Arguing Both Sides Of the Market

SAN DIEGO – I talk to myself. Actually, I argue with myself. Do it all the time, because I love taking both sides of an argument — and I do love to argue.

Take today's discussion about the market.

Myself: "What kind of market is this?"

Me: "For lack of a better definition it's a 'cover your ears and hum a happy tune when it comes to bad news' kind of a market."

Myself: "What's that supposed to mean?"

Me: "It means nobody likes to hear the bad news — or the real story. Just look at the recent brouhaha over Bernanke's comments on whether the Fed will pause. The whole thing would've been avoided if the markets had gone beyond the word 'pause' in Bernanke's statement. The market's 'no bad news' interpretation leapt (or is it leaped?) to the conclusion the Fed won't raise rates when it meets again in June. Maybe it won't, but even if it doesn't, the market chose to ignore the rest of what he said, which was captured perfectly by MarketWatch's Greg Robb, who at the time wrote: A pause doesn't mean stop, Bernanke said."

Myself: "Oh, so you're saying people aren't letting the facts get in the way of a good story?"

Me: "Exactly, just as long as it's a good, positive, feel-good story. Suddenly, the homebuilders turn down and nobody talks about it. It's as if they never existed. (Housing bubble? What bubble?) Urban Outfitters (URBN) disappoints and its stock suffer a slow bleed — and it's a good retailer. Nautilus (NLS), which has been struggling, comes in short and guides below estimates yet its stock goes up. Rather than buying cash-rich Microsoft (MSFT) , investors would rather bid up Netgear (NTGR) after it reports slightly better results following several blown quarters. So what if it sells a commodity product?"

Myself: "Don't tell me: Now you're about to argue the market is dysfunctional."

Me: "More than ever. Don't know if it's a function of so many ETFs, or what. And the list of dysfunction goes on and on, but the situation is best summed up in an April report headlined, "Garbage Stocks," by John Hussman of the Hussman Funds. 'Among stocks belonging to the S&P 500,' he wrote, 'those rated 'A' or 'highest quality' have gained just 1.01 percent year-to-date. In contrast, companies rated 'B-' 'lower quality' have gained 10.17 percent year-to-date. At the bottom of the quality barrel, those S&P 500 companies rated 'C' or 'D' for 'lowest quality' (or in reorganization) have gained a striking 16.90 percent year-to-date.' He says the pattern is the same in the Russell 2000."

Myself: "Hmmm."

Me: "Hussman didn't end there. He reminded readers that 'in general, bull markets have historically ended with investors showering their affection on speculative darlings that seemed to offer a ticket to sure money, fast money, or preferably both.' Citing the book, 'The Go-Go Years' by John Brooks, he added that these were '... the garbage stocks that everyone could make money on just so long as, and no longer than, everyone could continue to hold his nose and avert his eyes and imagine that the garbage was actually nourishing and palatable.' Sound familiar?"

Myself: "Sure, but I've heard this from you as long as I've ever known you. Remember this, Herbster, these kinds of markets can last longer than anybody thinks. You're almost compulsive when it comes to being early."

Me: "True, but we also know that when they end — they end!"

Myself: "Oh, you're so profound. What really concerns me this time, buddy, is that you're sounding the speculative siren just as the economy appears to be firing on every cylinder."

Me: "Okay, and if it is, shouldn't that result in higher inflation and higher interest rates? And doesn't the weak dollar play a role here, somewhere?"

Myself: "Not necessarily, you dope. Last time I looked, the CPI still suggested inflation is creeping ahead — not racing. And housing prices aren't going up any more. And the Fed is going to pause, my boy, pause. Who cares about the dollar?"

Me: "Plenty of smart people, and don't call me a dope. The CPI is looking in the rear-view mirror and can be interpreted any which way; that's something you can say about any government number. There are times (and I would never say this publicly) I think these numbers are all rigged to suit whichever administration is in power. All I know is that I hope I don't have to call a plumber to fix a broken pipe because the cost of copper makes my plumber's hourly rate look cheap. What's more, gas, airline tickets and clothes at Nordstrom are more expensive than they were last year. Those damn Ermenegildo Zegna ties are now $140; they were $120 a few months ago. Thankfully, the Ike Behar's are still under $100, and while they look good, they feel different!"

Myself: "Oh, you and your ties. Jim Cramer keeps saying on that show of his that you buy tie and shirt sets at Ross (ROST) ."

Me: "What does he know? Who rolls up their sleeves the way he does, anyway? And what's wrong with Ross?"

Myself: "Nothing. And note that their results aren't horrible. I guess as gas prices squeeze consumers, they're shopping more at discounters."

Me: "I suppose, but even Ross says it's worried about the impact higher energy prices might have on freight costs, the risk to consumer spending and the competitive climate. That's the other side of the story. Something is way off."

Myself: "But, Herb, didn't you just book a Summer cruise to the Mediterranean?"

Me: "Yep, and I had to pick the 12-day because the 7-day was booked. (Okay, we get to go to Turkey.) And there were only a few rooms left on the 12-day — and this was on Crystal, which isn't cheap, especially when you add the price of airfare."

Myself: "Well, there you go: The results of a booming economy. Even you're benefiting. The stock market is up. People feel healthy, wealthy and wise."

Me: "Never mind about me. I'm worried about everybody else. How do we know they're not living in denial off the remaining and dwindling equity on their homes? How do we know this isn't this party's last hoorah — and that the general consensus is that if they have to go to the poorhouse they might as well go in style."

Myself: "There you go, Mister Negative."

Me: "I'm not negative. I'm trying to be real. I'm trying to figure it all out and there is no easy answer. If there were, all of the economists and market strategists, who eat, breathe and sleep this stuff would always get it right."

Myself: "Good Point."

Me: "Thanks."

Myself: "But you really should get a life and stop worrying about this. You'd have more fun."

Me: "Good point."

Myself: "Thanks."