Holding on --- for dear life?

By Duru

July 27, 2003


If you sold in May with the intention of coming back in Fall, so far, you probably aren't doing too bad. Before this latest feast of earnings reports from America's finest, I declared I wanted to get more bullish, but caution dictated otherwise. Well, we have now churned around for about 7 weeks since the June highs in the market and have little to show for our "patience." I interpret the action so far as quite representative of the mixed feelings investors must now have about the market. The rally from the March lows probably anticipated July's so-so earnings reports which demonstrate that at least the economy has stabilized. But there is still no sign of a robust recovery, and those darn corporate CEOs and CFOs are ever cautious about the prospects for such a recovery. Regardless, as I have stated earlier, I think even more important for this rally has been the surplus of easy money flowing through the system. Whether all this money leads to the robust recovery the optimists are banking on, remains to be seen. So, for now, the mlarket just holds on. For what, we should soon see.


I am inclined to believe the market SHOULD be going down from here given that I think this rally has gone far too far. But ever since I bought into the more speculative features of this thing, I have put down reason and rationale and have decided to just hop along for the ride. I will be ignoring most economic signals for the short-term and will just follow the direction of the market whenever it decides to make the break - either up or down. I am also inclined to ignore most reports about insider-selling and the dire warnings of the skeptics about rampant investor bullishness. This rally has probably been the most criticized of the bear market. You have not needed me to remind you that the action in the markets must be sheer lunacy. A near-cacophony of people smarter than me on these things have been ringing the alarm bells all the way up. This means for me that sentiment is largely negative, leaving open the possibility for yet another strong leg up before the market is forced to pay the piper for its madness. I have also been looking under the covers of the market - while we have flipped and flopped, churned and chirped, opportunities have revealed themselves here and there. For you speculators and active traders, you probably want to ignore the general market when making your picks until the market begins trending up or down again.


Now, back to economic recovery...the 2nd-half of the year recovery fantasy has now quietly morphed into the early 2004 robust recovery fairytale. This sleight of hand was pretty slick; I have to give credit to the money masters in DC and NYC. This switch was done in a way that did not ring alarms with people who were buying stocks betting on the a 2nd-half recovery. If they so choose, they can now keep holding on until this latest story needs another revision. Why the claims and trust in good times for early 2004? Supposedly things MUST get rip-roaring better given all the stimulus pumped into the system. Yet, dogma has gotten you killed in this bear market. Given we have yet to ramp down bubble-created economic capacity more closely in line with economic demand (and I am talking on a GLOBAL scale here!), I find it very hard to believe that any kind of sustained robust recovery is anywhere in our near future. But this is just economic mumbo jumbo. The market does not care much about this right now. There simply is nowhere else to put money for a decent return....unless of course the explosive rise in interest rates continues unabated. If those long-term rates do not cool down soon, we could be in for a whole new kind of trouble that the Fed will be near-powerless to solve (well, I suppose they have not really solved anything in a very long while!).


What the market IS starting to care about is the prospect of a Bush re-election in 2004. The debacle in Iraq seems to grow continuously worse. As you all know, I was staunchly opposed to the war because I did not believe the tales being spun from the Bushies. Even worse, I could not see anything in their claims that justified instant, pre-emptive war. The Bushies have skillfully taken America's fear of terrorism and twisted it into a trusting body willing to suspend disbelief in the name of security. But the white lies and fairytales are now slowly coming home to roost. Headlines about one American dead a day at a cost of one BILLION dollars for each of those days do not help the Bushie's cause either. I do not think there are enough tap dancing skills in the White House (or in the British Parliament for that matter!) to keep escaping the repo man on this growing disaster. Heck, I do not think there is even enough bloodthirst in this country to just be happy that we are slaughtering evil-doers. As the case of Liberia proves (and SO MANY before it), it is not in America's interests to simply take out bad people. That is not something written in our Constitution or even sent on a scroll from God. Evil doers are only evil if they are somehow in the way of America's economic or political ambitions.


Why does this matter for the stock market now? After all, the stock market long forgot about the war before it was even officially declared over. The problem is that as the main Bushie's approval ratings begin to slip, the prospects of a Democrat in the White House get ever higher. The chances are still pretty small right now, but if my intuition on the farce of the Iraq incursion is correct, we could see a tidal shift more swift than a looney California recall. Again, why does it matter whether Bush or a Demo gets in the White House in 2004? Well, you can bet your easy money that none of the current slate of Democratic candidates is going to maintain or even put up with the free-wheeling, cheap money, budget-busting policies of the current administration. Hard to imagine we are now witnessing the Republicans as big spenders and Democrats as financial worry-warts, but that is indeed the case now. And when the Demos turn off the spigots, especially for the rich, you can bet the stock market will sink with all that missing cash!


Of course, I am stretching out a bit of speculation here, but this is the next key thing to look out for. The market is more and more likely to gyrate on its opinion of the 2004 election than on any remaining 2004 economic fantasies crafted by the money-men. Again, this is because whatever party we get going in early 2004 could be destroyed if the election does not go the way of easy money, especially easy fundage for those who already have plenty of it.


Finally, an ending note on the market's ability to see the future. You will often hear the optimists justify up markets by saying the market is rallying in anticipation of a recovery or some other good news. You will also hear these same people decry a sell-off in the market as an over-reaction and unwarranted given all the positives out there. Most of the time this is nonsense. The market makes bets. Occasionally, the consensus lends its weight in one direction or another and the market complies. Eventually, the market gets proven correct or wrong. You will pay a heavy price if you get caught leaning with the consensus at that moment of truth when the market realizes it is wrong. I say this to again implore those of you who have scooped up profits to protect some of it (heck, if not ALL of it!), and to be on constant alert going into the precarious Fall -- when, yes, stocks tend to FALL. And THIS Fall, the market has a whole lotta FALLING it can do!


Ó DrDuru, 2003