New Highs Possible, But Don't Expect Contrition from Bears

November 9, 1998

Bears will have some explaining to do if the current stock-market rally achieves new record highs.

As of Friday, the Dow Industrial Average had recovered four-fifths of the nearly 2,000 points it lost during the hellish slide that occurred between July 20 and October 8.

Some gloomy seers, including this one, saw the October 8 turnaround coming, but most of us expected stocks to plummet anew shortly thereafter.

Instead, the Dow Industrials and other widely followed indices trampolined off the October 8 bottom and have just kept on going.

Now the blue chip average sits within 400 points of its all-time high, having achieved gains in seventeen of the last twenty-one trading sessions -- one of them a 331-point stunner a few weeks ago.

Even more impressive has been the performance of the tech-heavy Nasdaq 100 index, which includes such bellwethers as Microsoft, Intel, Cisco, Dell and Yahoo. It is currently around 1458, a mere 8 points, or 0.5%, below July's all-time peak.

Not surprisingly, bear-baiting has been reinstated as the favorite pastime on CNBC, and the hubris surrounding a prospective Dow 10,000 is once again becoming clamorous.

As a case-hardened bear, I'll be the first to admit that it is not altogether unreasonable for bulls to think the worst is over, and that October's lows may have been the juiciest buying opportunity investors will see for a long time.

For one, the largest central banks have been acting cohesively to ensure that there is plenty of liquidity in the global financial system.

Not only have they been pushing short-term rates down here and abroad, they have also strong-armed private-sector lenders into offering generous lines of credit to such crucial borrowers as Brazil.

That country is currently viewed as the most salvageable of the world's financial war zones, and its economic vital signs are being monitored closely by anxious lenders around the world, who could topple like dominos if crisis befalls the new Brazilian government. For the time being, it looks as though the patches will hold.

The news has ebbed toward eerie quiescence elsewhere. Boris Yeltsin's health problems have somehow pushed Russia's economic health problems off the front page. And back-room haggling over the terms of a truce have muffled Netanyahu and Arafat.

Meanwhile, the Nikkei Average has rallied recently toward 15,000, where banks whose fortunes are tied to the rise and fall of Japanese stocks at least begin to take on the appearance of solvency.

At the same time, business in the U.S. appears to be plodding along if not quite humming like the dynamo of recent memory. Third quarter GDP was up 3.3%, and corporate profits rose by 3.0% -- unexciting, but still better than some estimates.

Moreover, even as consumers were telling pollsters their confidence in the economy was falling, they evidently continued to spend like crazy. October vehicle sales were up an impressive 9.8%, and that has lifted the spirits of retailers throughout the U.S. who as always will be praying for a "green" Christmas.

So why, even if the Dow actually goes on to make new highs, will my suspicions only increase that the stock market's month-long rally has been little more than a cruel hoax?

First, the lull in the news is the eye of the hurricane, not a harbinger of happy days ahead for Russia, Japan, Brazil and other global sinkholes. Their fundamental problems have not abated, even if some of the ugliest cracks have been spackled over by the G-7 bankers.

Brazil in particular is all too precariously balanced for comfort. Interest rates are being kept high there to discourage investors from fleeing to other markets, such as U.S. Treasuries. But the high rates will continue to burden corporate borrowers, and the government does not dare lower them for fear of creating a stampede out of Brazilian currency and debt paper.

Meanwhile, although Japan is having some success in pumping up the economy with fiscal and monetary stimulus, it is highly unlikely to trigger the necessary spending boom by consumers to pull all of Asia out of its deep rut.

As for Russia, the country is probably too far gone to save. Expect its money problems to resurface with a vengeance, regardless of whether Yeltsin lives or dies.

Signs of firmness in the U.S. economy are no less illusory. Car sales may be strong, but they are being pumped up artificially by fierce year-end discounting in the showrooms.

Most ominously, consumer spending has been stoked by levels of borrowing that should strike fear in the hearts of all but the most zealous bulls. Household liquidity is as low as it has been in the postwar period, and last month personal savings actually went negative for the first time since 1933.

More than ever, we are spending money we don't have. And that is surely no way to nurse a shaky economy back to health, or to rescue failing exporters around the word.

Concerning the stock market's powerful ascent of late, so far it has been fueled more by bears than bulls. In betting increasingly against the market's continued rise since October 8, die-hard pessimists have created ideal conditions for a short squeeze, a phenomenon which I have explained here before in some detail.

In brief, they have sold borrowed shares "short" in the hope of replacing them at lower prices. But with stocks surging higher each day the "shorts" have been losing money. If and when they throw in the towel, watch out, because stock averages easily could get driven to new highs.

But that will not mitigate the perceived problems in the economy that caused share prices to fall in the first place. The July-August minicrash was viewed by bulls as a correction, a way of bringing stocks down to more reasonable levels.

By that logic, with corporate earnings starting to slacken, the bulls should be squirming as stocks approach old highs. Based on their own post-mortem of the summer collapse, share prices are presently in even greater need of correction than they were then.

If and when some of the major indices reach new highs, don't expect bulls to submit amiably to this line of analysis. But neither should you expect bears to capitulate in contrition merely because stocks have one-upped July's exuberant highs.

In 1792 the U.S. Congress adopted a bimetallic standard (gold and silver) for the new nation's currency - with gold valued at $19.30 per troy ounce