Aimless and Restless
October 5, 2005
If anyone wants to understand why individual investors have drifted away from the stock market (and to real estate), you need look no further than the kind of action we have seen in the past two weeks. We have had two days of heavy selling right on the heels of a week in which the markets rallied sharply to end the third quarter with smiles. Today in particular felt like a massive liquidation day. We heard the standard slew of excuses for the selling - inflation fears, economic weakness - but almost everything sold off, even gold!
Most of the major indices are right back at or below the lows for September. But after you put this pain in perspective --- that is, most of the major indices are simply right back to where they were about a year ago, and we are still hovering around the highs we saw post 9/11 --- you realize that the market has mainly been much ado about nothing. You could have slept through this market for four years and missed little. Sure if you were quick, smart, and loaded with foresight you could have darted in and out of one hot sector to the next, or bought the dips and deftly sold the tops. Maybe you would have even developed a thesis around energy, commodities, and/or housing and stuck to your guns through the wild swings over the past few years. If you daytrade, you may be having field days playing the market's volatility. But in general, what we have had has been weeks and months of grinding, choppy, jerky action punctuated by bursts of exuberance. This action is a recipe for angst for anyone trying to remain awake through it all. At least we can say we have not even come close to revisiting those gut-wrenching lows in 2002 and 2003. Take solace in that!
Anyway, I ramble. I really want to take a quick moment to review the timeliness of some recent missives. A few days ago, I chided Standard & Poors for selecting Lennar (LEN) over Google (GOOG) for adding to the S&P 500 index. In classic form, LEN has been viciously faded for a complete roundtrip from index excitement to horror over massive insider sales and more whispers of slowdowns in real estate. It was the ripe set-up for shorting that I figured it to be. And what has Google done? GOOG too has made a roundtrip of sorts but all the recent headlines about the company are about the rapidly expanding business opportunities ahead for the company. The contrast could not be more stark. Look for the chasm between these two business (and business cycles) to continue to widen….and by the time the S&P finally gets its reluctant indexers to add GOOG to the S&P 500 index, well, uh, let's just say the final reason to buy the stock at these levels may finally be put into play. They caught LEN pretty much at the top of its cycle, why stop there, right? (It seems I am also far from alone in my critique of the S&P.)
Finally, a few days ago I officially declared that the Fed has become our foe. I used Greenspan's own words to demonstrate how he has aligned himself and the Fed against the market. How did the market respond to that threat? Well, it eventually rallied of course. This rally occurred during a week in which Fed governors were laying down hawkish comments like Kanye West lays down tracks on wax (that was a shout out to all you young hipsters reading this missive - go 'head with your bad selves!). This week, the backdrop of poor economic numbers seemed to clear the ears and eyes of the sellers even as the Fed continued its anti-inflation rhetoric. Clearly the sellers did not appreciate the rude awakening. If it has not yet become apparent to you that the Fed fears inflation more than economic weakness, you have not been paying attention! Even I have been writing for quite some time about the Fed's true bias. The market has been trying to fight the Fed, and it is slowly and surely losing the battle. I am not going to jump out like one of these panicky bears and call for a crash. But I do think that the fuel to fight the Fed is running dry. As long as commodity and energy prices steadily march upward, and especially as long as folks continue rampant speculation in real estate, the Fed will feel compelled to march onward and upward too. I have not studied these dynamics enough to hazard a guess as to how this will all end, but if it is stagflation - high inflation, high interest rates, no growth - then we might look to the 1970s and early 1980s for some lessons (but no solace!). In the meantime, you can bet the market will continue to exhibit patterns of manic behavior as it bounces from news about oil, the Fed, the economy, and who knows what else. For those of us who choose to stay awake through this madness, we can look forward to more aimless and restless days and nights.
Be careful out there!