Interesting article:
URL:http://www.foxnews.com/story/0,2933,69687,00.html
Contrarian View Doesn't Always Work
Saturday, November 09, 2002
NEW YORK — The best time to buy stocks is when people can make a laundry list of reasons why they shouldn't.
Right now, corporate earnings are subpar, consumers are feeling far from flush, the economy is struggling and there's the threat of war against oil-rich Iraq. The perfect scenario?
Don't bank on it. The experts say investors who believe the bear has left the building are making a big mistake, crafting a bullish case out of something that isn't.
The contrarian view — the opposite of what reason would dictate — may not work this time around.
"There is no way this market is going to just blast off relentlessly higher and leave those October lows behind as if they were a bad dream," says Jeff Walker, publisher of the Walker Market Letter. "We have just had nearly three years of a brutal bear market. There are too many investors who were burned too badly."
Stocks have been rocketing higher since tumbling to 5-1/2 year lows in early October. The springy Dow Jones industrial average chalked up its strongest October in decades, snapping six consecutive months of losses.
Walker says the market will soon pull back, and when the tide rolls out, the bulls who are swimming naked will be exposed.
"The market has become extremely overbought, much like a rubber band that gets very stretched out in one direction," Walker says. "It will become harder to pull it in that same direction."
This week, the Federal Reserve slashed interest rates by a huge half-percentage point, knocking the cost of borrowing money to a 41-year low. But, instead of a precursor of growth in the future, some see it as a sign the master mechanics of the $10 trillion U.S. economy are scared.
The central bankers went out of their way to reassure financial markets that they were not panicking as the recovery continues to lose momentum. But Fed Chairman Alan Greenspan appeared to be worried that the economy, which is being held up by cheap mortgages and zero interest rates on car loans, may soon lose its main props.
The economy is sputtering and there's an outside chance it could slip back into recession.
Economic activity in the third quarter increased at an annual rate of 3.1 percent, but most of the growth came from strong car sales. Excluding cars, gross domestic product would have risen by only an anemic 1.5 percent.
So why is the stock market doing well if the fundamentals are less then overwhelmingly good?
The smart-money people say it's a case of investors being afraid of missing out on the next bull market.
Since everything is a matter of perception on the Street, investors are "wishing" that the long-awaited capitulation, when everyone has thrown in the towel, has finally arrived.
Or perhaps they're trying to short-circuit the length of time the bear market needs to correct the speculative excesses of the 1990s.
The evidence shows there's likely to be little growth in corporate earnings and the economy in the short term.
What's difficult to explain is why investors who were reminded there's no sure bet on Wall Street are returning to the market with such enthusiasm.
Never before have so many lost so much money as over the last 2-1/2 years. The bear market of 1970s was bad, but stock ownership back then was not nearly as massive as in the great bull market of the 1990s, when half the nation's households had a stake in the market.
An estimated $7 trillion in market wealth has evaporated since the bubble burst in March 2000, the biggest wipe-out in a generation.
The best explanation is that people have put all their faith in the market's seasonal strength. Historically, stocks are the strongest in the last three months of the year.
The presidential election cycle may also have something to do with the exuberance.
Only twice since 1924 has the market lost ground in the last two years of any presidency, a 48 percent plunge in 1930-32 and 10.2 percent drop in 1938-40.
Going forward, GDP will likely fall flat because Detroit is having car problems. U.S. auto sales last month posted their biggest drop in four years, plunging by 27 percent from a year earlier.
"A big setback to real GDP growth in the fourth quarter arising from weak consumer spending is likely," says Asha Bangalore, an economist for the Northern Trust Co. "We are now predicting real GDP growth to be in the neighborhood of 1 percent in the fourth quarter compared with a 3.1 percent increase in the third quarter."
Since the economy is the ultimate engine driving companies' earnings, a stagnant economy would not be a delightful scenario for corporate America.
Then there's the deteriorating jobs market, which is now the most important force in the economy.
The unemployment rate crept up to 5.7 percent in October from 5.6 percent in September. The number of jobs fell for the second straight month, depressing consumer confidence to a nine-year low.
The scary thing is that consumers are feeling bad even after the recession has ended. It's not supposed to happen that way. Historically, the mood of American consumers has gotten better at the tail end of a down cycle, but it's now hitting new lows.
Policymakers say the risk of a double-dip recession is low. But much of their argument is based on hopes that consumers will continue to spend and keep the economy from losing traction.
"For this reason, we're not buying into any market rally, at least not hook, line and sinker " says James Stack, editor of InvestTech Research.
On the week, the Dow Jones industrial average gained 19 points to close Friday at 8,537.13. The broader Standard & Poor's 500 index fell 6 points from a week ago to end at 894.74, and the technology-laced Nasdaq Composite index slipped 1 point to finish the week at 1,359.25. |
