Live and Learn
SAN FRANCISCO -- Upon further review of recent columns, it seems I've been on a bit of a (ahem) tirade against
for using monetary policy to target the stock market, or -- at least -- giving the appearance thereof.
A reader emailed about this subject this weekend, honestly asking why I thought it was such a bad idea. I repeated many of the arguments expressed here previously, from
moral hazard, to the fact that targeting equities (or any other market) is not what monetary policy is designed for and that past attempts to use it for such purposes have ended in failure.
I compared Greenspan to a stoker in an old-fashioned, coal-fired locomotive. With the "train" (a.k.a., the U.S. economy) losing speed as it headed up a steep hill, stoker Greenspan shoveled coal madly into the fire in January when the
cut interest rates by a combined 100 basis points. The Fed's aim then, and now, was to get the train to the crest of the hill before it stalled out.
If Greenspan continues on such a course, one risk is that he uses up all the coal -- he currently has 550 "shovelfuls" left -- before the train reaches the crest. Those who adhere to that scenario believe the Fed is powerless to avert a significant recession/downturn already under way. Thus, the Fed undermines its credibility every time its eases and fails to ignite the economy.
A second scenario is that Greenspan risks overheating the engine so it picks up too much speed and the locomotive goes flying off the rails when it reaches the top of the hill. This
reinflation scenario holds a higher possibility than most currently acknowledge, although it gained more credence with the release of the
Producer Price Index
Consumer Price Index
reports for January
In the coming days, I plan to address the question of where to invest if inflation is making a comeback. For now, consider that commodity producers have traditionally done well in times of rising inflation. The
Morgan Stanley Cyclical Index
rose nearly 3% today amid reports of steel producers planning price hikes. Additionally, the
Philadelphia Stock Exchange Gold & Silver Index
rose 6.6% as traders quietly mused over whether gold is embarking on a long-awaited breakout or yet another head fake.
In the aforementioned Greenspan criticisms, I have been pretty consistent in expressing a view that the economy was not as weak as some feared. That said, my criticism is not that the Fed shouldn't have responded to what it saw as a steep downturn in the economy's health. I believe it was wrong for the central bank to take action on an intermeeting basis. By cutting on Jan. 3, the Fed reinforced the notion it was (and is) targeting the stock market. To do so again this week -- perhaps as early as tomorrow if
proves weaker still -- would be to repeat the same mistake.
For those who feel a few weeks or days don't make a difference and thus the Fed need not wait until March 20, I turn the question around. If rate cuts take six to nine months to take effect on the economy, as nearly every Fed watcher agrees, there's no harm for the Fed to wait until its scheduled meetings and avoid giving the appearance there's something for investors to panic about. Even Greenspan concedes falling confidence can become a self-fulfilling prophecy.
I still feel strongly about the aforementioned Greenspan criticisms and have focused on them because I have a hard time believing the third scenario, that "everything works out fine." Perhaps Greenspan really is a "maestro" and can navigate the U.S. economy like a sports car. But to date, those who suggested investors should ignore the fundamentals and buy because the Fed started easing have proved wrong. Furthermore, given all the precedent-bursting events of the past five years, I think we have to at least acknowledge the risk that the postease environment might be different this time.
But as I realized in my email exchange with the reader, perhaps I've been overly focused on the philosophical vs. the practical. The practical implication for investors is that additional Fed easing still has the power to inspire, at least for the short term, and speculation of more intermeeting rate cuts
gets buyers excited.
Such sentiments helped stocks recover from their intraday lows Friday and were the main catalyst for today's rally, which saw the
Dow Jones Industrial Average
rise 1.9%, the
gain 1.7% and the
As was the case Friday,
economist Wayne Angell put himself at the forefront of the debate, upping the odds of an intermeeting cut to 80% today from 60% Friday. Angell, among many others, was apparently inspired by the Fed's announcement Greenspan will alter the
testimony he gave to the Senate on Feb. 13 when he appears before the House on Wednesday. Traditionally, Greenspan has repeated the testimony -- formerly known as Humphrey-Hawkins -- during his second visit to Capitol Hill, thus making the House appearance newsworthy only for his answers to lawmakers' questions.
The hope now is Greenspan will indicate the Fed is going to move prior to its March 20 meeting, or at least lay the groundwork for such action. But as the chairman himself indicated, most economic indicators have improved since the Fed's first easing (which I believe reflects that December's data were unduly weakened by the election morass and harsh weather vs. the argument that Fed rate cuts sparked an immediate reversal). As
(among many others)
observed, the only thing that's weakened since Jan. 3 is the stock market.
With the equity market threatening more weakness if it doesn't get what it wants but the economy signaling more rate cuts may not be necessary at this juncture, Greenspan finds himself with a
One largely of his own making, I contend.
GuruVision: Whither Bears?
Despite all the talk of gloom, almost "everybody" on Wall Street is expecting a rally. The big difference being how long they expect it to last.
While bullishness among individuals fell to 26.3% last week vs. 30.4% previously, according to the
American Association of Individual Investors
, bullishness among newsletter writers rose to 61.2% vs. 57.8%, according to
Even some well-known bears are conceding a rally is in the air.
"Although there is still a chance of a more pronounced move down from current levels, the scenario for a short-to-intermediate turn at these levels seems far more likely," Alan Newman, editor of
H.D. Brous & Co.'s
, declared in a "special update" today.
On Friday, he recommended covering shorts on
Capital One Financial
, as I noted in
Newman, who works closely with recent GuruVision participant
Howard Rosencrans, is "still very much in the bear market camp" and believes the averages will head south again beginning in late April/early May. But in the interim, he sees the Dow trading as high as 11,200 and the Comp approaching 3000.
Such a scenario seems awfully similar to the predictions of Don Hays of
Hays Advisory Group
, who hasn't been perfect by any stretch, but has been pretty accurate in calling the market's intermediate-term moves.
In a report today, Hays stood by his recent calls for an intermediate-term rally, despite the Nasdaq inability to hold his 2420 support level and the Dow's failure to lift last week.
Meanwhile, Wall Street's bullish gurus remain (
) so inclined. Even
Credit Suisse First Boston's
Thomas Galvin, who lowered his earning estimates and year-end targets for the S&P, wrote "we very much believe the current market abyss is an excellent buying opportunity for patient investors."
Jeffrey Applegate cut his expected 2001 S&P 500 earnings to $54 from $58.50, which would be a 4% decline from 2000's results. Additionally, he admitted being wrong regarding when the market would bottom -- it still hasn't, he said -- and about the extent of the profit recession.
Still, Applegate left his asset allocation at 80% stocks and 20% bonds and forecast a 22% return for stocks this year.
Elsewhere, Edward Kerschner at
, Robert Robbins at
in Atlanta, and Brian Belski at
U.S. Bancorp Piper Jaffray
in Minneapolis essentially reiterated their optimism in their most recent filings.
For fans of irony, a rally now would be perfectly timed, given
The Wall Street Journal
has awoken (
) to the fact bullish gurus such as Galvin and Abby Cohen have been wrong for some time and have lost credibility with some investors.
(For a GuruVision primer, check out
Aaron L. Task writes daily for TheStreet.com. In keeping with TSC's editorial policy, he doesn't own or short individual stocks, although he owns stock in TheStreet.com. He also doesn't invest in hedge funds or other private investment partnerships. He invites you to send your feedback to
Aaron L. Task.