"There is only one side to the stock market; and it is not the bull side or the bear side, but the right side." -- Jesse Livermore (1877-1940)
As promised, I will deliver a few posts this week that will attempt to find some sense among all the noise in financial markets. Today, we'll take a look at some of the most current and fundamental differences in bullish and bearish sentiment.
Generally, the bulls feel that bad economic news means the Fed will cut interest rates and good news means recession will be avoided. Either way, stock prices are headed higher. The bears generally see the housing and credit problems worsening and recession as nearly unavoidable.
I'll refer to a few choice excerpts from articles that I read today that make some sense: From The Economist, "Bad-news Bulls" and from The Wall Street Journal, "Some Warning Flags Fly as Stocks Continue to Soar" (subscription only)...
Let's begin with some views from the bull side:
The American economy may be slowing but the rest of the world, particularly emerging markets, can make up for it.
The dollar's decline has added impetus to the earnings of American exporters and multinationals with overseas subsidiaries.
As a result, corporate profits can continue to be strong.
Much of the panic in August was caused by fear of what banks had on their books; now the bad news is out, investors can relax.
...the market's records mean that large swaths of buyers remain willing to snatch up stocks. As in any rally, it is likely that some of those buyers are confident that the economy will strengthen, and some are just chasing the market's recent performance despite their uncertainty about the long term.
Now take a look at some views from the bears' perspective:
House prices will surely fall further and defaults increase, as homeowners struggle to cope with higher mortgage rates from "teaser" loans taken out in 2006.
American profits are close to a 40-year high relative to national output, according to Longview Economics, a financial consultancy. That suggests they should return to the mean, especially as the profit numbers taken from national accounts data look a lot weaker than those reported by quoted companies.
The dollar has plummeted to historic lows and gold, a traditional haven during times of investor nervousness, has leapt.
And while the weak dollar may be good news for the American exporters, it is bad for European companies. Having been strong in the early part of this year, the latest data on European economies have weakened sharply...
Also, crude oil has broken through $80 a barrel, raising concerns about a possible drag on consumer activity if average Americans start spending more at the pump and less on everything else.
Certainly, both the bulls and bears can make strong arguments for their views. The prudent investor, however, knows that any argument can be made about something that is unknowable; therefore, it is not "right" to choose either side...
Tomorrow, we'll focus on making the "right" choice -- the decisions that are within our control -- asset allocation...
TFPAuthor, Kent N. Thune, is the President and founder of Atlantic Capital Investments, LLC (ACI), a 'fee-only' Registered Investment Advisory firm located in Mount Pleasant, SC.
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