Aimless and Restless
By Duru
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!