What a Week: Ouch, My Aching Portfolio!

SAN FRANCISCO -- The once-bullish gurus who said abandon ship Tuesday probably didn't make many friends. But anyone who listened to the "retreat" call at least had the chance to live to sail another day. The waters seemed to calm Friday afternoon, but this holiday-shortened week was a tempest for those long.

A colleague joked we should change the name of this column to: What a Freakin' Week.

Rogue humor aside, the Dow Jones Industrial Average ended the week down 3.3%, while the S&P 500 shed 4.3% and the Nasdaq Composite tumbled 6.8%.

Still, the level of fear diminished noticeably as major averages rallied sharply from Friday's intraday lows -- the Nasdaq rallying back from as low as 2156.29 to close up 0.8% at 2262.52. The Chicago Board Options Exchange Volatility Index, which measures fear in the market via the prices of S&P 100 options, rose 1.9% to 30.34 Friday, but closed well off its session high of 35.22.

The session generated talk that "capitulation" selling had led to a turnaround, if just on a short-term basis, even if trading volumes Friday weren't as heavy as those usually associated with such sessions.

"I think we got a good shot at a snapback rally Monday and Tuesday," said Sam Ginzburg, senior managing director of equity trading at Gruntal. Early Friday, Ginzburg predicted the session could be a rewarding one for those willing to step in the abyss, as detailed in RealMoney.com's Columnist Conversation.

"Like a sniper, you pick your spots," Ginzburg said, mentioning purchases of the Nasdaq 100 Trust (QQQ), S&P Depositary Receipts (SPY), EMC (EMC), Micron (MU) and Charles Schwab (SCH); each closed well above their intraday lows.

Friday morning, the trader said it was time to buy because all of the rumors -- notably about an intermeeting rate cut -- could lead to hedge fund buying and/or short-covering.

Despite the relief Friday afternoon, the S&P still ended the week down 18.4% from its all-time high, and at its lowest level since October 1999. The Nasdaq this week traded at its lowest levels since January 1999, while the Dow is at its lowest level since Dec. 20, 2000.

Profit warnings and/or outright disappointments from tech bellwethers EMC, Corning (GLW), Sun Microsystems (SUNW), Brocade (BRCD), and Motorola (MOT) kept the pressure on tech-weighted indices this week.

There's nothing new about that, but investors acknowledged a new threat this week: Concern about inflation's re-emergence, and even flashbacks to the stagflation of the 1970s.

Wednesday's stronger-than-expected Consumer Price Index, coming on the heels of a strong Producer Price Index report Feb. 16, was the week's dominant event. The CPI, along with the index of leading economic indicators' first rise in four months, got investors fretting that the Federal Reserve might be less aggressive with easing. The notion of Alan Greenspan's dilemma pressured the majority of stocks, heretofore the beneficiaries of tech's malaise.

Will They? Won't They?

"No one had anticipated [the Fed] might be worried about inflation in late December/early January," James Bianco, president of Bianco Research in Barrington, Ill., observed Thursday.

Bianco believes the threat is real. The current situation is similar to that in the fall of 1998, when the Fed eased to alleviate concerns about the Asian currency crises and resulting implosion in Russia and Long Term Capital Management, he said. But in 1998, the CPI was under 2%, vs. growing at a 3.7% annual rate now, as Tuesday's report indicated.

Should Wall Street get the much hoped for "soft landing" and the economy re-accelerates, "you start with inflation at a much higher pace," Bianco said. "Where is it going to be two years down the road?"

Concern about that very issue, he continued, is why long-dated Treasury bonds failed to rally much this week, despite the carnage in stocks and expectations of more Fed easing.

After being sharply up most of the day Friday, the benchmark 10-year bond ended down 3/32 to 99 6/32, its yield rising to 5.105%. The 30-year, which struggled throughout the week, fell 2/32 to 98 14/32, its yield rising to 5.48%.

The yield curve did steepen this week, indicating the bond market's forecast for an economic rebound, which should benefit corporate profits and ultimately stocks.

But those hoping for more Fed easing should "be careful what you wish for," Bianco said, because rising bond yields will eventually prove troubling to equity investors.

Yet the majority on Wall Street believe an intermeeting rate cut is not only necessary, but forthcoming.

Rumors of such a cut were rampant throughout the week, sparked by the market's tumble to economic uncertainty in Turkey. The latter rationale being the Fed would seek to pre-empt Turkey from becoming another Thailand, whose 1997 currency devaluation sparked financial unrest throughout Asia, which eventually made its way across the globe. (I don't make this stuff up, folks.)

No rate cut was forthcoming this week, but a prediction by Bear Stearns economist Wayne Angell on Friday refueled the speculation, which helped spur the market's rebound. The commonly held view is that if the consumer confidence report next Tuesday or the National Association of Purchasing Management data next Thursday prove weaker than expected, or just plain weak, the Fed will take action. It would be ironic if the market rallies enough in anticipation of an intermeeting rate cut to mollify the urgency for the rate cut. Moreover, with so many expecting an intermeeting rate cut, the Fed loses the element of surprise, which was such a big factor in the (short-lived) boost its Jan. 3 cut gave the financial markets.

But that all presumes the Fed is targeting the stock market, something a growing number of market watchers -- Pimco's Bill Gross among the latest and most prominent -- have recently expressed as being dangerous and wrong, a view this column has long espoused.

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