Market Talk

[gfs_1999]

Bernie Schaeffer's Take:
I must now turn to the subject of the US stock market. Yes, financial matters pale in
significance to what happened yesterday, and to what will happen today and in the days
ahead. But the dynamics that I discussed in my market commentary from Monday
(Wallowing in the Mire of the Bear Market ) will not abate during a world crisis. In fact,
those who would gladly separate you from your financial assets in the interests of "calm
and order" are likely to redouble their efforts in the days and weeks ahead. And I feel a
strong sense of responsibility to keep you informed of my perspective, which as you know
often differs by 180 degrees from the conventional financial wisdom. Hence, the following
Q&A with myself.

Q: How do you feel about the U.S. stock market remaining closed for two consecutive
sessions?

A: I'll get the necessary disclaimer out of the way immediately. There is an emergency
situation in the area surrounding the physical location of the New York Stock Exchange
that may preclude trading from the NYSE floor for today and perhaps for some days to
come. But I am concerned about a continued closure, particularly if it includes the
Nasdaq, which has no central physical location. I was impressed with last night's speech
by President Bush. However, if we as a nation wish to send a strong and consistent
message that we refuse to live in fear of terrorists, then Mr. Bush cannot for listen long to
those at the Fed and in his cabinet, who may be afraid of a sharp market decline and are
hoping to stall it away. You cannot stall it away; it will only get worse a la 1987 when
investors realized that the futures markets had stopped working and that Nasdaq market
makers were not answering their phones. The panic, therefore, accelerated. The mantra
from government officials that "trading will resume as soon as it is practicable to do so" is
already beginning to ring a bit hollow with me. In my view, the resumption of trading is of
extremely high priority. If there is anything resembling foot dragging on this, the U.S.
stock market will pay a long-term price for the perception that trading can be suspended
for long periods of time at the whim of the government.

Q: What's your reaction to the various studies that have been trotted out over the past
12 hours that acts of terrorism tend to present buying opportunities in the U.S. stock
market?

A: Nausea. The happy-faced Wall Street spinmeisters never stop grinding out their
worthless bullish gruel, even on a day that will live in infamy. References to the rally that
followed the start of fighting in the Gulf War are particularly ill conceived. The market had
declined by over 20 percent in the months ahead of the Gulf War in anticipation and fear
of the event, and the post-hostilities rally was simply a massive "sell on the news"
situation that was preceded by incredibly negative investor sentiment. The stock market
weakness this year has been blamed on lots of things, but I don't recall hearing "fear of a
terrorist attack on New York City and Washington, D.C." as one of them. And as you
know from my prior commentaries, investor sentiment ahead of yesterday was anything
but "incredibly negative."

Q: So what's your take on where the market will be once it reopens?

A: The best overseas proxy for the US stock market is the FTSE 100 index for the
London market. The FTSE declined by 5.8 percent on Tuesday, and after some wild
fluctuations is currently about 0.8 percent higher for a net five-percent loss since
Monday's close. This would be my best guess for where the Dow Jones Industrial
Average (INDU – 9605.5) would open right now – down by five percent, or down by
nearly 500 points. It may be worse for the Nasdaq Composite (COMP – 1695.3), as my
understanding is that a number of the big tech names were off very sharply (10 percent
or more) in brief trading in Europe on Tuesday morning.

Q: And where does the market go from there?

A. My guess would be a sharp bounce to the upside, perhaps even a bounce that erases
all the losses and pops the Dow above Monday's close. This would certainly please the
Fed and Wall Street, and I've come to believe that these folks "have their ways" of
causing the market to sing their tune for short periods of time. I'd also expect that Fed to
act very promptly to further reduce interest rates and flood the economy with liquidity. But
this isn't 1987. This isn't "bull interrupted." It's "bear interrupted." This economy does not
need extra liquidity and it does not need lower interest rates to fix what ails it. And it
certainly doesn't need higher energy prices, a weaker dollar, and lower levels of business
activity due to the legitimate distractions and fears created by the new world in which we
now live. So my expectation is that climactic selling and climactic fear after trading
resumes could produce a temporary bottom. But the ultimate bottom remains a good
distance down the road in time and in price.