Fleck...10/25/01
<Have OPM, will jam 'em (with apologies to Paladin).
Buckle up, we've got a lot to cover. In the wee hours, the Asian markets were firm and our futures were up modestly. Then Europe sank, both before and after the ECB decided not to cut rates, and our futures went along for the ride. Aiding and abetting the process was a one-two punch of bad news: Orders for durable goods fell far more dramatically than expected (down 8.5% vs. expectations of 1.3%) and existing home sales were far weaker than expected. For most of my 20-plus years in the investment business, I can't ever remember a time when people paid much attention to either durable goods or existing home sales. But home sales matter now because the Fed and Bubbleonian types have been counting on the housing market bubble to bail out the previous stock market bubble. It won't. So today, as a number of light bulbs began to go off, that added pressure to the downside.
Dipsters Propelled By Mustered Gas In terms of the action, we opened substantially weaker and then mustered a 15-minute rally. After that got smacked, we traded down to the lows, at which point the S&P was down just about 2% and the Nasdaq about 3%. From those lows, we had a vigorous rally that lasted all day, as that dip was bought as well.
Bulls Stick Pitons Into Their Lederhosen If one looked at an intra-day chart, it appeared as though Captain Kirk had locked onto the stock market with the tractor beam. The indices were relentlessly pulled skyward all afternoon, to finish on the high ticks that you see in the box scores. The action was simply breathtaking as the apparent early-morning wipeout was arrested, and we had the epic turnaround that today became. Also, volume was up over yesterday, with Nasdaq volume more than two billion, a respectable number. So, yet again bulls will get very frothy about this in the worst-has-been-seen department. Then, of course, we have the fundamentally most correct days of the month in front of us next week, in which case we could see even more fireworks.
Falsie Rally So, the rally that we have been musing about continues to unfold. Today was one of the more explosive days we've seen. The Sox had a medium-sized day, up about 6%. The bank stock index was up a couple percent. The biotech stock index went wild, up over 5%. You know, just a good old day when people who run other people's money were desperately seeking more octane for the portfolios so they can try to make up for previous losses. I don't know how far this will carry, but I wouldn't be surprise to see it extend into early November. But if this keeps up, by the middle of November, the market will be setting itself up for another tremendous opportunity to sell stocks at ridiculous prices when ridiculous notions have once again been impounded into stock prices.
Fixed Incoming Flight To Quality Away from stocks, gold and silver were higher. The euro initially sold on the back of the firm stand by the ECB, while the yen rallied a bit against the dollar. I'm sure that had more to do with euro/yen cross-rates than anything else. As for fixed income, it repeated yesterday's strong showing, in part because Argentina is once again in trouble. Confirmation came by way of news that last night Domingo Cavallo met with New York Fed head William McDonough. So, people are now starting to fret about an Argentinian default, and that would cause a bit of a flight to quality in our bond market.
When Push Comes To Shove, Clear Turns To Bailout Turning to the busy world of current events, there's a lot worth discussing in today's newspapers. On page one of the New York Times' business section, there is an interesting article by Floyd Norris called "Does the U.S. Still Trust Markets to Work?" (Registration required.) It is paired with a related story called "Europeans See American Intervention As Heresy," by Alan Cowell with Edmund Andrews. Taken together, the two articles point out a serious disconnect: On the one hand, we talk about free markets and letting the markets clear; on the other, we have been rather quick to resort to bailouts, most especially so in the last few years. But, no matter which bailout you choose -- Long Term Capital, Y2K, the bubble aftermath, post-September 11 -- you'll find it branded Greenspan Et Al.
Hazardous Morass In one of the stories, there is a particularly good quote by French economist Elie Cohen about the double standard that exists between us and the people we advise: "But when it turns out the Americans are facing the same problems, they seem to forget the universal laws of the market." That, as I said, has been especially the case under the current regime of Easy Al. We are seeing the moral hazard of bailouts in a number of industries. We propped up the airlines. Now we are talking about propping up the insurance companies. Of course, the rental car companies also want to get into the act. Next, it will be the resorts, etc. Even though the terrorist attacks have caused unique troubles for the airline industry, much of the problem is a direct descendent of the bubble that predated September 11. Starting down this path is a horrible policy decision, because once you do, it's almost impossible to get off.
Name, Rank, Serial Number, And Anything Else You Want To Know Also in today's Times, there is an interesting article in the "Marketplace" column entitled "With Stocks Weakened Further, Some Retirement Investors Seem Ready to Sell Low and Buy High." Writer David Cay Johnston highlights how tenuous is the strategy of being a long-haul investor. A recent survey conducted by Cigna discovered that if the market ends lower this year, "nearly half" of those polled intend to change their retirement investment plan. So, while people claim to be in it for the long haul, what they really mean is, as long as stocks always go up. If you have a contrary bone in your body, you will be disturbed to read the results of a recent Merrill Lynch internal memo. Apparently, "88% of those investors polled said they expect the domestic stock market to be 'somewhat strong' or 'very strong' in the next 12 months." Yet again, we have a survey showing that people absolutely believe the worst has been seen. And why is that, ladies and gentlemen? Because they refuse to understand the problem that came before it. Yes, I am talking about the bubble.
The Defenestration Of Redmond Lastly in The New York Times, and echoing my thoughts on the problem, there was a fine Op-Ed piece by Robert Cringely called "Windows of Opportunity." Yes, Windows XP will make your computer more stable, but it will also make Microsoft more in control of everything that you see or do. Now, I am not one of those 1984 paranoid types. However, I for one do not wish to have Microsoft suggesting what I might want to see or do. The writer says, "The flip-side of convenience is that the goods and services you buy will mainly be from those companies, like Buy.com, that are willing to pay Microsoft to be introduced to you." The integration of the operating system and a browser makes it far too easy for Microsoft to be in a position to dictate policy. Microsoft has had a monopoly, as everyone knows, and I believe the company is in the process of using that to enhance itself at the expense of, potentially, some of our privacy and freedom to choose.
The Bubble -- The Gift That Keeps Giving I'd like to wind down today's Rap by discussing a page-one story by Phred Dvorak in today's Wall Street Journal: "Can't Give It Away -- A Puzzle for Japan: Rock-Bottom Rates But Few Borrowers." (Registration required for a two-week trial.) I think the moral of this story about the 10-year problem faced by Japan is that animal spirits or psychology plays an important role in how things work. And, I think more than anything it shows the enormous distortion and long-lived impact that a bubble has. To repeat my earlier thoughts about raising the moral hazard, it all comes down to the grand point that the bubble's creation is a nightmare of epic proportions. We've had three in this century. The first two took a long time to right themselves. In my opinion, the present one is even bigger than the previous two. Right in front of our eyes are egregious problems, yet people seem to think that all is well and will be okay. This is without a doubt the greatest financial disconnect in the history of the world. Of course, the problem is made worse because the Twin Titans of Finance -- Easy Al and Paul O'Neill -- continue to pursue policies that will only exacerbate the problems in the long term.> |
