It's about faith
It's about trust. -- Sade.
"Face it, Flounder, you screwed up. You trusted us." -- Animal House.
"They lie. They lie, and we have to be merciful." -- Apocalypse Now.
SAN FRANCISCO -- The dominating specter of
loomed over Wall Street this week. The
chairman made two public appearances -- before the
House Financial Services Committee
Wednesday and the
House Budget Committee
Friday -- and seemed even more omnipresent than usual this week.
But it doesn't appear that all Alan all the time was very good for shareholders. For the week, the
Dow Jones Industrial Average
gained 0.2%, but the
declined 0.9%, and the
Nasdaq Composite Index
dumped another 6.4%, ending the week at its lowest point since mid-December 1998.
Another slew of profit warnings or outright disappointments from high-tech bellwethers such as
Applied Micro Circuits
, as well as Old Economy names including
Procter & Gamble
, were registered this week. But most of the blame for the market's weakness was laid on the Fed chairman.
The week began with optimism, amid speculation of an intermeeting rate cut. But such hopes were rattled when the Fed failed to move despite another big drop in consumer confidence Tuesday, and all but killed Wednesday by Greenspan's
wrong -- and the week's economic data were mixed, although skewed toward stronger than expected -- Greenspan's comments led to steep market losses, which fueled talk of meltdowns. Such concerns were further exacerbated by early losses Thursday. But a comeback that afternoon led some market watchers to declare the long-awaited bottom was in hand.
Friday's action proved inconclusive. Major proxies closed off early lows, but failed to sustain a midday advance, with the Dow closing up 0.2%, the S&P off 0.6%, and the Comp down 3%.
We Love You, Alan? ...
The market's fate certainly doesn't begin and end with the Fed. But of the major influences on the stock market, only Fed policies seem to be able to directly affect some of the others, particularly investor sentiment and the economy, which, of course, has a great impact on corporate profits.
To observers such as Don Hays of
Hays Advisory Group
, growing disillusionment with the Fed will precipitate the bear market's
third-stage, in which whatever remaining bullish sentiment is eradicated. As the economy falls deeper into recession, the Fed will become increasingly powerless to stop the slide and investors will continually lose faith in the central bank, the theory goes.
Even though it has looked shaky, Hays is sticking to his recent call for an
interlude rally that precedes the third stage of the bear market, which he maintains will begin some time in the second quarter. "Short-term conditions
have dropped to a level ... from which the stock market almost always rallies," Hays commented on Thursday. "The market has been acting very much the way you would expect at a significant bottom."
But one man's harrowing downturn with echoes of Japan's post-1990 demise is another man's opportunity.
"The more and more negativity that comes out
regarding what Mr. Greenspan has to say, the more people start to doubt him -- the quicker and stronger the recovery we'll have," said Sam Ginzburg, senior managing director of equity trading at
. "I'm just hoping we can get even more negative. He's the last bastion. When people don't listen and the shine starts to tarnish, that only leads to capitulation, where people will sell anything."
Like many investors, Ginzburg is eagerly (ghoulishly?) awaiting that capitulation because the trader foresees huge opportunities emerging. He also believes fears that a long-term, Japanese-style demise will follow a crash are misplaced, if not ridiculous.
But after a week during which notable former skeptics such as Doug Kass at
declared the capitulation has largely occurred and the time to get bullish is nigh, Ginzburg suggested otherwise.
There have been some classic signs of capitulation, including the ceremonial throwing in of the proverbial towel by formerly bullish sell-side analysts, and layoff announcements from Wall Street firms such as
, he said. But "the consumer isn't dead yet," Ginzburg continued, citing anecdotal evidence such as the article in Friday's
Wall Street Journal
about few vacancies at resorts. Harder evidence includes this week's stronger-than-expected reports on personal income and auto sales.
Short term, "the path of least resistance is up
but we haven't seen that
breach of the floodgates yet. I look for more negatives before something positive happens," he said. "We're just going for singles
right now, aiming to live to play tomorrow."
Oh Yes We Do
For all the heat Greenspan is current taking, most on Wall Street still seem to have a soft spot for the guy. "He's the best there is," Ginzburg said flatly.
"You could say Greenspan tightened too much or loosened too little but the record speaks for itself," added Scott Bleier, chief strategist at
Bleier credited Greenspan for his handling of the 1987 crash, the savings and loans crises and ensuing recession, the 1994-95 Mexico peso crises, and the Asian currency crisis and
Long-Term Capital Management's
implosion in 1997-98. Critics say Greenspan's policies either helped cause those threats or ignored them until they reached crisis status, but "he's maneuvered our economy through all those potholes whether you like him or not," Bleier countered. "He can see the big picture, but Wall Street can't. Wall Street can only see the next trade."
Blaming Greenspan for the current mess is folly because it was not the Fed chairman who "got caught up in the greedy frenzy" that, for example, added about $100 billion to
market cap in 2000 when the firm's revenue grew about $2.25 billion to $8.9 billion, Bleier said. "We have nobody to blame but ourselves for the entire contraction of the tech sector."
Still, Greenspan's decision this week to "not lower
rates at the market's whim" suggests the overall structure of the economy and the consumer are still good, the strategist said. He continues to recommend mid-cap growth names mentioned here
. Today, he added
to the list. Prime Charter has not done any underwriting for the above companies.
Overall, Bleier believes the bottom has likely occurred in terms of price, but not in terms of time. "There's going to be a lot of heartbreaks for those looking for nice, significant rallies that stick," he said.
Thursday, Greenspan has come under increasing criticism lately (and this column has certainly participated). Yet for all the Greenspan-bashing, investors still seem to hang on his every utterance. Whether they maintain their faith in the Fed chairman could be key to whether or not any kind of sustainable bottom has yet been reached.
So let us know where you're at:
Regarding Alan Greenspan:
I like him, I trust him.
I don't like him, but I trust his judgment.
Not ideal, but the best we got.
Past his prime/overstayed his welcome.
Intolerable. Inexcusable. He IS the problem.
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.