What a Week: Bulls Well-Fed
Nat Worden
02/16/07 - 05:58 PM EST
Call him "the Bull Whisperer."
"Gentle" Ben Bernanke, the chairman of the
Federal Reserve, coaxed the bulls forward in both the stock market and the bond market this week with his testimony on Capitol Hill. In his soft but direct style, which draws a sharp contrast to the cryptic gravitas of his predecessor, Alan Greenspan, the bearded central banker laid out his case for a smooth landing for the U.S. economy.
The markets responded with enthusiasm. Stocks finished the week higher, with the
Dow Jones Industrial Average gaining 187 points, or 1.5%, for the week. The
Nasdaq added 36 points, or 1.5%, and the S&P 500 rose 17 points, or 1.2%.
Bonds took Bernanke's words less optimistically, rising on the belief that a rate cut could be in the cards if the economy slows too much. The 10-year Treasury rallied in price to yield 4.69%, compared with 4.81% on Tuesday before Bernanke's speech.
After an economic takeoff engineered under Greenspan's watch, Bernanke has been left manning the landing gear and walking a tightrope between letting things get too hot (inflation) or too cold (recession).
So far, so good. With the Dow hitting new all-time highs and the S&P approaching a record of its own, Bernanke painted a picture of a slower-growing economy with moderating inflation that is managing the burdens of heavy debt-loads and the pain of a housing slowdown with strong employment and wage growth.
The Fed chief was careful to specify that he's still on guard against inflation, but he sees its threat as diminished thanks to recent drops in energy prices. On the other hand, he sees "some tentative signs of stabilization have recently appeared in the housing market," signaling that the economy is not headed off a cliff due to the real estate slump.
"If you look at the expectations for the economy going forward, the central outlook for the various banks is for slightly sub-par growth over the next year or two with further moderation in inflation," says Gary Thayer, chief economist with A.G. Edwards. "It looks like the soft landing scenario that the Fed has been trying to engineer."
Such an environment all but drowns out skeptics of the nearly eight-month rally in stocks.
"The market would like to pull back," says Paul Nolte, director of investments with Hinsdale Associates. "It's looking heavy, but there's very little in the way of catalysts out there that can carry stocks down for more than a couple of days. Investors, in general, are very interested in putting money to work and going into the market. When the market declines for a day or two or three, that gives them a reason to do it."
Indeed, this week's market shrugged off weak economic data in areas like January retail sales and industrial production, but the most worrisome data came on Friday, when the Commerce Department said January housing construction plunged to its lowest level in nearly a decade.
"The housing numbers out today put the specter of a hard landing back into play," says Nolte. "Those concerns were pretty well laid to rest a couple of weeks ago, but now it's clear that we're not done with housing yet."
Despite the gloom, stocks took a mere dip on Friday to hold on to their gains for the week -- a response that Gary Shilling, president of economic consultant firm A. Gary Shilling & Co., views as a sign of denial. He sides with the bond market, which is posting gains on the premise that the economy is losing steam.
"We come down on the bond side because we are very negative on housing and we think the numbers today are right in line with our thinking that this thing is in deep trouble," says Schilling.
He argues that housing peaked in June 2005, followed by a period of denial that should last between 18 and 24 months before sellers begin lowering prices in earnest.
"Somebody at a cocktail party tells you they're not going to give away their house, but what they're really saying is that they're not going to lower the price to discover the market," he says. "Fast-forward a year and a half to two years from the peak and that's when, if history is any guide, we're going to see prices go off a cliff and take the economy with them."
Bulls argue that housing weakness, like the current weakness in the U.S. auto industry, is an isolated problem that strength elsewhere in the economy can offset. But Schilling says the excess inventories in the housing market and the excess inventories at the auto companies are both symptoms of the same disease.
"It's excess inventory that is the real nemesis for economic cycles," he says. "There's a sense of euphoria out there and there's a tremendous amount of money sloshing around the world in private equity, commodities and carry trades, and that can keep things going for a long time."
On Wednesday,
DaimlerChrysler (DCX) acknowledged the tough realities facing its U.S. business, announcing a sweeping restructuring plan that will cut 13,000 workers over two years and shutter a number of manufacturing plants.
The automaker's shares jumped 14% for the week, partly because investors like the cost-cutting measures, but mostly because the company's management signaled that its troubled U.S.-based Chrysler Group could be on the block.
Meanwhile, in yet another sign that speculators are taking the reins, the tech-laden Nasdaq is leading the major stock indices for the year, up 3.2%, compared with the Dow's 2.3% gain and the S&P's 2.5% increase.
Even with Friday's loss after its CEO, Steve Ballmer, tamped down expectations for the release of its Vista operating system,
Microsoft (MSFT) is trading at $28.74, up 28% since May.
Cisco (CSCO) is up 41% over that span.
The gains in the tech sector suggest that the stock market has finally shaken off its fears. But when it comes to Nasdaq rallies, investors know from experience that the harder it comes, the harder it falls, and someday, Bernanke will have to learn how to talk to bears, too.
