Mid-Life MBA: The Art of Business

The Securities and Exchange Comission has announced a temporary rule on short selling of investment bank stocks as well as the stock of Fannie Mae and Freddie Mac.  The rule will require brokers to actually pre-borrow the shares before shorting a stock.  Currently many short sellers could short a single stock based on the same shares; the new rule will require a broker to cover shorts, share for share by removing shares from the market once a stock has been shorted.  The SEC will consider extending this rule to the broader market.  To me this is kind of a “duh,” or, self evident principle that should have led to reform years ago.

While the running of the bulls in Pamplona occurs in July, the American bulls often begin their state-side run each November. 

With the DOW up .95% at the close of today we may just be in for a terrific end of year rally.  Yahoo finance reports that over 70% of the 150 S & P 500 companies reporting end of quarter earnings have reported in the double digits.  Today’s shining star was WalMart, up 3.7% after its announcement that it will significantly trim back capital expenditures.

“Up and down, without much change,” sums up the market performance for this week.  While not atypical for summer months in terms of its overall stagnancy, the market shows distinct signs of confusion in the wake of Ben Bernanke’s failure to hint at the direction of further interest rate adjustments in his most recent speech and the upward trend in crude prices on speculation over pending summer storms. Perhaps the annual retreat of the world’s central bankers to Jackson Hole this weekend will result in state-side monetary policy clarification though analysts are cynical.

Allen Sinai, chief global economist and president of Decision Economics, said whatever comments might emanate from Fed officials over the weekend, they are likely to stick to a “script” they have already laid out. “I think the members by and large in casual conversations, to the extent they have them, will stick to the script and the script is the consensus view of the economy and inflation, which is a transition to a moderate pace of growth and, very slowly, a winding down of inflation,” he said.

A not so quiet buzz continues over the real estate market.  When the impact will be felt and of what order is speculative but that there is a building “storm” with market-shaking potential is a seeming certainty.  One interesting article from last year attempted to show how the lion’s share of US GDP was driven by the housing boom and cheap credit following the dot com bust. Taking a defensive posture, John Fisher and Saad Quayyum, economists at the Chicago Fed have penned a new Fed study.  “The housing boom has not been driven by unusually loose monetary policy,” they conclude, attributing the boom to increased productivity.

The DJIA has beat it back into the black in a stunning two day recovery of almost 300 points.  The Nasdaq showed its largest gain in two years.  Some of it had to do with good news from Caterpillar, some of it had to do with good news from Goldman Sachs and Lehman Bros earlier in the week and then Bear Stearns today (NI up 81%), more of it probably had to do with Bernanke’s doveish comments and improved reports from the Feds.

Still, the economic indicators remain mixed and most agree that at least a quarter-point interest rate hike is in the works. “It’s a resignation rally,” said Bob Hynes, senior market analyst at IFR Markets. “People are resigned to the fact that the Fed is going to go higher.”

I agree and remain concerned about macroeconomic pressures.  Aggregate demand is still being driven by war (that and the relentless appetite for consumer credit at any price) and even with slight pull back below $70.00 for oil, fuel costs continue to drive inflation.

Despite reports on inflation and the looming Fed increase the dow bounced back 110 basis points today.  I wish the economic indicators were substantial enough to point to more than a sucker’s rally but in my opinion they do not.  Even the WSJ reported the one day upturn in terms of disbelief, “Stocks advanced Wednesday, even though a stronger-than-expected inflation report heightened expectations the Federal Reserve would raise interest rates again at the end of June”

Many downturns over recent weeks came in late trading after a positive uptick.  Today stocks bounced 40 points higher following positive announcements from Boeing, partly pumped by the delay on Airbus A-380s.  Airbus’s parent company EAD dropped 26% yesterday as investors panicked while Boeing rose 6.5% today following a new Singapore Airlines order for 20 Dreamliners.  Overall trading was mixed with as many stocks rising as falling. 

I still can’t see jumping back in until September.

Barrons reported that James Bailey, an insider at Getty Images, a visual content producer, has doubled his holdings.  He has purchased 10,000 shares at $65.48 each for a total investment of $654,800.00.  The stock had hit an all time high of $95.43 on November 22nd 2005 but had recently been at a 52 week low of $58.50.

The Index of the Bombay Exchange Sensitive Index (Sensex) - the benchmark index of the Bombay Stock Exchange (BSE) has lost 25% since its May 10th peak. It is the oldest stock index in India.  The Indian market lost 331.34 basis points today alone in an unpredictable bout of seesaw trading.

A commentator from Mumbai reported, “Concerns over liquidity and mutual funds redemption are dogging market sentiment. “Liquidity is going to tighten. The easy availability seen over the last two years is not going to remain. And with commodity prices ruling high, corporate numbers will not look too attractive. Added to this there have been rumours of a leading mutual fund calling up to stop redemption. There is total withdrawal of buying interest,” said a dealer.”

Again, another almost 100 point drop in the Dow.  What’s up?

Jim Jubak says it well on MSN, “Don’t Bet the Ranch on a Rebound.”  While he doesn’t believe the stock market rally is dead, he suggests that there are too many uncertainties afoot to risk much in the short term.  He does go so far as to admit that the rally that began in 2003 is getting a little “long in the tooth.”

Bearmarketcentral.com goes a little further: it’s bad and only going to get worse.  A great book with a similarly pessimistic outlook is “The Bear Book,” by John Rothchild.  Give it a read if the notion resonates with you.

Bear market musings on PBS.org features several brief articles and comments on bear markets by a variety experts including Peter Lynch.  Read it for some sobering perspective before you reinvest in those Latin American or Emerging Market stocks and funds.

Where the market is going tomorrow is anyone’s guess but I’m doubtful that there should be much rush to buy back in before the fall at the earliest.

Stock prices fluctuated wildly today losing over 170 points by mid-day but as bargain hunters entered the fray, the DJIA managed an overall 7.92″ point gain by closing.

According to the WSJ, emerging markets have shed $250 billion in market capitalization in the past month, while all stock markets outside the U.S. have shed  $1.3 trillion over that period, according to MSCI.

The selloff comes as Americans’ exposure to overseas markets many be at an all-time high. Foreign markets in 2005 outperformed U.S. stocks for the third straight year, and U.S. net purchases of foreign stocks exceeded $100 billion for the first time last year. That suggests that many Americans, through their mutual funds and 401(k) plans, will feel the pain more acutely than they have in similar reversals abroad.

A co-worker of mine has lost over $20,000 in value in her modest 401 K account.  The figures above suggest that this may not be unusual.

Today the DJIA dropped another 71.30 points to 10930.90, the lowest level in three months.  The Wall Street Journal attributed the drop to interest anxiety.  BusinessWeek blamed the problem on concerns for all three of the “big ‘I’s” rising interest rates, rising inflation, and dwindling corporate income.  The DJIA has lost over 316 points this week and markets in Japan, China and Europe have all taken a beating.  European markets recovered slightly.

“When we have big down days on big volume, that’s a sign of capitulation,” said Chris Johnson, manager of quantitative analysis at Schaeffer’s Investment Research in Cincinnati. “Monday and Tuesday, we saw selling, but it wasn’t the type of volume we like to see for short term-buying opportunities…. All the sellers aren’t out of this market yet.”

If they’re not, it might be a good time for them to kiss their losses goodbye and tread water in the money markets for awhile, at least through September.