6 Reasons for the Market's Latest Episode of Bipolar Disorder
By Allan Sloan
washingtonpost.com
Tuesday, December 1, 1998; Page D03
We stock owners had a lot to be thankful for on Thanksgiving. In October,
Wall Street was Gloom City. The bull market was over. The Dow Jones
industrials and Standard & Poor's 500 index were down 20 percent from
their summer highs and seemed headed lower. Hedge funds, those
unregulated investment pools that cater to rich investors, were going to
collapse and bring down the world's financial system. And the market
decline was a harbinger of a nasty recession in the United States.
Wrist-cutting kits were going to be the next big growth industry. But now,
it's the people who bailed out of stocks who were the turkeys. Those of us
who hung in when things seemed hopeless are gobbling up profits. The
gloom is gone. Life is good. Recession? What recession? Yesterday's drop
notwithstanding, the Dow is up almost 1700 points from its intraday low of
7467 on Oct. 8.
It would be nice to find a logical reason for all these moves. But not all
market moves are logical. Markets tend to extremes -- they get irrationally
high, then irrationally low, then irrationally high. Think of it as financial
bipolar disorder. To attribute wisdom to every twitch is madness.
So herewith, based on conventional wisdom and Newsweek's own
analysis, are Six Reasons the Market Has Been Rising. Before you send
me a nasty letter or e-mail, please note that in some cases, my tongue is
firmly in my cheek.
Alan Greenspan is our guardian angel. Believe that and you also believe
that in less than a month a fat man in a red suit will slide down your
chimney and leave you presents. Yes, Greenspan, chairman of the Federal
Reserve Board, has cut short-term rates three times in two months. But
don't think that Greenspan is looking out for us retail stock investors. The
Fed never comments on its motivations, but I think Greenspan's goal was
to restore confidence in the credit markets, not the stock market. Bonds,
remember, had tanked in October because of the collapse of Long-Term
Capital Management L.P., that now-infamous hedge fund.
Greenspan is said to be unhappy with stocks' recent rapid rise. It's easy to
see why. Stocks have been rising, even as corporate profits have been
slipping. The S&P 500 ended last week at about 27 times the most recent
12 months' profits, a record high.
Anyone counting on Greenspan to protect us little investors is in for a nasty
shock. Just remember how he cut short-term rates sharply in 1990 to bail
out Citibank and other zombie banks that were awash in bad loans but
were too big to be allowed to fail. That drove retirees and other
yield-hungry investors into long-term Treasury bonds and "emerging
market" debt. After the banks got well, Greenspan raised rates, long
Treasuries tanked and the emerging markets submerged yet again. Little
guys got killed.
Among other things, Greenspan has to worry about the "moral hazard"
created by bailing out the U.S. stock market, however inadvertently.
Moral hazards arise when people who buy risky things such as Thai
government bonds get bailed out by international rescue missions designed
to keep countries afloat. Goosing the stock market, as the rate cuts have
done, is the moral hazard to end all moral hazards. I can't believe
Greenspan will dare do it again.
Corporate takeovers. The animal spirits are roiling the market again, with
the list of takeovers longer than your arm. Takeovers raise prices, if only
because investors bid up the companies they think may be next to be
bought. But you have to wonder about the wisdom of the buyers.
September or October would have been a better time to buy, because
stocks were generally lower then. Anyway, many of the deals involve
trading the buyer's overpriced stock for the seller's overpriced stock. It's
like trading a $50,000 mongrel dog for two $25,000 alley cats.
Baby boomers have to buy stocks to fund their retirement. There's
something to be said for this. But what about August and September?
Boomers managed to find something else to do with their money. Some of
them -- horrors! -- actually sold stocks. The idea that stocks have to go up
because people have to buy them scares me even more than Internet
stocks' going up or down 50 or 60 percent in a day. Buying stocks
because you think other people are buying isn't investing, it's gambling.
We had a bear market -- it just happened to last only seven weeks. If you
define a bear market as a decline of 20 percent or more from the peak, we
had a one-day bear market, on Oct. 8. But forgive me, to me a bear
market involves not only math but also state of mind. Stocks have to go
down and stay down so long you wonder if they're coming back. By that
definition, we had a bear burp, not a bear market. Besides, according to
Salomon Smith Barney, as of a week ago, more than 200 of the S&P 500
stocks were down at least 20 percent from their highs.
Japan is straightened out. We've heard this almost from the day Japan's
stock and property markets started cratering in 1990. Japan is forever
announcing "reforms," but nothing much seems to change. I'll believe it
when I see it. Which may be a long time from now.
Time and Newsweek had gloom-and-doom covers. Time's Sept. 14 cover
was "Is the Boom Over?" Showing even better timing, my employer,
Newsweek, had an Oct. 12 cover called "The Crash of '99?" What more
can I say?
Rich Thomas contributed to this column. Sloan is Newsweek's Wall Street
editor. His e-mail address is sloan@panix.com.
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