Positive Thinking vs Skepticism in the Markets

Wednesday, May 14, 2008 | 06:25 AM

Today we have an an interesting guest commentary from Jack McHugh. 

I found it thought provoking, and thought you would too. Call it The Power of Positive Thinking, Market Edition.

"It makes sense to approach life with a positive frame of mind. Positive thinking lightens the load at work, makes the goals in life feel easier to achieve, and allows both friends & family to more often enjoy your company. Even family pets know the difference between a smile and a scowl.

But when it comes to investing, I've always tried to be a little more demanding, even skeptical. As a result, some may mistake the tone or subject matter of these commentaries as more properly belonging to a sourpuss of the Doubting Thomas school of economic thought than to one who looks forward to each and every day. I humbly disagree, and as evidence I offer up more than just my usually sunny disposition: I always maintain net long positions in my personal portfolio (hedged to various degrees, yes, but always net long). 

These scribblings are mostly about risk management, and as such, I will always be on the lookout for the next problem, the dangers which may not be clear and present, and the events which can otherwise harm the returns of investors -- especially those trusting souls who believe in things like the "Greenspan/Bernanke put". I subscribe to the adage: "Be trustworthy to all and optimistic in all your dealings, excepting those of a financial nature."

The trusting and the skeptical have been doing battle all year, and the stark contrast offered by the market action on Friday and today are only the latest examples. That AIG has sprung a second and massive leak of red ink in as many quarters (which prompted its former Chairman to claim the company is "in crisis" -- see below) was the news that sat so poorly with Mr. Market on Friday. Today looked like it would fare little better when Fed Ex announced yet another shortfall over the weekend and MBIA served up another loss this morning (also below). Market participants would have none of it, and after an opening dip, they powered stocks higher almost all day. Not even a prediction from one of their heroes, Jamie Dimon, that the "recession is just starting" could deter the optimists, nor could a pronouncement from the Carlyle Group that "enormous bank losses" still have yet to be recognized (see below). The rally came, saw, and conquered because of the final quartet of news items you see posted below. HSBC reported lower write-downs than had been feared, Apple announced it was running out of I-Phones, and it was revealed that HPQ has an amorous interest in EDS. It also helped that some retailers posted better than expected results, causing many to think a recession won't visit these shores (see these charts). 

These " it's all about the future" thoughts are nicely summed up by the following quotation:

"The earning power of U.S. corporations continues to improve, and as a result equity prices are likely to move higher,'' Kevin Cronin, the Boston-based head of investments at Putnam Investments, which oversees about $173 billion, said in an interview on Bloomberg Television. "The market and the economy will do better as we get through the rest of the year.''  (source: Bloomberg)


Mr. Cronin may give little credit to the power of contracting credit (earnings during the past two quarters have displayed anything BUT power by declining), but investors have been on his side of the argument since the Fed--arranged wedding of Bear Stearns and JP Morgan.  The major averages finished with gains ranging from just over 1% (Dow) to just under 2% (NASDAQ). The bond market edged lower, and yields edged 2 to 6 bps higher. The dollar fell a touch, but it didn't help commodities. Falling energy prices were the main driver in the 0.6% loss posted by the CRB index.

I find it amusing, but it's interesting how so many want to ignore a $5/bbl. uptick in crude oil and then want to celebrate the subsequent $2/bbl. downticks. 


This form of positive thinking, and many others like it, have been on the march since the middle of the month bearing the same name. Stocks are more than 10% off their lows and keep rising, despite the thump of the occasional credit shoe. It's just this type of thinking that powers bear market rallies of the type Credit Suisse depicts in their latest "Global Performance Monitor" (see attached PDF).

Looking at the CS charts, and seeing just how eager folks are to ignore bad news, it's quite possible this market has further to run.
The skeptics ask, mostly to themselves these days, why, if the crisis is over, are companies like AIG still losing big money? Why, if the CEOs of financial companies are so bullish on their companies' futures are they selling dilutive stock at depressed valuations? Only one spring ago, these far-sighted chieftains were buying back shares at levels 2 to 3 times higher than current levels.

It's interesting; Wall Street CEOs are talking like bulls and selling like bears, while Wall Street money managers are talking like bears and buying like bulls. When financial companies feeling the need to dilute their shareholders just to make ends meet can link up with the trusting managers of other people's money, it's more than just the perfect match.   It's the perfect example of positive thinking at work in today's markets. 

--Jack McHugh, May 12, 2008

Thanks, Jack -- great stuff.


AIG Should Postpone Annual Meeting, Greenberg Says

FedEx Lowers Profit Outlook, Cites Higher Fuel Costs

MBIA Posts Loss of $2.4 Billion as CDO Slump Deepens

Carlyle's Rubenstein Says `Enormous' Bank Losses Unrecognized
HSBC Sets Aside $3.2 Billion for More Bad U.S. Loans

Apple Says IPhone Is Sold Out at Its Internet Store

Electronic Data Jumps on Report of Hewlett-Packard Buyout Offer

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From today's Portland, Maine Press-Herald:

Taxpayers' plans more survival than stimulus

A survey finds that most Mainers will skip the extras and use their rebates to pay down debt or will save it for a rainy day.

Only 17 percent of Maine residents plan to spend their government economic stimulus checks on discretionary purchases such as trips, clothing and furniture, a new statewide survey has found.

One-third of Mainers surveyed expect to pay bills, notably for heating oil, electricity and gasoline. Another one-third said they'll save the money for a rainy day. The results suggest that many Maine residents are nursing a painful financial hangover from record energy prices, and that many more expect hard times ahead.

"This is catch-up money, not stimulus money," said Curtis Mildner, president of the Market Decisions research firm, which conducted the survey of 404 Mainers. "This is a picture of people hanging on."


Posted by: Douglas Watts | May 14, 2008 6:44:33 AM

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