Like many portfolio managers, I spend a good part of each day just keeping up with the news flow on the companies that I own, the stocks on my watch list, the markets, the latest Bollywood gossip, and the global economy. Most of the "news" out there is nothing more than noise, and sifting through the garbage can be time consuming.
One of the "news" outlets that I gave up on years ago is CNBC. When I saw how they turned from somewhat serious reporting to out-and-out stock pumping during the tech bubble, I lost my lunch. When they started to rewrite history during the market collapse and claim that they had done a terrific job of being balanced, I lost my wife's lunch. It was a nice reminder that there really isn't much worth watching on TV. My wife and I canceled our cable.
I'm also not a big fan of TV Jim Cramer and TheStreet.com although I do enjoy the writing of contributor Doug Kass. I'll save a more detailed review of Jim and TheStreet for another time, but let's just say that I've done fairly well fading (doing the opposite of) a number of his recommendations. One of my main complaints about Cramer is very similar to one of my major complaints about Wall Street analysts, strategists, and economists -- there is an ever-present pressure to have a strong opinion about a stock, the market, or the economy, but no one can know everything about everything (unless she's married to me). It's great for generating commissions but not so great for investment performance.
With that out of the way, let's turn to an article just highlighted on TheStreet.com. The article is written by Tony Crescenzi and is entitled "Big Rally Possible." Normally, a junk title like that would be enough to keep me away, but it's a slow news day. Now, I don't know anything about Mr. Crescenzi, so I checked out his bio. He's a chief bond strategist, so that's one knock against him. He did write a couple of books I'm not familiar with, but so did Madonna, so...I'm not really sure what to make of that. Most importantly, Tony Crescenzi is a name straight out of "The Sopranos", so I'm going to change my locks and avoid making direct eye contact with anyone for a few days. Let's look at what he wrote:
There is a scenario that has a low but reasonable chance of occurring next week that could result in a very large rebound in share prices and risk assets next week and the week after, say 500 points or so in the Dow.If the G-8 delivers a communiqué strong enough to reinforce the recent message on the dollar, and if OPEC's meeting with consumers results in more oil production, the combination could boost the value of the dollar, jolt the commodities markets, and thus bring a huge sigh of relief to investors. U.S. Treasury Secretary Paulson has resisted opportunities like this before, particularly following the April 11 G-7 meeting, which produced a communiqué that French Finance Minister Lagarde said was on par in importance with the 1985 Plaza Accord. Any effort to boost the dollar would be welcome worldwide, given the recent surge in commodity prices. Massive intervention would cap it off.
So what specifically might happen according to Tony? The Dow could rally "500 points or so." Well...sure. First of all, that would be about a 4% increase. Given the recent volatility in the markets, I don't know that anyone would be shocked by a 4% move either way "next week and the week after." The market fell by 400 points this past Friday alone. It's not like calling for another Black Monday when the Dow lost 22.6% of its value in one day.
What's going to cause this big rally? Apparently, IF the U.S. and G-8 get super serious about the dollar with strong words and massive intervention and IF OPEC starts pumping a lot more oil, then commodity prices would get whacked and money would flow into the U.S. market.
Could it happen? Sure. But the very opposite is at least as likely to happen. Paulson and Bernanke are already starting to talk tough about the dollar, but I have a hard time believing that they're going to raise interest rates or intervene in the currency market to support the dollar given the weakness in our economy and financial markets. Raising rates certainly won't help the economy recover, and the Fed has shown this to be of primary importance. A higher dollar would also harm U.S. exports, which have been one of the few GDP bright spots. So, until proven otherwise, this is just talk. Words are their only weapon since they don't have the cojones to raise rates. Once the market figures this out, I would expect the dollar decline to resume.
As for OPEC suddenly pumping more oil, I've addressed this in prior posts. Does anyone seriously think that there is one OPEC country sitting on idle production with oil prices this high and climbing? No way. First of all, these guys remember $10 oil in the mid '90s. They're going to make hay with current prices. Second, high oil prices are ultimately bad for OPEC as they encourage lower demand and the development of alternatives, and OPEC is well aware of this. If OPEC had the power to drive oil prices lower, they would -- not to $20, but back towards $100 seems reasonable. The only way they could do this is by further opening the spigots. I think the fact that oil prices continue to climb well beyond a level that OPEC is comfortable with points to the likelihood that the spigots are already open. OPEC is fairly powerless right now to combat rising oil prices (how ironic) and is not likely sitting on idle capacity. In fact, it's possible that some countries are producing at rates that are too high for the long-term well-being of their oil fields.
Of course, anything can happen in the short-term. So, should the market rally in the next week or so because of a dollar-led commodity price collapse, I'll be more than happy to take the opposite side of both of those trades and further short the dollar and add to commodities.
As for Tony's article and for others like it, they just don't serve a useful purpose. I know that it isn't easy writing in a public forum and opening yourself up to criticism, but idle speculation about possible big moves in the market that might or might not happen over a ridiculously short time period if certain other things do or don't occur really doesn't add a lot of value. This type of article could just as easily have been written about the possibility of a 500 point drop in the market if the things Tony discusses don't come to fruition.
Before I go, let's consider Tony's employer. Tony works for Miller Tabak + Co., LLC, which according to their website, is "a twenty-four year old institutional trading firm specializing in the discrete handling of stock purchases and sales, portfolio rebalancings and listed options." He works for a trading firm, and he's out with an article that (at least implicitly) encourages short-term trades. Coincidence? Perhaps. Either way, there appears to be a strong negative correlation between the number of articles/posts someone writes and the quality of opinions expressed in said posts (present author excluded, of course). Tony appears to be a prolific writer.
Finally, people seem to be more disposed towards remembering correct predictions/recommendations than the predictions that don't work out. The fact that Joe Battipaglia still has a career as a Chief Investment Officer following his disastrous pronouncements during the tech bubble and collapse is testament to this. Although calling for a 500 point move isn't terribly bold in the current environment, Tony will get a ton of credit (and perhaps press) if it happens. If it doesn't happen, who will remember? There is no downside. From an "investment" perspective, his minor investment in a few paragraphs of words has tremendous upside and no downside. Tony may be wrong, but he ain't stupid.
The author is short the G-8, Battipaglia, and the dollar and long OPEC, Bollywood, lunch, and cojones.
