Even Former Bear Says Market Looks 'Just Right' -- for Now
By Aaron L. Task
Senior Writer
5/17/01 8:37 PM ET
SAN FRANCISCO -- A frightening specter was spotted on Wall Street today. No, it wasn't inflation, deflation or even some shirtless fat guy scrambling to get another free doughnut. It was (cue haunting music) Goldilocks.
The notion of a "Goldilocks economy" has risen from the dead amid optimism that the Federal Reserve is going to revive the economy but inflation is under control (even if looks can be deceiving). Such hopes were advanced by today's economic news: Jobless claims fell for the second straight week, while the Conference Board's index of leading economic indicators rose 0.1% in April, reversing declines of 0.2% in both February and March. Conversely, the Philadelphia Fed's survey of regional manufacturing activity fell for a sixth straight month.
As Goldilocks re-emerges from her tomb (covered in petrified porridge, of course), portfolio managers are simultaneously dealing with another relic of the bygone boom: Performance anxiety following yesterday's monster rally.
"That translates into an equities market in which one doesn't have to sell, but if everyone else is buying [that] creates a greater sense of urgency," commented Charles Payne, president of Wall Street Strategies.
The sense of urgency was evident early on, as major averages rose solidly. The advance stalled at about 2 p.m. EDT, but the Dow Jones Industrial Average and S&P 500 each closed up 0.3%, while the Nasdaq Composite rose 1.3%.
Market internals painted a more accurate picture of the rising bullishness. Gainers bested declining stocks 19 to 12 in Big Board trading, where 1.3 billion shares changed hands. Winners led 12 to 7 in Nasdaq trading, with 2.1 billion shares exchanged. New 52-week highs swamped new lows by 276 to 4 in NYSE trading and by 214 to 44 in over-the-counter activity.
The renewed enthusiasm was also evident in percentage gains by individual issues such as Hewlett-Packard (HWP:NYSE - news), specialty retailer Too (TOO:NYSE - news), and momentum favorites such as Protein Design Labs (PDLI:Nasdaq - news) and Micromuse (MUSE:Nasdaq - news).
Additionally, a host of four-lettered stocks that trade under $1 saw big percentage moves, suggesting a level of speculation beyond even that which The Wall Street Journal warned about yesterday.
"It was a timely article, one that was supposed to serve as a warning to investors," Payne noted. "However, just the opposite happened" as investors fear the proverbial market train is leaving the station.
Such anecdotes should give chills to those who experienced the stock market from March 2000 through early April. Clearly, many investors fear this rally will prove to be yet another false dawn.
But one former skeptic is encouraged by such wariness -- at least for now.
"I don't detect any of the old euphoria [and] a lot more caution," said Donald Coxe, chairman and chief strategist at Harris Investment Management in Chicago (who obviously isn't talking to the same people as Payne). "That's reassuring."
Coxe believes "the path of least resistance is up," a view he says is supported by:
Positive technical factors such as the advance/decline line;
A robust liquidity situation with the Fed "pumping money like mad" and other central banks cooperating, now that the European Central Bank has gotten with the easing program;
"Smart investors" and erstwhile bears such as Ned Davis and Steve Leuthold being their most bullish in years.
"It's hard to protest in the face of that," Coxe said. "Technically, the market is in good shape, the liquidity is getting into better shape, and the shorts are once again getting devastated."
Bullish, Yet Wary of Excess
In mid-April, the strategist upped his recommended allocation from 39% equities to its current 51%, with 28% U.S. and 23% foreign. The remainder is in 37% domestic bonds and 6% each in foreign bonds and cash.
The revised equity allocation remains far below that of most strategists, but being conservative has served Coxe well. The $18 million Harris Insight Equity fund he manages was up 5.6% in 2001 through yesterday, after rising 8.2% last year, according to Morningstar.com.
Currently, the fund is overweight energy shares such as USX-Marathon (MRO:NYSE - news), Conoco (COC^A:NYSE - news) and Valero Energy (VLO:NYSE - news); food stocks such as Smithfield Foods (SFD:NYSE - news) and Sysco (SYY:NYSE - news); and defense contractors Goodrich (GR:NYSE - news), Lockheed Martin (LMT:NYSE - news) and United Technologies (UTX:NYSE - news).
The fund is also overweight health care, although Coxe prefers medical device makers such as St. Jude Medical (STJ:NYSE - news), Stryker (SYK:NYSE - news) and Becton Dickinson (BDX:NYSE - news) vs. big pharmaceuticals.
As the modest equity exposure and defensive portfolio indicates, Coxe is far from wildly bullish. He fears tech valuations are again egregious, especially given the negative trend in earnings. (News after the bell from Palm (PALM:Nasdaq - news), Agilent (A:NYSE - news) and Dell (DELL:Nasdaq - news) further reflect that trend.)
The strategist also fears the recent downturn in bonds -- which reversed today despite a slew of negative comments, including Merrill Lynch adopting a bearish stance -- and the upturn in gold "suggest the Fed had better be very cautious about doing more easing."
Coxe has been negative on gold and the fund owns no gold stock. "But in light of what's been happening I'm going to have to rethink that position," he said. "This may really be a situation where we're going to create new excess [aka inflation, ] and the only areas that smell this are long bonds and gold."
The Philadelphia Stock Exchange Gold & Silver Index rose another 1.1% today.
Coxe's biggest fear is that "we may be setting ourselves up for some kind of break in the dollar" that will result in foreigners quickly repatriating assets, a la 1984 or 1987.
"The Calvinist in me says we should be punished for our sins," he said, citing the trade deficit, negative savings rate and equity bubble of the late 1990s. "But the rational investor in me says you want to own stocks [here]. All's right in the world expect for a few indicators, so why be a curmudgeon."
With so much for investors to be positive about these days, why indeed?
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