Is It Buying Time Again?
03/24/2008 12:00 am EST
Since JP Morgan Chase and the Federal Reserve combined to take over Bear Stearns a week ago—and it became clear that investment firm Lehman Brothers was not going under—investors have started to ask whether it’s safe to go back in the water.
Late last week, several major investment firms published reports suggesting the worst of the bear market/correction was behind us. Richard X. Bove, an influential banking and brokerage analyst with Punk, Ziegel & Co., put out a widely circulated note that proclaimed: “The financial crisis is over.” Barron’s magazine made essentially the same argument over the weekend, while the Financial Times had a big piece Monday examining whether the “bottom has been reached” for the market as a whole.
We won’t know the real answer for months, but it might make sense to at least begin nibbling at stocks again.
Bove’s report lays out the case for what he calls a “once-in-a-generation opportunity to buy bank stocks.”
First of all, Bear Stearns’ implosion and dramatic “rescue” may be the kind of symbolic event, like the collapse of the Penn Central Railroad in 1970 or Continental Illinois National Bank in 1984, that concentrates all the fear and anxiety in the markets and lances the boil, so to speak. (That assumes, of course, that no other big institutions collapse.)
Second, the “innovative, dramatic, and in my view, brilliant” actions by the Fed, as Bove puts it, not only cut rates and helped prevent the complete collapse of Bear Stearns; by opening the discount window to investment firms as well as its traditional commercial bank customers, the central bank “created a template that will increase liquidity in the banking system and, just as importantly, bank profits.”
Meanwhile, the major investment banks’ first-quarter earnings reports showed they “were open for business” and “could withstand concentrated runs on their assets,” Bove writes. That should help shore up confidence in the financial system, which has been at the heart of the current crisis.
Also, the succession of Fed and government actions—including the big rate cuts, expanded discount-window borrowing, increased mortgage loan limits for Fannie Mae and Freddie Mac, and $168-billion stimulus package—has created ample liquidity to fuel a sustained market rally. With plenty of cash on the sidelines and the first quarter drawing to a close, fund managers may be putting some of that money to work in stocks again.
So, it’s no surprise, then, that US large-cap indexes like the Dow Jones Industrial Average and the Standard & Poor’s 500 index, have managed to avoid the 20% declines from the peak that mark the official definition of a bear market. On January 22nd-23rd the Dow fell to an intraday low of 11,508 while the S&P hit its intraday low of 1270. Both indexes retested those lows again last Monday (when the Dow dropped to 11,650 and the S&P hit 1257.)
Since then, both indexes have rallied sharply on heavy volume and strong breadth (many more advancing than declining issues). That’s a good sign, as is the recent strength of the Dow Jones Transportation Average, which remains comfortably above its support levels, too.
If the financial stocks and the Dow Transports have truly hit bottom, then investors may be expecting either a brief downturn or no recession at all. Since the stock market anticipates the real economy by a few months to a year, that could mean the weakness investors foresaw several months ago, when stocks started falling, will give way to a rebound as early as the second half of the year.
That would be consistent with the actions of corporate insiders, who, according to columnist Mark Hulbert, “are more bullish than they have been at any time since late 2005, when the bull market was alive and well.”
Citing a study by Professor H. Nejat Seyhun of the University of Michigan, Hulbert writes that “insiders have been reacting to the market’s recent tumble by markedly increasing their buying.”
Professor Seyhun’s Insider Trading Index stood at 71.5 in mid-March, well above the bullish 55 threshold and not too far below the 84.7 it registered after the Crash of 1987, when, as Hulbert writes, “many investors were worried about the financial system’s solvency.” Twelve months later, the Dow Jones Wilshire 5000 was 17% higher.
But the insiders’ optimism contrasts sharply with the doom and gloom among investors. Consensus Inc.’s survey of institutions showed only 22% bullish sentiment in mid-March, deep in oversold territory. And Citigroup’s nifty Panic/Euphoria model recently hit a -0.51, near the panicky lows of January.
Individual investors’ sentiment has been even worse. A couple of weeks ago, the American Association of Individual Investors’ Sentiment Survey produced one of the lowest levels of bullishness and highest percentages of bearishness ever recorded in its 20-year history.
The nearly 40-percentage-point spread between bearish and bullish sentiment was almost as wide as it was during the run-up to the first Gulf War in 1990. From that bear market bottom, the S&P 500 rallied more than 40% by the end of 1991.
Now I don’t know if we’re in a new bull market or just a powerful bear market rally. (And as I’m writing this Monday morning, the indexes are off to the races again.) And there’s plenty of risk out there, as I’ve laid out in a previous column. Also, I have incorrectly called the bottom of this market before. And maybe the presence of so many “we’ve-turned-the-corner” articles (including this one) may mean the current move should be taken with a contrarian grain of salt.
But on the chance this may be the real deal, it may make sense to put some of your money—and only money you can afford to lose—back to work in US markets again. As I said, it’s probably worth at least a nibble.
Howard R. Gold is executive editor of MoneyShow.com. The opinions expressed here are his own and do not necessarily reflect the views of InterShow.