As we await Alan Abelson’s return from Timbuktu, the formidable Randall Forsyth continues to fill in, looking askance at the markets run up in the face of Oil and Interest Rates arisin’.
He can turn a phrase: "Yet those who have heeded the warning flags have lagged behind those who headed out with sails unfurled."
For those who like your truthiness straight up, here is this week’s Up & Down Wall Street:
"MEANWHILE, THE TRANSITION OVER AT THE FEDERAL Reserve has been so seamless you’d hardly think there’d been a change at the top. At the first Federal Open Market Committee meeting chaired by Ben Bernanke, the panel chose to stick with much of the deathless prose of that Hemingway of the policy directive, Alan Greenspan. The FOMC did elaborate a bit on the outlook (about which Mr. G was uncharacteristically taciturn in the committee’s policy announcements).
While the committee notched the funds target up another quarter, to 4¾%, as everybody expected, it dashed the hopes of those who thought it might be done raising rates, or nearly so. Fed-funds futures are betting a 5% overnight rate is a virtual lock at the May 10 meeting. But the panel also said its decisions will depend on incoming data, so the market has placed a 40% probability on the FOMC going to 5¼% on June 29. A week earlier, however, the odds of a June hike were virtually nil.
What’s somewhat puzzling is the alacrity with which the stock market continues to soldier ahead in the face of rising interest rates. Indeed, for the first quarter, it turned in a performance worthy of an estimable 12 months. That especially was true of small stocks, with the Russell 2000 returning 13.9%, including reinvested dividends, according to Bloomberg’s calculations. Nearly as good was gold, which soared 13% in the quarter, and the Philadelphia Gold and Silver stock index, which was up 10.6%. But gold’s surge wasn’t just a play on the weaker greenback, as the dollar index slipped only 1.6% in the quarter.
Notwithstanding forecasts from the best and brightest, the big names continued to trail the little guys. Both the Dow Jones industrials and the Standard & Poor’s 500 returned a none-too-shabby 4.2% for the quarter, including reinvested dividends, while the Nasdaq composite returned 6.4%. Bonds? The iShares Lehman Aggregate exchange- traded fund (ticker: AGG) lost about 0.77% for the quarter, including income. Yet, despite higher rates, real-estate mutual funds returned a sturdy 13.8% for the quarter, according to preliminary data from Lipper.
What’s striking is that, even as the big, boring stocks that dominate the major indexes lumber on, the speculative small fry continue to race ahead. Not just the real, respectable companies that make up the Russell 2000, but the ones found on the Bulletin Board and the Pink Sheets, where activity is cooking these days. The froth also can be seen in the ongoing rush into foreign mutual funds and the rising volume at online brokers.
Somehow, aggressive trading while interest rates and oil prices are rising seems like a dangerous combination, like heading out for a sail when the white caps are whipping up and the sky is turning dark. Yet those who have heeded the warning flags have lagged behind those who headed out with sails unfurled. The problems have hit in places far removed, from Iceland to the Middle East bourses to New Zealand. The squalls never matter until they hit." (emphasis added)
Hey, Snow Problem
Randall W. Forsyth
UP AND DOWN WALL STREET
Barron’s April 3, 2006
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