Bottom feeders fail to see a gathering perfect storm Oil prices are the great unknowable

for an increasingly volatile market.

Fear of missing the bottom drove US sharemarkets higher at the weekend, but fear of hitting bottom still haunts Wall Street.

After the previous session's 379-point fall in the Dow Industrials and the latest tanking in the Nasdaq Composite index, all the Street's usual suspects turned out to play on the greatest fear of American investors...not doing as well as other investors.

Leading the spruiking was the Street's "Queen of Bulls" - Goldman Sachs' chief investment strategist Abby Joseph Cohen - with her usual "don't worry; be happy" spiel. Sharemarket volatility had intensified but not much had changed with the US economy or corporate performance in recent weeks so the lower prices improved values and the S&P 500 Index was 15 per cent undervalued, said the Queen of Bull.

It seemed to work. Bounceback bargain-hunting gave the Nasdaq its second largest percentage gain ever, 7.87 per cent, while lifting the Dow by 157 points (1.57 per cent) and the S&P 500 by 44.34 points (3.3 per cent) - leaving them down for the week by 1.37 per cent, 3.82 per cent and 2.55 per cent respectively.

The irony was that there was even less reason for a bounce on Friday than earlier in the week once the week's big economic figures appeared, because both were twice as strong as predicted. September retail sales rose 0.9 per cent for their largest gain since February. The wholesale price index (PPI) rose 0.9 per cent overall and 0.3 per cent at the core level without food and energy - triple the expected increase.

In more normal times that would have sent equities to the back of the woodshed for a severe spanking as everyone fretted about the strength of the economy, potential inflation and the postponement of the market's hopes for a cut in short-term rates - not to mention prospects for further rate increases given the latest leap in oil prices.

But hyped-up equity investors ignored it in their determination to seize the bottom, if not the day, even though oil prices eased only a tad as the Middle East crisis continued amidst concern that general instability in the region will interrupt the supply of oil from OPEC member nations and punch US inflation even higher.

Oil traders were not as sanguine. With threats to production and shipments compounding colder US weather and tight petroleum supplies, they believe there is a much greater chance of panic buying pushing prices higher than of slowly falling prices if tension eases.

The Street's spin-meisters ignored that too, preferring to celebrate Merrill Lynch analyst Henry Blodget's defeat of four-time Internet category winner Mary Meeker of Morgan Stanley Dean Witter in the latest "Institutional Investor" rating of analysts (even though Blodget's surname has become a widely used verb substitute for "tout") by blodgeting the entire market.

Insight, as usual, was noticeable by its absence; helped along by the collaboration of most of the US media which, before the latest down-leg in the market, was cheerily waffling on about the 10th anniversary of the bull market although even then the average Nasdaq stock had fallen 47.6 per cent from 52-week highs (worse than at the pit of the '87 crash) and the average NYSE stock had tumbled 27.5 per cent.

After Thursday that had become 50 per cent and 29.4 per cent respectively. More importantly, the fall from the grace of 52-week highs for the over-$US20 billion big-cap stocks, which had buoyed the indices for two years while all around them fell, reached 28.32 per cent. That was worse than at the bottom of the '87 crash, the '90 bear market and the October 1998 tumble.

Behind the Street's PR machine, meanwhile, worries and fears continue to mount. Not about the fate of investors but the fate of the major investment banks and brokers.

In August, this column focused on the Perfect Storm that some insightful Streeters were predicting because a hitherto unnoticed hurricane was sweeping in just as the storm front battering Wall Street markets and technology stocks met the strong economy/Fed interest rate action storm.

Said institutional broker Donaldson, Lufkin & Jenrette strategist Tom Galvin at the time, "A serious credit crunch is unfolding behind the headlines. DLJ's leveraged finance specialists are increasingly concerned about the possibility of an impending financial recession rather than an economic recession".

In recent weeks the third storm hit. But the biggest waves so far have hit Wall Street and not corporate America. The junk bond market has sunk, taking with it billions of dollars of the investment banks' money, and the biggest whisper game right now is which firm is most underwater in the high-yield market.

The second biggest whisper before Friday was about reports of a central bank, possibly not far from New York, selling US Treasuries to raise funds for intervention in financial markets. Friday's rumour was that the Nasdaq market had been the beneficiary. That certainly would explain much, but wave-calming in the junk bond market would seem more needed right now. Barton Biggs over at Morgan Stanley (which coughed up to high-yield losses last week) believes the deteriorating financial position of many telecom companies and their falling coverage and credit ratios could prove a problem for institutional lenders and the banking system.

It also could prove a problem for tech stocks. Their technology might be great but their share prices are still overvalued if share buyers, like the speculators who have lost most of their money in the dot com and telcom bubbles, suddenly realise they are playing in a global Ponzi scheme.

So far there is no sign of a shift to the panicky bearish sentiment that always goes with market bottoms, so a rebound ahead of a further fall is possible but oil prices might prove the best guide.

http://greenspun.com/bboard/q-and-a-post-new.tcl?topic=Grassroots%20Information%20Coordination%20Center%20%28GICC%29

-- Carl Jenkins (Somewherepress@aol.com), October 16, 2000

Answers

Carl, great find. Do you have the source and date for this one? (Sounds like _The Age_ from Aussieland, correct?)

Thanks.

-- Andre Weltman (aweltman@state.pa.us), October 16, 2000.

More proof that Congress and the Clinton Administration will do anything for the High Tech industry to keep the party going even if it is bogus.

-- K (infosurf@yahoo.com), October 16, 2000.

URL for this article...

http://www.smh.com.au/news/0010/16/text/business12.html

-- (links@r.us), October 18, 2000.