What Will Stop This Raging Bull?

Despite the ills that have befallen this market, one expert thinks the final blow to the bull will be found in the currency markets.
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Financial crises in Asia, Russia and Brazil. Impeachment hearings. The AFC's

Denver Broncos

winning the Super Bowl (twice). El Nino. War in Kosovo.

To date, the Wall Street equivalent of the biblical plagues of Egypt has yet to stop the bull market for any substantive period. To the growing list, add the resignation of

Treasury

Secretary

Robert Rubin

and the

Federal Open Market Committee's

adoption of a tightening bias amid rising bond yields and signs of inflation's potential reemergence. Aw heck, add locusts, too.

Unstoppable Force
Overcoming a modern version of vermin, frogs
and hail, the S&P 500 still surges.

Stocks suffered in the immediate aftermath of both

Tuesday's FOMC announcement and Rubin's

May 12 resignation but significantly pared losses by the close of each session. Stocks rose across the board yesterday after a stilted start and opened today on another upswing. Moreover, the

Dow Jones Industrial Average

was up 18.6% year to date heading into today's action and just 2% off its

May 13 all-time high of 11,107.19. Broader market averages trail the tumescent Dow but are enjoying solid performances thus far in 1999 as well; even the once dormant

Russell 2000

is up 5.7% year to date.

The market's ability to shake off seemingly anything and everything is, as

Bugs Bunny

would say, unbelieva-bull. The bottom line is the U.S. economy remains robust and inflation, subdued, while liquidity continues to flow into stocks. For the week ended May 12, $7.1 billion flowed into equity funds, the largest weekly level since Oct. 8, 1997, according to

AMG Data Services.

Meanwhile, the most prominent market seer predicts nothing on the horizon to derail the market. At the

Financial Women's Association of New York's

annual awards dinner last night at the

Grand Hyatt

,

Goldman Sachs

market strategist Abby Joseph Cohen asked the packed house to "give credit where credit is due" for the bull (implicitly deflecting credit from herself).

"The reality of the situation is I have not been bullish so much about the stock market but about the U.S. economy," Cohen said upon receiving the FWA's "Woman of the Year" award, private sector category.

Cohen specifically lauded the "fabulous" restructuring job by corporate America in the past decade and its accomplishment of taking the "national assets of capital and people and putting them where they can be most effectively employed." In a speech in which the market soothsayer worked the rapt audience like a seasoned stand-up, Cohen noted a "staggering" 15.5 million new jobs have been created in America since 1990, the majority of which pay above average vs. "make work" positions. During the same period, U.S. corporations generated return on equity in the 18% to 20% range, while European counterparts produced roughly half that and the Japanese were in the red.

Prudent government policies of the fiscal, monetary and trade variety were also cited by the Goldman guru. She acknowledged the role the "rule of law" has played in fostering the development of the U.S. capital markets, expressing specific (and seemingly genuine) gratitude for accountants and the

Financial Accounting Standards Board

. Proving she is not only smart but shrewd, Cohen also kowtowed to the benefit of the U.S. unleashing the "other 50% of the brainpower," by giving women near equal opportunity and access.

Doubting Thomases

Cohen's optimism is consistently countered by doubters. But that's healthy because rising markets need skeptics, for it is only when "everyone" is a believer does the bull turn tail. So perhaps investors should take heart in results of a recent survey by

KPMG

: Portfolio managers and chief investment officers from 61 financial institutions predicted the domestic equity market will post an average annual return of just 7.6% in the next five years vs. 24.1% in the past five.

Similarly, investors owe a debt of gratitude to mega-bears such as Robert Prechter, president and CEO of

Elliot Wave International

; Jim Grant, publisher of

Grant's Interest Rate Observer

; Michael Metz, former chief investment strategist at

CIBC Oppenheimer

and even

Barron's

columnist Alan Abelson. For they -- among others -- have for years promulgated theories about the macro outlook that have proven dead wrong, save for brief periods such as mid-July through early October of last year.

Speaking of which, Don Hays, director of investment strategy at

Wheat First Union

, recalled in a written comment yesterday that the broader market began topping around this time last year, spending the week following its May 13 peak "teasing and taunting before it really started taking the wind out of the bulls' sails."

Hays, who in February exchanged a long-held bullish outlook for a decidedly negative view, remembers large-cap indices enjoyed "one last fling into new highs" in mid-July while the average stock was "virtually ignored."

Presently, the veteran market strategist is watching to see if the resurgent small-caps and cyclicals produce a similar move in coming weeks.

"We may see this sector come back for one last try in July, just like the large-cap indices did last year," he said. "If we are right, the large-cap indices will start a long period (maybe five years plus) of underperforming, and that last fling by small-caps will be the first hint of future trends."

As for what finally undoes the bull, Hays is focused on developments in currency markets. Recent weakness in the yen makes Japan's goods more competitive but simultaneously "strengthens the quasi-dollar-pegged Chinese yuan," he wrote. "And with China's extreme inefficient economy they cannot stand any further loss of competitiveness."

A Chinese devaluation -- so feared last year -- has nearly vanished from the market's consciousness, and Hays isn't predicting such an occurrence. But he expects "all of these struggling countries in the world to start cutting interest rates, trying to force their currency down further against the dollar to help them increase their exports to Uncle Sam's consumer."

Meanwhile, traders are reporting an increase in the yen carry trade, through which yen are borrowed at low rates and invested in higher-yielding U.S. Treasuries. Such trades were popular last summer when the dollar rose as high as 147 yen. Notably, the abrupt ending of the dollar's upturn vs. the yen roughly coincided with the market's July 17 top.

Furthermore, a rising dollar "hurts the earnings of the multinational U.S. companies," Hays noted, adding, "somewhere, someplace, the growing U.S. trade deficit is going to cause extreme heartburn to the

Fed

and the monetary chieftains."

Today, the deficit was reported at $19.7 billion in March, topping the previous record of $19.4 billion set in the prior month.

Last night, Cohen said the deficit is "large not because we are in trouble, but because our trading partners are."

But concerns from others abound, likely to the benefit of the seemingly unstoppa-bull market.

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