the old boilerplate special --
always the last refuge of the irretrievably flummoxed --
namely, that the market was deeply, terribly, impossibly
"oversold." Well, there's no question, when stocks you
own go down, they're oversold, and if they go down a
lot, they're deeply, terribly, impossibly oversold.
If Friday's action is any guide, it didn't take all that much
to cure the oversold condition. Since we hate
disappointment and we've been expecting a decent
bounce for weeks now, we like to think that dark energy
doesn't run out of gas that quickly. But maybe it's the
nature of the phenomenon that on the wane it can only
exercise its powers in spurts. On that critical question,
Einstein was uncharacteristically mum and, as we say, he
can't be reached. But we can speculate that the answer
played some role in his avoidance of tech stocks.
I t doesn't take an Einstein to figure out what hit the
market on Friday: bad news, courtesy of the Bureau of
Labor Statistics, on what happened to the nation's
payrolls in March. In a word, they shrunk. More
specifically, employment dropped by 86,000 last month,
which contrasted rather starkly with the consensus
estimate among Wall Street economists of a rise of
60,000. Say what you will about the consensus, it's
rarely right but never in doubt. The decline in jobs was
the first since last summer and the steepest since
November 1991, when the economy was still trying to
shake off the vestiges of recession.
Once again, the weakness in employment was spread
through the length and breadth of the economy. Even the
hitherto immune service sector lost 19,000 jobs, while
there was no letup in the hemorraghing in manufacturing,
where the casualty count ran a formidable 81,000. The
unemployment rate moved up to 4.3%, the highest in
nearly two years, and in light of the recent rise in new
claims for unemployment insurance, we suspect there's
more to go on the upside, likely a fair piece more.
For once, Wall Street refused to succumb to its perverse
impulses. Typically, when unemployment rises, the
Street celebrates by running up stocks, not because it's
heartless (there are documented sightings of brokers and
even investment bankers dropping pennies into
mendicants' cups), but on the notion that it will move the
good governors of the Fed to cut rates and hopefully
more aggressively. But such cute calculations seem to
have lost their charm, perhaps because the numbers now
so powerfully exude the strong whiff of recession and so
disquietingly conjure up visions of greater misery ahead
for sagging corporate earnings.
interactive.wsj.com
Table: Drop Dead Dow1
That for investors, the dour economic outlook now
outweighs liquidity in the scale of things was evident
also in the big rally on Thursday when something like
Dell's hardly blazingly bullish utterances were seized on
as a possible harbinger of better times.
A shrewd money manager whom we've known forever
remarked to us over breakfast last week that the vast
majority of economists and investment pros were in
denial as to the real state of the economy. The truth,
though, is evidently beginning to leak out and, who
knows, one of these months it may even sneak into the
sanctum sanctorum where the Fed does its very private
gabbling and monetary dabbling.
We're increasingly convinced, moreover, that this
recession, which is the misbegotten issue of excess, will
last longer and carry deeper than anticipated, especially
by the folks who get paid to do the anticipating. We don't
think that kind of recession is in the market. Which is
why we don't think we're even close to a bottom.
I f nothing else, the latest job totals should help to
puncture the myth that all those layoff announcements that
now daily dot a newspaper's financial pages and, not
infrequently, nudge their way onto its front pages, as
well, are just so much grist ground out by companies for
the benefit of Wall Street, which views pink slips as
prima facie evidence of strong management and a
penchant for cost cutting.
This particular canard was probably the brainchild of
some social misfit -- an Internet analyst driven to mad
pursuits by the spectacle of his companies vanishing by
the score. But it was embraced and given wide currency,
it grieves us to note, by our distinguished colleagues in
the financial press.
During the bubbly days of yesteryear, no question,
corporate rogues and scoundrels found it great sport -- to
say nothing of good for their stocks -- to make a big
hullabaloo about being lean and mean by boasting how
many people they were planning to can and were given to
embellishing the number with gusto. But those days are
long gone. There's nothing phony or funny about today's
layoffs.
ISI, which has been tracking the dreary data for eight
years and counting, reports that each month of this year
witnessed horrendous increases in the number of people
destined to be laid off compared with the tally in the
corresponding month last year. January's 257,200, to
illustrate, was 640% greater than January 2000; February
was up 329%, March 385%. Those are real people, not
papier-mache figures for entertaining Wall Street.
Another myth -- and this one happily cannot be blamed
on journalists -- making the rounds among the
stock-market uncognoscente is that amid all the prattle
about bear markets we've actually been having a "stealth
bull market."
Nothing daunted by the fact that ordinary people
unblessed by superior vision can spot neither hide nor
hair of a bull market, those professing to detect a stealth
version point to the rather doughty performance of the
Dow, which has yet to decline the 20% that supposedly
defines a bear market (that's another myth, but each in its
turn). The fetching table that graces this page provides a
rather interesting retort.
It's adapted from the handiwork of one of our tireless
correspondents, a savvy and properly skeptical chap
named Howard Boyet. And, as you can tell at a glance, it
shows how far down each stock listed is from its high of
the past two years.
Howard's point is that a large majority of the stocks that
make up the revered Dow Jones Industrial Average -- 22
of them, to be precise -- are off a heap. And anyone who
says each of those 22 stocks have not been mauled by the
bear should rush to tell their shareholders, who, he
imagines, would be overjoyed to hear the news (but we'd
avoid the ornery ones who just might shoot the
messenger).
The last myth we'd like to mildly eviscerate is a residue
of the recent looney epoch that came to an ignoble end in
March 2000. It contends that stocks always go up; hence
the only true risk they carry is the risk of not being
owned.
This delusional view is oblivious of history and
experience, hard fact and common sense. Such missing
ingredients, far from discouraging its advocates, seem to
serve only to harden their conviction of its validity.
As Alan Newman, the scholarly author of CrossCurrents,
an investment newsletter put out under the aegis of HD
Brous & Co., notes, the unfortunates who bought at the
top in '29 had to wait until 1955 to get even. Those who
bought at the highs in '66 didn't get above water until
1995. And the unsuspecting souls who got into the market
in December of '72 waited a full decade for a good
night's sleep.
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