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Bulls & Bears
This week’s Bulls & Bears: Pat Dorsey, director of stock research at Morningstar.com; Tobin Smith, editor ChangeWave Investing; Scott Bleier, president of HybridInvestors.com; Gary B. Smith, columnist for Real Money.com; Bob Olstein, president of the Olstein Funds.
Trading Pit: The New "New Deal"
President Bush proposing massive initiatives outlined while addressing the nation Thursday night from Louisiana.
It's probably the biggest and most expensive government program since FDR's New Deal. What will it mean for the economy and stocks?
Tobin Smith: President Bush’s plan is good because it will be great for the economy, and it reduces uncertainty. The President was a late starter, but a good finisher and this new plan restores confidence in him. It will also get Social Security and other issues off the table.
Bob Olstein: Spending is good for the economy, at least in the short run. We’re in an undervalued market right now. This plan will help the economy, but won’t have any bearing on the stock market.
Gary B. Smith: The success of this plan depends on how it is funded. It could potentially be a budget buster because we don’t know how it’s going to be paid for. If spending in other areas is not curbed, the deficit will swell, which will end up being bad for the economy.
Pat Dorsey: Spending cuts will need to happen elsewhere. Here's a crazy thought: How about axing some stuff from the pork-laden highway bill that got passed a couple of months ago? Divert money from projects we don't need - and which have no other purpose than lining the pockets of constituents around the country - to projects we do need in New Orleans.
Scott Bleier: The markets are wary of all this increased government spending, but they know that it is something that must be done. It just needs to be done in a smart way. I think deficit spending will continue, but high oil prices are going to cause the market to bring down earnings expectations. This will be what hurts the market over the next six months. The market just hasn’t realized that yet.
Why Are Stocks Up?
Hurricane Katrina is one of the worst natural disasters in United States history. So, why are stocks up since the storm hit?
Gary B.: In every major event, stocks follow the predominant trend regardless of the news. Stocks had been trending up since mid-year. We thought at the end of last week that stocks were going to go down, but then saw a bounce on Friday. It just continued in the overall trend.
Bob: Katrina was a devastating blow to the people of New Orleans, but the event is only a temporary short-term negative to the market. Eventually rebuilding New Orleans is a long-term positive to the economy. The market is still 5 percent undervalued based on earnings, but earnings will be growing at 5 percent and thus we are in a low return market. The only thing that counts is earnings. However, the quality of earnings and free cash flow are the highest they have ever been.
Tobin: We’ve learned to be optimistic. Stocks are up because investors are anticipating the year-end rally NOW. The year-end rally thesis: the Fed takes a rest; inflation is benign; earnings misses are blamed on Katrina; and the Federal Government’s plan to put $200 billion into the reconstruction effort boosts stocks.
Pat: Stocks are barely up. It’s not going to have a major long-term impact. It takes a lot to dent such a big economy. This is just a speed bump and no more.
Scott: This year is the “Calamity Market”. Every time something bad happens, it seems stocks go up! Stocks are up because everyone expected them to go down. Plus, traders took a page from the July 7 London train bombings and bought stocks instead of selling them. Everyone also expected the Fed to cool it on interest rate rises.