Live from NYC
My car pool buddy Linda and I were talking this morning about how the actual war is probably going as the government expected, but we are just not used to seeing it. We acknowledged how important a role the media plays in creating and then changing expectations. We are not sure whether it is a good or bad thing -- we are just sure it is a different thing. As I considered what to write this morning, the conversation with Linda ended and the TV interview with WNN (Whacko News Network) in my head began.
Bill (WNN Anchor): Good morning Tony, welcome back to WNN -- you are one of the Whacko Network's favorite guests.
Tony: Thanks Bill, always great to be here (and here and here and here).
Bill: Lets turn our attention to the War in Iraq. It seems that everyone is disappointed that it wasn't over last weekend. How do you think it is going?
Tony: Well Bill, as you know I always wanted to be a general and as a result feel like I am qualified to make a public statement regarding the progress of the War. First, I sincerely doubt that the people who make major War decisions actually expected a one-week war in Iraq. The problem Bill is that the whole thing is televised for the first time, which means expectations are going to fluctuate with each visual effect. For example, on Friday as the bombs dropped in Baghdad it appeared as though this would be a pretty easy victory and that the military in Iraq was waving the white flag. Obviously, that led traders to scramble to get in prior to the next week's imminent rally.
Bill: Hold on a second, where is the rally?
Tony: Well, the video images on the TV Friday created the perception that the war would be quick, but the pictures for the rest of the weekend quickly changed that perception. In addition, the article I wrote last week suggested that chasing a 10% one-week spike might not be the right course of action. Frankly, I felt rather foolish as the market spiked higher on Friday, but obviously, expectations exceeded possible outcomes. Having reporters bring live video feeds from the battlefield showing the horrors of war on a real-time basis is really something new and non quantifiable. I want to stress to your viewers how my prayers go out to those in action and their family and friends that worry about them. Clearly, it puts my problems into perspective.
Bill (trying to bait me): Good for you Tony, you missed a 12% move and now that the market pulled back by 3% yesterday, you feel vindicated? What happens from here?
Tony (busting his chops back): Well Bill, as a Wall Street strategist, I think the market could go higher, but also think it could go lower. In all seriousness to your viewers, suggesting any edge from either a fundamental or technical perspective would be total guesswork in a wartime situation. Just this morning there have been well known economists interviewed on competing financial networks suggesting a double-dip recession and better-than-expected growth. Both very smart but having opposite views using the same statistics. Thank God I have our new Fixed Income and Economics Strategist to sort it out.
Bill: We have been in bear markets before, so isn't there any precedent you could go by?
Tony: There is, to some extent, but events can always change the perception pretty quickly. I cannot emphasize enough how live video feeds and reports from the front can change the direction of the market on a dime. That has zero to do with anything fundamental or technical -- this is an event-driven market with live video for everyone to see. How is one to control emotion when watching that? Just when you are ready to respond to the news conference that everything is going as expected, you get a cut in from Kuwait City with an "incoming siren" in the background and see a reporter with a gas mask. I don't know about you Bill, but that doesn't make me want to buy or sell anything because it highlights from a very near-term perspective that what we see and hear is totally unpredictable.
Bill: We are not going to have you back unless you make a call here strategy guy!
Tony: Bill, we are in what would be the fourth year of a bear market and the third year of a president's term. Basically, to not have a double-digit positive year would be unprecedented since before FDR given those two situations. The only issue I have is whether that gain comes from lower levels. Technically, the indicators that I track have not lined up to suggest a major sustainable low, but the recent rally clearly sets the stage for "the mother of all positive divergences." Fundamentally, valuations are at the high end of neutral, bond yields are low for a reason (poor economy) and more robust corporate profit growth is now pushed off due to the war.
Clearly, it would be great to have a deeply oversold market that is cheap as the economy picked up steam due to a victory in Iraq. Obviously all those wonderful factors aren't going to happen because real sustainable lows and bottoms are not that clear. By definition, no one expects a bottom when it happens because everyone would have sold.
Bill: So what are you saying?
Tony: That I am torn. I can make a bullish and bearish case right now -- but both, depending on what happens in the Iraq War. If things go well and we enter and take Baghdad, the market is going to scream higher. If it doesn't go well and takes time, I would expect those intermediate-term indicators to line up and set the stage for a very powerful rally later in the year -- but from lower levels. So as you can see, I expect a rally, but am not willing to say, "buy here" because what happens next in Iraq is totally unpredictable after Monday's drop. You can't say the market is up for "x" days in a row and is due for a pull-back because we got it Monday. And you can't say the market is deeply oversold and due for a spike because we got that over the last week and a half.
Bill: So in sum, whether you would be a buyer now or a bit later depends on your time frame and risk tolerance?
Tony: You got it Billy boy. Only individuals can decide that for themselves. God bless our troops and may God continue to bless America!!
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