Taskmaster Ready to Run Through Pamplona?

Timing is Everything

SAN FRANCISCO -- Sharp-eyed readers may have caught an allusion to my growing bullishness and a promise to follow up with more Tuesday morning. But departing Los Angeles this morning, I was thinking of ways to maybe weasel out of that promise because major averages were careening lower again and near intraday lows.

But just about the time we took off, so, too, did the major averages. Once as low as 9106.54, the Dow Jones Industrial Average closed off a relatively minor 1% at 9389.58, while the S&P 500 closed down 0.4% at 1117.58 vs. its nadir of 1081.25. The Nasdaq Composite finished up 3.7% to 1897.70 after trading as low as 1794.21.

Whatever happened while we were in the air, I can now at least make the bullish case without it looking totally kooky.

First and foremost, the Federal Reserve is easing and history suggests that's ultimately the biggest positive. While I've been critical of Alan Greenspan for engendering moral hazard, and others say the Fed chairman hasn't done enough to alleviate the current misery, the bottom line is that the central bank is adding liquidity into the system at a rapid rate. In addition to the 150 basis points of easing already delivered in 2001, with more likely to come, money supply -- as measured by MZM -- is growing by more than 20% on an annualized basis.

This "liquidity cushion" was the main argument of Ronald Hill, chief investment strategist at Brown Brothers Harriman, and the lone voice of optimistic dissent in an otherwise overwhelmingly bearish panel yesterday at the Milken Global 2001 Conference in Los Angeles.

A little over a year ago many investors felt "the Fed didn't matter," and that its rate hikes from mid-1999 to early 2000 wouldn't affect stocks or the economy, particularly the New Economy variety, Hill recalled. "Today, people are saying the Fed is not going to [help] but the Fed is going to keep cutting until it works."

The strategist forecast bigger rate cuts at forthcoming Federal Open Market Committee meetings vs. intermeeting moves, unless retail sales and/or consumer confidence "dramatically worsen."

Regardless of when the Fed cuts, to believe more easing is powerless to revive the economy is to believe we are Japan, which I don't.

Second, the "pure economic numbers are not terrible," as Hill noted and I have been suggesting recently. The idea that we are in a financial markets crisis but not an economic one was made by Robert Hormats of Goldman Sachs and others at the Milken Conference. Despite Fed easing that might make dollar-denominated assets relatively less attractive to foreign investors, the dollar hit a 22-month high vs. the yen and a three-month high vs. the euro today. The greenback's muscularity reflects that core strength of the U.S. economy.

As an aside: Those kicking, screaming and holding their breath for the Fed to ease more aggressively seemed to conveniently overlook yesterday's (again) stronger-than-expected consumer price index report.

Still, I too believe the Fed will keep lowering rates until the markets stabilize and the economy reaccelerates, and will worry later about any inflationary pressures that may emerge down the road. Given the alternative of continued market despair that could really send the economy off a cliff, that's probably a prudent course of action.

Meanwhile, Japan's Nikkei 225 rose nearly 913 points Wednesday and gave back "only" 250 Thursday. Yes, Wednesday's gains were fueled by government buying of stocks, but there are smoldering hopes that the island nation is finally on track to get its financial house in order, a third reason to be more upbeat.

"It's easy to be down on Japan but underneath the hype there is tremendous change" happening, Jesper Koll, chief economist of Merrill Lynch Japan Securities, said Tuesday at the Milken Conference.

Koll noted that Japan has already whittled 24 divisions of government bureaucracy at the end of 2000 down to 13 today. Another sign of the changing mentality was the government's recent refusal to grant protection measures sought by Japan's textile industry fearful of Chinese competitors. "This is like [Ronald] Reagan saying 'I love Russia,' " he said.

Most crucially, Japanese companies will adopt American-style accounting methodology beginning April 1. Accordingly, Japanese companies will use current market prices to value their holdings.

"Once you get the accounting [changes] the rest will fall into place because banks and insurance companies will no longer be able to lie about the true value of their assets," the economist said. "In a year's time you're going to see a very different Japan and start hearing about success stories."

Koll cautioned that such necessary reforms will be painful and that it's too early to start investing in Japan, but "you can't have your cake and eat it, too."

Koll's cake comment brings us to a fourth -- albeit anecdotal -- reason, what I'll call the "gloating of the bears." In his presentation at the Milken Conference yesterday, Morgan Stanley Dean Witter chief strategist Byron Wien reminded some attendees of a scolding parent or grandparent, chastising the (entirely adult) audience about the continued need to "lower expectations." Americans "take the good life for granted," he said, and "have had it too good, for too long" and are about to have "a different kind of experience."

Even if there's some truth to Wien's statements, the style in which they were delivered was particularly jarring. (P.S.: To any readers who believe I'm guilty of the same sin -- so be it. It only supports my point.) Meanwhile, the level of short interest on the New York Stock Exchange hit a record for the month ended March 15, the Los Angeles Times reported today.

The old clock on my PC says it's time to wrap this up, so I'll just briefly note the following additional reasons for optimism here:

• The Fear Factor: The Chicago Options Exchange Volatility Index rose 9.7% to 39.70 today after trading as high as 42, levels not seen since the lows of mid-April 2000. Additionally, as the bear market attacked the so-called defensive stocks in February, mutual funds suffered net outflows.

• Good Gurus Gone Bull: Thomas McManus of Banc of America Securities and Don Hays of Hays Advisory have each recently come out with optimistic comments, McManus for the first time in nearly a year. Neither is perfect or deserves to be followed blindly, but they've proven to be two of the top market watchers I've followed.

Similarly, Doug Kass of Seabreeze Partners, whose work I haven't followed as closely or for as long, but who claims to have been up over 85% in 1999 and 2000 and up 14% in the year to date has gone from 120% net short a year ago to 60% net long today. "With the expectation of going 100% long," he said in a recent email.

"This is the most momentous opportunity on the long side in many years," Kass declared, expressing more ebullience then when he first came out bullish here on March 1. If the kind of gains he's expecting come to fruition, the hedge fund manager won't have minded being a little early to the dance.

Standard Disclosure

On the other hand, I could probably put together a list equally as long of reasons why you should run in terror from equities. Furthermore, I am in no way trying to call a bottom or suggest we're about to embark on another V-shaped rally similar to the one beginning in late 1998. Most of us will never see an equity advance like that again in our lifetimes, and given the carnage that inevitably followed (and it was inevitable), that's probably not a "bad" thing.

Finally, let me remind you that it is not my job to "call" the market or tell you how to manage your finances. It is my job to make you think about things in ways you otherwise might not. Right now, I think you should be thinking about reasons to be bullish, even if it gets worse before it gets better.