Bears and bulls locked in trench war

By Jon Markman

Can it really be only mid-February? The stock market this year has featured enough left turns, spinouts, reversals and explosions to fill out a NASCAR race card. It's one of those years so far that only a day trader could love because the concept of a multiday move in one direction has become quaint, as trends are lasting about as long as President Barack Obama's nominees for commerce secretary.

The feeling in the market is much different than in 2008, a year that featured pitched battles between bulls and bears ranging up and down the countryside at full gallop. This year has been all about trench warfare, as optimists and pessimists opted to battle over a narrowing stretch of territory: the 802 area of the Standard & Poor's 500 Index ($INX) on the bottom and the 867 area on top, with one excursion at the start of the year to 940. Now the battlefield looks ready to shift lower, to the still-narrow range of 740 to 820.

To keep it simple on your score card at home, the median, until Tuesday, was 850: If bulls could have pressed their advantage in early February and kept the market above that line in the sand for a week, we would have seen an explosive rally that moved toward January and even October highs. But the longer we spend below it, the more likely the index will test November's lows and then, after a brief bounce, probably drop well below. According to independent credit analyst Brian Reynolds, bonds are already trading at levels that are the equivalent of the 600 to 700 area of the S&P 500.

Why have battle lines narrowed since last year? In 2008, there were big differences in bulls' and bears' opinions, while this year the differences are relatively minor. Scary as it seems, bulls and bears are starting to agree about two things: that the global economy is truly a mess and that earnings at big companies are likely to get worse -- possibly much worse -- before they get better.

Puzzling, uninspiring leadership

Last year, you may recall, bears had high conviction that stocks were overvalued and likely to be hit hard by slowing revenues and thinning profit margins. Bulls, in contrast, had conviction that the bears were out of their minds, and they were happy to try to take advantage of big dips in March and July to buy stocks with abandon, causing two-month squeezes. Don't forget that, until autumn, bulls were so sure of their point of view that they were still insisting there was no recession and complaining that the Federal Reserve should start to raise interest rates to keep the economy from overheating.

Now there is consensus that the Fed is likely to keep rates low all year and continue to pump money into the system. The difference between bulls and bears now has narrowed to the questions of what size boost the economy will get from the stimulus package and lower interest rates, and when that might happen.

The bears continue to think that stimulus measures will have a very modest effect, while the bulls think that the stimulus will energize the economy to the point that we'll see positive gross domestic product growth in the third quarter. These differences of nuance are a lot smaller than they were last year, with bulls now mostly dispirited and bears mindful that they could be wrong, so the two sides are willing to squabble over a much smaller amount of territory.

One of the maddening things about this development is that, with general agreement that business is awful, the debate has shifted from topics with which investors are comfortable -- product innovation, market share growth and earnings -- to the devilish swampland of politics. And even worse, investors need to be able to judge not only how the new administration is thinking of changing the rules of the game but how major overseas fund managers and creditors would react to that.

The sense I get from talking to fund managers and veteran analysts, as well as watching price and volume trends, is that investors fear that the new president has lost control of the stimulus package to Congress, lost control of the bank rescue package after hitting resistance from both banks and the Fed, and lost control of his hiring process after losing four key high-level nominees on personal and philosophical issues that should have been worked out in advance.

Managers don't understand why Obama did not insist that Treasury Secretary Tim Geithner come up with a specific, easy-to-understand plan for the banking system, and at the same time they don't understand why Obama let congressional leaders write the stimulus package instead of his own staff. It's all very puzzling and uninspiring, and neither of those emotions are conducive to any confident urgency about betting on a quick U.S. economic recovery and buying stocks.

Compounding the concerns over confidence is a rising sense of dread over what might happen if Geithner goes ahead and throws a bank loan party in a public-private partnership, as proposed last week, and no one comes. Or even worse, investors are wondering what may happen if politicians and bureaucrats exercise their newfound populism by imposing really Draconian limits on banks that decide to sell their lousy assets to the feds in exchange for new leases on life. Current thinking is that a newly recapitalized banking system that is run mostly by the government would return to the pre-2000 and even the pre-1990 culture: It wouldn't lend money to anyone who needed it.

Continued: Not 'great' -- and not good

 1 | 2 | next >