Up and Down Wall Street
SATURDAY, AUGUST 13, 2011
Prince or Pauper Market
Whatever happened to the blessed summer doldrums, when the living was easy and a fellow could sneak away from his quotidian labors (only kidding, boss) to partake of a long lazy weekend? When even the most frenetic animals extant -- stock traders -- tend to drowse, and markets are content to lope languidly from opening to closing bell?
Suddenly this summer, the doldrums have disappeared, traders are, if anything, so frenzied as to risk having to be carried out, and incredibly juiced-up markets swing wildly from ridiculously bad to sublimely strong and back again.
Any frivolous impulse to go AWOL, even for a couple of hours, can render a normally insouciant investor atremble with guilt and dread at the mere thought of leaving his portfolio untended and subject to mortal risk of wipeout or, nearly as painful, missing a shot at a 20% appreciation in less time than it takes to read this sentence. This has been a prince-or-pauper market, depending on whether, at any given moment, you're in or out, short or long. As Barry Ritholtz, the indefatigable main man at Fusion IQ, notes with just a tinge of incredulity, last week's thrilling and chilling roller-coaster ride featured four days in a row when trading was totally lopsided: In every session roughly 90% of volume represented buying or selling and the number of advances over declines or, alternatively, declines over advances, also weighed in at 90%.
It was, Barry says, only the second time since 1940 we were treated to four consecutive 90% days and the sole instance when each of those extraordinarily one-sided markets reversed the very next session. What it boiled down to was a contained panic epidemic, with a selling panic promptly followed by a buying panic. Since high-frequency trading accounts for something between 60% and 80% of turnover these days, maybe those wonderful algorithm-driven computers deserve at least a chunk of the credit for these breathtaking and bewildering switches in direction.
Of course, what initially shocked the market and touched off a nice little run on equity mutual funds (net outflows last week alone totaled $11.4 billion) and an overwhelming rush by investors of all sizes to unload was the act of atonement by Standard & Poor's. In downgrading the nation's credit status from AAA to AA+, S&P was seeking to atone for its critical role in the making of the ill-fated subprime mortgage bubble by bestowing its highest rating on all manner of ragged bundles of securities thrown together by client banks for sale to the usual suckers.
In its haste to restore its credibility by taking Uncle Sam's creditworthiness down a notch, it committed a modest arithmetic error of $2 trillion in reckoning what the nation's future obligations would be. Apparently, its electronic calculator was in the shop for repairs and the statistician doing the figuring ran out of fingers and toes. S&P was quick to acknowledge the mistake and just as quick to say, Hey, what's the diff? Forget about the numbers, which it had initially cited in explaining its action; the likely political atmosphere over the next 10 years is the real reason for the downgrade.
Gosh, if we had only known all these years that Standard & Poor's could foretell what the political climate could be from one year to the next, much less 10 years out, think of all the bets we could have collected on. Who needs Nostradamus when good old S&P is only an e-mail away. We eagerly await the 2012 election so we can confidently call the winner, place a modest wager with Ladbrokes, the British bookies (and voice our appreciation to the unheralded clairvoyants at S&P).
CONCERNS OVER EUROPE'S FINANCIAL WOES flared again, touching off a host of rumors about terrible things in store for various and sundry European Union banks and their kin, which had a spasmodic impact on our market, as well as European bourses, during its recent violent down days. For the moment, the fears eased, on news, among other things, that France, Belgium, Italy and Spain would put a temporary ban on short-selling of financial issues (joining Greece and Turkey in the anti-bear clique).
Chances are, what was widely taken as a relief rally might easily have been more of a short-covering rally, triggered by disclosure of the ban. It stacks up as a futile antidote for a mostly imaginary problem. But short sellers, we must admit, do fulfill a positive function by providing a handy scapegoat for clueless politicians. Such prohibitions have been tried more than once before, including by our illustrious powers-that-be during the Great Collapse, but each time and everywhere to no noticeable avail.
What truly ails the banks in the European Union, Harald Malmgren of the Malmgren Group points out, is that in recent weeks interbank lending has been drying up at an alarming rate. And for that decidedly unpleasant development he fingers the recent EU stress tests. Just about all the major institutions passed the test, which hardly was surprising since it wasn't terribly rigorous. But, as it happens, disclosure of the test results included greater transparency of their assets and capital, enabling the big banks to more keenly size up one another's strengths and weaknesses.
The results of such revelations were not entirely salutary, occasioning, as Harald avers, "declining trust of euro-zone banks in relations with each other." Or, as he puts it, while few Euro banks failed the stress test, many failed what might be called the "interbank trust test." J.P. Morgan famously advised not to do business with someone you can't trust.
Seemingly, the Euro banks have taken that maxim to heart. Their timing, inevitably but unfortunately, couldn't have been more inopportune.
THE STOCK MARKET CLOSED OUT the weird and woolly week on the upbeat. A half-way decent Labor Department report showing new claims for unemployment insurance slipping below the 400,000 mark, and better-than-expected July retail sales -- goosed some by higher gas prices and the continuing afterglow of the Fed's decision to hold interest rates just this side zero for a couple of more years -- were among the obvious pluses.
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They were enough, in any case, to lure traders and investors back into what is manifestly a treacherous market and, of course, they provided red meat for the eternally optimistic souls who make a living advising plain folks what to do with their money, and who by and large view "sell" as strictly a four-letter word in every sense. On that score, even the roughing up of equities of late failed to instill much caution in the advisors as they transformed a threatening and damaging market drop into a "healthy correction" (we'd hate to see a "sick correcton") and chirped about nothing but blue skies ahead.
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Once again the disconnect between Wall Street and Main Street was glaring. The early August poll of consumer sentiment by the University of Michigan released on Friday was downright horrible, with the gauge dropping to a 54.9, from 63.7 in July and, hold on to your hats, the lowest reading since May 1980.
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We're loath to smear the investment pros with too wide a brush. Some of our best friends fall into that job category, and, besides, many of them are kind to their dogs (the kind that bark, not the kind they trade).
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The market, being an ornery beast, might decide to take a run up for a few weeks anyway. The bullish mantra that companies loaded with cash and earnings have been incontestably good is by no means malarkey. But we don't buy that we're due for a repeat of 2010. Nor, most emphatically, does Michael Darda.
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Michael has graced this space with some worthwhile insights, and in his latest commentary he shrugs off some of the recent relatively favorable shoots on the economic landscape as likely misleading, "given the abrupt tightening in financial conditions and the associated spike in equity volatility." He points out that financial conditions tend to lead GDP by one or two quarters.
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He warns investors not to expect the earnings environment to remain "decoupled" from what he calls the growth environment, citing the recent widening in high-yield spreads, which have risen to 438 basis points, from 151 basis points in February. Those spreads, he explains, lead year-ahead earnings estimates on the S&P 500 by three to six months. What they may be telling us is there's more than a 30% downside to analysts' expectations for next year's corporate profits.
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Not the least of the reasons why he thinks the analogy with 2010 fails is that the outlook is a good deal more precarious now. The euro zone is in much more trouble than it was this time a year ago, and the monetary and credit-market data coming out of China are much weaker than a year ago, so expectations that booming China will bail out the global economy could prove wishful thinking.
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And then there's the U.S.
Our economy, Michael laments, slowed to stall speed in the first half of the year, with real domestic demand growth at a piddling 0.45% annual rate, making it much more vulnerable to a shock now than it was last year.
All in all, not a happy prospect.
Copyright 2011 Dow Jones & Company, Inc. All Rights Reserved
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