Market Wrap: Bullishness Reigns

The stock market enjoyed another delightful week, as the Dow gained 102 points to 9,675 and the Nasdaq added about 2% to 1,915. Investors seemed to relish every tidbit of positive economic news that crossed the wires, while ignoring worrisome phenomena like the dollar’s continuing weakness or the "surprising" signs of a budding inflation.

The bullish hordes of stock investors did not display the slightest twinge of anxiety over the dollar’s 2% slide to $1.18 per euro, nor over crude oil’s 5% price spike to $31.97 a barrel, nor over an unexpected jump in wholesale prices. But the gold market acknowledged the dollar’s troubles – and the nascent signs of inflation — by recouping some of the ground it lost the week before. The yellow metal jumped $4.10 to $374.10.

The stock market’s stellar performance last week was a fitting tribute to the bull market’s one-year anniversary. One year ago, as CNN/Money’s Justin Lahart reminds us, many investors were "rocking back and forth in the fetal position under their desks, trying to think happy thoughts about what it was like before the big bad bear came and ruined everything."

On Oct. 10, 2002, the Dow hit a 6-year low of 7,197. But then the blue chips stopped falling.and started rising. They have been rising ever since. The Dow has jumped a hefty 34% over the last 12 months, while the Nasdaq has soared an astounding 72%.

Today, investors worry no more about falling share prices or economic weakness or geopolitical troubles. And they realize now that they should not have been worrying about anything one year ago.except about investing too little money in the stock market.

Bullishness reigns.

While playing the role of "guest host" this week on CNNfn’s "Market Call" program, your New York editor listened politely to an unending stream of bullish predictions from various Wall Street luminaries.He was not persuaded.

The bullish opinions expressed on the show feature the typical – and predictable –refrains like: "The economy is recovering".because."The consumer is feeling more confident and consumer spending is robust".which is why."We like the market at these levels and expect it to move higher through the end of the year."

But the bullish opinions expressed also featured atypical observations like: "Do you realize that the stock market has produced a positive year every time the Boston Red Sox have made it to the World Series?"

It’s true; the stock market has chalked up a winning year in each of the four instances since 1918 that the Boston Red Sox have participated (and lost) in the World Series. But it’s also true that the Red Sox have not yet made it to the World Series. They must first defeat the formidable New York Yankees, and success is not guaranteed.

We would also point out that the dollar has lost more than 90% of its value since 1918. Thus, Boston’s latest attempt to advance to the World Series reminds us of two of America’s immutable financial trends – stocks tend to rise and the dollar tends to fall.

But stock market investors are too preoccupied with the delirium of rising share prices to worry about the sorrow of a falling dollar. They are content to see the prices of their stocks go up, even if the value of their dollars is going down.

Americans are optimistic and confident. That’s why they will eagerly pay 50 times earnings for Nasdaq stocks and blithely draw down the equity on their homes to buy plasma TVs. They do not lack for confidence – not to buy stocks selling for 50 times earnings and not to buy things they don’t need with money they don’t have.

But sometimes, a little fear is a healthy when you’re about to put your hand into a fire.

Eric Fry,
The Daily Reckoning

October 11-12, 2003

P.S. As always, you’ll find This Week In The Daily Reckoning below…


POOR HOUSE II (10/10/03)
by Bill Bonner

"…Last week, we established an important point: that the house itself – the physical thing – couldn’t possibly increase in value. All its components deteriorate, depreciate, fade and decay – just like everything else. [This week,] we contend that houses have not really made people wealthy at all…in fact, they’ve made them poor. And now we call our star witness. ‘Mr. Alan Greenspan, would you step up to the witness stand, please?’…"

by James Davidson

"…Seen in the light of economic logic, the politician who could accelerate productivity growth and make more jobs redundant would be doing the most to raise living standards for his constituents. Jobs are a cost of production. You are better off when you reduce your costs. Hence a truly ‘jobless recovery’ would be a great thing. Too bad this isn’t one…"

FAT TAILS (10/08/03)
by Bill Bonner

"…Things that are extremely out-of-whack eventually work their way back into whack. But then they diverge again and the tails fatten. Sometimes prices diverge from the mean. Sometimes they regress towards it. Give yourself enough leverage, and you can go broke in either direction. The geniuses at LTCM lost $4.5 billion – much of it their own money. You or I could probably never have lost anywhere near that much – even with a computer, we’re not that smart…"

by Steve Sjuggerud

"…While the ‘smart money’ sells tech stocks in record amounts…the ‘dumb money’ is taking on debt to buy these stocks on margin. By my studies, the ‘dumb money’ is at an extreme of optimism not seen since, well, right before the 1987 crash…When optimism reaches extremes, as it has right now, quite frankly, there is nobody left to buy…there is no ‘greater fool’ left to buy and hope for a higher price…"

YOU PAY, WE PROVIDE (10/06/03)
by the Mogambo Guru

"…Earth to Mr. Stiglitz! Yes, the President, the Secretary of the Treasury, and especially the Fed Chairman CAN be blamed for the bubble mania, and I, the Mighty Mogambo, blame them with every fiber of my being, and with every decibel of my loud and irritating voice, and I point my long and bony finger at them and say ‘Shame! Shame!’ Their every action was in reckless pursuit of expanding and exploiting the bubble economy via growing government meddling…"


A table top display in the Lower Manhattan Borders bookstore… a giant poster of the cover at the Frankfurt book fair (one of Europe’s largest)… requests their order of multiple thousands of copies be shipped by Fedex…!?!

For your editors the writing of Financial Reckoning Day was simply a way of manhandling our ideas down into a coherent – and hopefully enjoyably readable – pattern… the writing was not easy, especially given our daily publishing schedule. But now… oh la la… the marketing of the book has seemingly taken a life of it’s own. The above details are just some of bits and pieces of information trickling our way by eyewitness sources. We’ve managed to make our way to #4 on the Wall Street Journal Business best-seller list. (Bill, as you might guess, is rather modest about the whole thing… I’m ecstatic. Together, we hope you’re enjoying the spectacle of it all, at the very least.)

We’ve also received the first of several serious reviews… "…the ‘Ought to’ school of economics suggests the trade deficit should stop," writes our good friend John Mauldin "and that governments should stop manipulating the values of currencies. If this continues, it will create a significant and painful correction.. The dollar should be allowed to fall in value. But they were saying that years ago, when the deficit was half of what it is today, and the parade has yet to end…"

Meanwhile, Eric Fry, our man on the scene in Lower Manhattan, and guest host of CNNfn’s ‘Market Call’ this week, wraps up the sizzling markets… just below…

Cheers, and hope you’re having a great weekend,

Addison Wiggin
The Daily Reckoning