What’s Eating at the Market?
 Had someone told me last Monday that, before week’s end, we’d see Apple, Google, Hewlett Packard, Amazon and JP Morgan (just to name a few) blow away analysts’ earnings estimates, I’d have said we’d now be staring at a Dow a lot less than a thousand points away from 11,000. But even after these bellwethers made Wall Street’s best look no brighter than a lowly investment counselor (a forecaster I’m not), the Dow finished the week about a percent lower than where it started. So what gives?
Well what gives is a number of things, each deserving of its own full-blown commentary – but other than geeky financial types like yours’ truly, who’d read ‘em? So, in the interest of keeping your interest, I’m going to briefly touch on what I see as the market-impacting issues of last week, some of which are non-issues for the long-term equity investor – others however, if left unresolved, could provide major headwinds for the market well into the future (but remember, a forecaster I’m not).
The “Whisper” Number:
For starters, there’s what’s called the “whisper” number. It’s the earnings number analysts believe a company will report, but don’t have the guts to publish. Instead they whisper it just loud enough for the rest of Wall Street to hear. The problem is, while reporting companies have thus far beaten Q3 published estimates 81% of the time, they’ve only topped the whisper number 69% of the time (according to CNBC).
Any long-term issue here? No, at most it’s a short-term bummer.
Buy the Rumor:
All of Wall Street’s whispering virtually assures that stocks had already priced in last week’s earnings reports. I.e., the market had anticipated (partly due to the whispers) better than expected earnings and therefore discounted them in the rally leading into last week.
No long-term issue here…
Dow 10,000:
Then there’s the supposed psychological Dow 10,000 barrier. I heard someone say that the Dow has touched 10k twenty-eight times since it first crossed that border in the late ‘90s. I personally counted five times where it passed through in a meaningful way (i.e., it stayed awhile on the other side). Do I think Dow 10,000 today holds any psychological significance? Nope. Like I said, we’ve been there at least five times in the last ten years, and when you visit the same place that often, it’s just no big deal anymore.
No long or short-term issue here.
The Dollar:
The greenback threatened a (albeit slight) rally last week. Now this is indeed something to get excited about – although I suspect I’ve commented on this topic more than enough lately, so we won’t go there today. But if you happened to miss Minnie Mouse, The Market and The Dollar, click the link at the bottom, it’s worth the five minutes.
Is the challenge our currency faces in the face of runaway government spending a long-term issue for the market? You betcha!!
The Public Option:
There’s so much we could look at when it comes to the 1,000+ page healthcare reform plan, but for today let’s just say that the notion that a government-run “public option” (which was put back on the table last week) would provide healthy competition to private insurers, is beyond ridiculous. How can any company compete with an entity that by its very design will lose massive amounts of money and always stay in business? If installed, the public option literally stands to put private insurers out of business. Just think about the last time you visited the DMV (I know it’s run by the state government, but you get my point).
Could a public insurance option for healthcare be a long-term problem (for every citizen)? Well duh!
The Pay Czar:
The news that Pay Czar Ken Feinberg is looking to cut the compensation of the top 100 execs at bailed-out companies spooked the market at the end of the week. Now I can see where even a self-respecting capitalist might say, “Hey, if they took from the Government’s outstretched hand to stay in business, that hand gets to slap them around until they pay it back.” And while that certainly makes some sense, the notion that a government hatchet-man can tell any company in this country how much to pay its top brass scares the living crap out of Wall Street. As it should! And quite frankly, the precedent this sets should scare the same out of Main Street as well. We absolutely do not want our government that close to our businesses.
Would the government controlling the pay packages of U.S. executives (if it stretches beyond TARP recipients) be a long-term issue for the market? Are you friggin kidding me?
So there’s your list of last week’s concerns. While the “threats” eating at the market, particularly the latter three, are indeed concerning, remember, as I’ve been preaching since the beginning of this rally, a steady dose of worry keeps rates low and liquidity high. And I assure you, without the worries, interest rates would scream higher (there’s a bubble in treasuries) and, particularly at this moment, the market and the economy would end up with one whale of a bellyache. So, at this stage, a little bad news is good news.
Now, that said, we must continue to address, with passion, any and all issues that would adversely affect the way we conduct business in free-market America.
I’ll close here with a quote from the 18th Century Scottish moral philosopher and father of modern economics, Adam Smith. I’d like you to read it carefully and think about the government’s latest forays into corporate America. And understand that the greatest risk to our economy and our financial markets has never been and never will be the actions of the individuals who run our corporations. Our greatest risk, in my humble opinion, is the risk that our government will legislate away our ability to risk.
“It is the highest impertinence and presumption, therefore, in kings and ministers, to pretend to watch over the economy of private people, and to restrain their expense, either by sumptuary laws, or by prohibiting the importation of foreign luxuries. They are themselves always, and without any exception, the greatest spendthrifts in the society. Let them look well after their own expense, and they may safely trust private people with theirs. If their own extravagance does not ruin the state, that of their subjects never will.” Adam Smith
In other words: “Our “leaders” (both sides of the aisle), who possess the power to dictate how we run our businesses, are a group of individuals who blow money like a bunch of drunken bachelors in Vegas. Their spending habits are the ultimate threat to our economy.”
Click here if you haven’t read Minnie Mouse, the Market, and the Dollar…
Have a nice day,
Marty
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