Tuesday, August 18, 2009

Response to Agnes Crane on Reuters

Writer Agnes Crane has written an article for Reuters Blogs entitled 'Don't be fooled by global stock stumble.' Her basic argument? Don't lose confidence in U.S. stocks because of today's (8/17/09) stock market drop.

I want to emphasize that I am definitely not a stock market "guru." I personally feel that the stock market doesn't accurately represent the real American economy. To begin with, the stock market does not encompass the entire American economy - small-businesses often drive American economic growth and expansion much more than publicly-owned corporations. Secondly, the stock-market is driven much more by psychology than by economic fundamentals. The various bubbles that have popped or are in the process of popping during this recession were created because individuals ignored the fundamentals of the economy and latched onto blindly optimistic sentiment that grossly overvalued just about everything in our economy. Psychology changes on a whim, but the fundamentals stay basic.

Still, I do follow news concerning the stock market because it does have some relationship with the real economy. I just try and keep a critical mind that attempts to discern between reality and falsehood. With that in mind, I want to respond to Crane's commentary here.

She writes:

Don’t blame global stock markets for being skittish. It is August, after all, a month that has spelled trouble in the past two years.

Recall that, a year ago, Fannie Mae and Freddie Mac started wobbling at the precipice while AIG, desperate for cash, began paying junk-like yields in the corporate bond market. A month later, all hell broke loose.

In August 2007, a shutdown in short-term lending markets forced global policy makers to rush in with a flood of liquidity to keep the lifeblood of the financial system from clotting.

So it’s only natural that, this year, sellers are trigger-happy at the slightest whiff of trouble.

Once again, the argument is entirely psychological. According to her, all that is wrong is that investors are psychologically uneasy because of the significance of August (and presumably, her commentary will serve to destroy this notion and keep you psychologically optimistic and ready to invest in stocks). Is this argument true? Personally, I find it laughable. Lets try to imagine this scenario for a moment ... an investor is watching his money grows as the stock market rallies, suddenly he looks at his calendar and sees its August ... uh-oh, bad things have happened the past two Augusts ... I guess its time to pull all of his money out! Sound realistic? Last week Reuters reported that major "insider" investors were pulling out of stocks. Do we really imagine that big-time investors with lots of experience and lots of money invested in the market are going to pull-out based on what month it is?!

Problems surfaced in the United States last week, when a double-whammy of soft retail sales followed by a drop in consumer sentiment reignited worries that for all the good cheer about an emerging recovery, the exhausted American shopper is still unfit to carry the economy.

These concerns carried over into Monday trading in Asia, where they mingled with homegrown worries. In China, a drop-off in direct foreign investment helped fuel a nearly 6 percent decline in the Shanghai stock index and concerns about the Japanese economy helped trim more than 3 percent from the Nikkei.

U.S. stock indices have followed suit, with the S&P 500 off 2.43 percent and the Dow Jones Industrial Average off 2 percent.

Hmm ... wait, I thought it was all just skittishness on the part of investors? So, Crane admits here that the economy has serious problems that cast major doubt on the viability of the current rally. Should you be worried, like a lot of those "insider" investors are?

Monday was an ugly day, but investors should try to rein in their anxiety about what it means for such big-picture questions as what shape the economic recovery will take. That’s because a battle between bulls and bears, which typically emerges at economic turning points, has taken hold of financial markets — meaning today’s worries about the global economy are likely to morph into tomorrow’s worries about too much stimulus creating dangerous asset bubbles.

It’s a constant tension and one that will continue to push and pull financial markets for some time to come.

Her answer is no. What shes basically saying is that we're in a time of great volatility. Keep in mind that the Great Depression was a period of great volatility as well. The Great Depression saw some impressive stock rallies, which all turned out to be illusory by the way. The author has no way of ascertaining that this is a "turning point" except through hindsight, so it is merely supposition, or wishful thinking, on her part.

“The markets have very selectively reacted to economic data,” says Stephen Stanley, chief economist at RBS. Little more than a week ago, for example, the S&P 500 hit a 10-month high after the U.S. reported “only” 247,000 workers were dropped from payrolls in July.
When do the markets not selectively react to data? The entire housing bubble was caused by "selective reaction." Furthermore, the July unemployment numbers have been challenged for being artificially-low by various sources. I won't go into it now, but if you want to know more about how the U.S. calculates unemployment from payroll sources, I point you to ShadowStats.com's page on the matter.

Given the big run up in risky assets like stocks and corporate debt since March, and last week’s data, it’s not surprising that investors are now worried that the rosier outlooks failed to take into account the growing fixation of the U.S. consumer on savings.

Take price-earnings ratios. Bespoke Investment Group noted last week that the P/E ratio of companies in the S&P 500 climbed to its highest peak since 2004, as earnings failed to keep pace with the optimism that fueled a 50 percent jump in the S&P 500 stock index since March. For earnings to catch up, the consumer will have to shake off worries about high unemployment rates and pitch in with good old-fashioned shopping. So far, that’s looking like a stretch.

So, chalk up the stock declines to correcting what had become overbought conditions and get ready for more choppiness ahead.

This is the messy reality of turning points, not necessarily the foreshadowing of something truly ugly to come. Even if it is August.

I don't have much to add here. The author asks the reader to not be worried and assures us that this is merely a "turning point" towards better times ... yet provides us with nothing but troubling economics forecasts. Where is the positive news to convince the reader to stay invested? It is definitely not present in this article. The author seems to think that by merely explaining the reasons why investors have lost confidence in the market rally that somehow negates those reasons.

Overall, I found this to be a very poorly argued commentary piece and I'm quite disappointed in Reuters. Financial journalism isn't very good these days. More often than not, you're better off reading independent and alternative news sources for actual truth.

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