Sometimes the new media have a way of making even savvy guys sound dumb. That may have been the case yesterday in a Wall Street Journal story that attempted to explain why a 120-point rally in the Dow completely evaporated by the final bell. The smart guy quoted by the Journal was Ed Yardeni, and here are the words attributed to him: ‘No speculators want to be extremely long ahead of the earnings season, because of the realization that the earnings might be worse than expected.’ In the first place, we wonder why he has ascribed caution only to speculators? Aren’t there many others ‘ you, me and nearly everybody we collectively know, for starters ‘ who wouldn’t touch shares with a ten-foot pole right now? Why would anyone, given that the economy appears to be sinking into it worst funk since the quasi-depression of 1973-74?
We’ve said it a dozen times, but we’ll say it once again for the benefit of those who still evidently cannot make sense of the stock market’s erratic behavior: Rallies are being driven almost entirely by one frenetic source of buying ‘ namely, short-covering. This is something you will never hear on the evening news, but it is true nonetheless. In fact, no bull, not even Kudlow, harbors the kind of conviction that might serve to push stocks sharply higher on a given day. No, it is only panicky bears facing margin calls who can muster that kind of enthusiasm, if you can call it that, and they are induced to panic regularly by specialists adroit at constricting the supply of shares for short stretches of time.
Returning to the quote from Yardeni, we note that he has pulled his punch, to unintended comic effect, by saying investors do no want to be ‘extremely’ long here. We wonder what constitutes ‘extremely long’ in his book. Is it perhaps someone who is 200% invested in stocks touted frequently on CNBC? Whatever the case, Yardeni needn’t have used retail-speak, as if to imply that it’s okay to be, say, ‘only’ 80% invested in stocks right now.
And what about his use of the word ‘realization’ ‘ connoting that, sometime around mid-morning yesterday, ’speculators’ had this epiphany — that earnings ‘might be worse than expected.’ Who, really, was doing this expecting and realizing, we might ask, and why did they sour on stocks midway through yesterday’s session rather than six months ago like sane investors?
It was one thing when CNBC had a near-monopoly on such poppycock. But we fear that, as the bear market deepens, the factually challenged logic of bulls will come to permeate all areas of stock market coverage. Rallies will be attributed to bullish developments in the economy; declines, to ‘disappointment’. Take it from us: it’s all about short-covering. And most unfortunately, there will not be nearly enough of it to repeal gravity in the months and years to come.
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