Prayers for Japan
I'm starting to feel like I don’t have enough zeroes on my calculator...
Let me see if I have all this straight: we have a record high Federal deficit, 9% unemployment, a housing market that still hasn't bottomed, a Federal Reserve that's hell-bent on spending our way out of a debt crisis, a banking system that won't lend but wants to pay dividends, a looming energy crisis, instability in the Middle East, soaring commodity prices, Europe has a never-ending debt crisis, China can't stop its own inflation, Japan is on the brink of nuclear meltdown, and Apple's iPhone reportedly couldn't handle the daylight savings time change.
In fact, I read that one user called her iPhone "stupid."
Ye gods.
Now, it's not my intention to trivialize the tragedy that has struck Japan. The death toll is reportedly over 10,000. We all know that natural disasters like the 8.9 earthquake that hit Japan can hit just about anywhere in the world, at any time. I have uttered my prayers for the Japanese.
As a stock market commentator and investor, it is my sworn duty to try and digest the events that affect stock prices. As you know, I tend to look on the bright side, and that's absolutely been the right way to view the economic recovery for the past two years.
But I'll admit, looking at the above laundry list of negativity is giving me a bit of intellectual indigestion. Is there an economic model where we can plug all those items in and get a reasonable estimate of 2011 GDP growth? Does any hedge fund manager have an earnings model that can account for all these variables?
Like I said, I feel like I don't have enough zeroes on my calculator. Because I'm suddenly having a hard time adding it all up...
*****From time to time, I talk about the stock market as an emotional thing. The stock market reflects investors' emotions every bit as much as it reflects P/Es and PEG ratios. Maybe moreso. How else do we explain that NetFlix (Nasdaq:NFLX) trades at 36 times its book value?
It's a human trait to assume that the past is prelude, that as it has been, so shall it be. NetFlix has been adding subscribers and beating earnings estimates at an amazing pace. It's a nifty service, why shouldn't it continue to grow at such a rapid pace?
*****The rally that started in late August has been a lot of things. Relentless. Powerful. But emotional? Not really. Apart from a few interesting moments with tablets and smartphones, it hasn't been particularly exciting. It's been bland. "Well, the Fed is going to support stock prices, so I guess we should buy stocks, blah, blah, blah..."
I came up during the Internet bubble. Maybe it was because it was my first real taste of the stock market, but that market was highly emotional. It was exciting. It seemed all of Wall Street was riding the "it only gets better from here" wave."
It wasn't Alan Greenspan's 50 point rate hike on March 13 2000 that permanently popped the Internet bubble. It was 6 months later, September 11, 2001. That was the day the emotions really changed.
*****The S&P 500 had been as highs as the 1,240s right before Hurricane Katrina hit New Orleans on August 29, 2005. It's hard to forget how impossible it all seemed -- a U.S. city underwater, devastated by a natural disaster.
It took nearly a year for the S&P 500 to make a sustained move above its pre-Katrina levels.
*****I know none of you need a reminder of how terrifying the financial crisis was. Investors still suffer "post traumatic stock market syndrome" from it. And we know darned well that the root causes have not been addressed with any financial regulation laws.
For the past two years, it's been a struggle to get back on our feet as a nation. And while we as Americans believe deep down in our collective soul that we can -- and will -- lift ourselves up by our bootstraps, we also know that belief won't fix everything.
We've seen investors rise above unemployment and housing, a contentious political climate, frustration at the financial sector and our Fed and Treasury. We've rallied past Greece and Ireland.
But the positive spirit, the "it only gets better from here" vibes are under assault. Right now.
*****As investors, we know the terms "fear" and "greed" intimately. They are emotional terms, and they do not shift quickly. That's why bull markets climb the "wall of worry" and its why bear markets always hit unimaginable lows.
But when the sentiment does switch from "fear" to "greed", it's a good idea to pay attention. Because they both tend to build to a crescendo that takes months, not days or weeks, to reach.
*****So it's unfortunate that my calculator only does numbers. Because while I say that I need more zeroes, what I really need is a calculator that does emotions.
Now that Libya is in flames, can we not imagine something equally sinister playing out in Saudi Arabia? Or Iran?
Japan may have lost 10,000 people. Entire towns were washed away by tsunamis. And now, several of the country's nuclear reactors are in danger of melting down.
Sometimes it's easy to identify a singular event that has the power to the mood of the entire community of investors from bullish to bearish. Other times, it's one event, stacked on top of several others, that finally breaks the camel's back.
*****I know, we've become quite accustomed to a rising stock market. And after all the potentially negative catalysts there have been over the last few months, the S&P 500 has only given up one support level -- 1,301. That was last Thursday. And even then, the S&P 500 rallied to close above that level, while we were seeing the videos of 30 foot waves washing far into Japan's interior.
I've been as bullish as they come for months. But I don't mind telling you, I'm on high alert for a bearish turn.
