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Bear With Us

Low interest rates, strong job growth, and rosy corporate profits usually spell a bull market. So why are the grizzlies on the loose?

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Damn grizzlies came back. Doesn’t matter that stocks rally in election years. Doesn’t matter that the so-called jobless recovery is on pace to create several million more jobs by year’s end than even the Bush administration thought it could. Doesn’t matter that corporate earnings couldn’t be more robust (most companies clobbered estimates in the first quarter). Nor does it matter that there are trillions of dollars on the sidelines looking for a market home, from the $56 billion at Microsoft and $16 billion at Intel to the trillions in money funds that are earning next to nothing as stocks cascade lower. The grizzlies woke from hibernation and now prowl around Wall Street like they own the joint.

With the averages down for the year, and having given up some truly terrific recent gains (from the start of the Iraq war on March 19, 2003, to its 2004 peak on February 11, the Dow was up 30 percent), is it time for the official coroner’s inquest into the death of the year-plus-old bull? Some hold out hope that the bull is still on life support, ready to wake from its coma now that we’ve shaken out the excess optimism and speculation that ushered in 2004. Me? Perhaps because I am “long,” to use the vernacular of the biz, I think the patient is too far gone to resuscitate; the steep recent declines signal that rigor mortis beckons.

No one expected a return of the bear in 2004, simply because you don’t get a bear market with interest rates this low, the economy this strong, and corporate profits this healthy. At this point in virtually every other economic cycle, one year after the bottoming-out of interest rates and three months into the beginning of intense job creation, you have a market that gets led by the cyclical stocks, the smokestackers, companies like Caterpillar and Deere, Phelps Dodge and Alcoa.

But those stocks, along with an amazing 700 of their brethren, are at or near their six-month lows, having been poleaxed by sellers heading for the sidelines, many of whom can still feel the claw marks from the last market dive. Similarly, tech stocks have always been standouts one year into a recovery, but the beating Intel and Cisco and EMC have taken of late puts the lie to that bit of history, too.

“The grizzlies woke from hibernation, and now prowl around Wall Street like they own the place.”

What the heck’s going on? Why are the percentages not playing out? Why are only Procter & Gamble, Clorox, Avon Products, Kimberly-Clark, and the rest of the kitchen-and-bath set rallying while everything else is sucking gas?

If the bull is clearly in a do-not-resuscitate mode, here’s what the autopsy is going to find: First, the hedge funds, the determinant of prices, are more focused on Iraq, and its effect on the pro-stock Bush government, than on any particular earnings report. I’ve seen stocks blow away the numbers, only to get blown away themselves when the news flashes to Fallujah or Abu Ghraib or smuggled shots of soldiers’ coffins unloaded in Delaware. Wall Street’s usually unemotional about war, but, perhaps post-9/11, the market can’t shake the Iraq malaise. Just the Friday before last, a super-rally developing over a strong employment number got the blood sucked out of it as traders’ eyes switched from the tape to Donald Rumsfeld’s congressional emasculation.

Second, the Federal Reserve screwed things up royally by not raising rates at its May 4 meeting. With the economy creating jobs, with inflation heating up, with industrial capacity growing tight, the Fed issues some mealymouthed statement signaling that it might, in the not-too-distant future, actually raise rates. Huh? We need rate increases, and we need them now, to protect the purchasing power of the dollar and of all financial assets. Greenspan’s killing us with his “measured” and “patient” approach even as he says he is no longer going to be measured or patient. The longer the Fed waits to move up rates, the harder and faster it will have to move to slow the economy down. Don’t believe me? Consider that in May 2000, the Fed moved the federal funds rate up a half-point, following the five quarter-point hikes in the previous year, to an astounding 6.5 percent, helping to push the economy into the Grand Canyon of recessions, just when it should have been cutting rates furiously. The Fed’s already so far behind the curve that it will have to raise rates with a vengeance, which will kill off the economy and crush the smokestack stocks. No wonder Procter and Lilly were among the only stocks that hit highs in the past two weeks. Those are the safety stocks you buy when you sense the Fed’s about to have an accident and has to jam on the brakes while skidding on the black ice of inflation; they’re the inflated air bags of the market.

Third, oil keeps going higher and higher even as other commodities like gold and copper and aluminum crash by double-digit percentages. We all know why the metals are declining; the Chinese equivalent of the Federal Reserve has banned new lending in lots of industries that need raw materials in an effort to cool inflation and keep the Chinese economy from imploding. Leave it to the communists to kibosh run-amok capitalism just when the U.S. was starting to sell these raw materials to China for the first time. But oil prices this high, with no big natural-gas reserves, no new drilling to speak of, and no source of cheap energy to switch to (we haven’t built a nuclear-power plant in this country in twenty years) have obliterated the margins of just about every oil-guzzling industry, from aluminum-smelting at Alcoa to chemical-making at DuPont to the almost-back-on-their-feet Deltas and USAirs. Even if oil retreats five bucks from $40, which it hit last week, most American companies can’t pass on the increases, and most American consumers can’t fathom the pump prices without pulling back from retail spending.

We’d love to find some resolution to these woes, some equivalent of the defibrillator paddles with strategists yelling “Clear!” Heck, we’d take a flatline at this moment instead of the endless chart downward. But we’ve squandered the legacy of the 30 percent increase in prices that we saw since the Iraq war began—an increase that was based on a swift conclusion of the war (including an outsize recovery of oil), as well as a triumphant return of the Investor President to the Oval Office and a Federal Reserve that prudently inched up rates rather than jolted them willy-nilly, as will now have to happen. Let’s just hope that at some level—9,500 on the Dow, 1,800 on the Nazz?—we can accept that all the bad news has been factored in and any good news (say, the smooth transfer of power in Iraq) hasn’t yet been accounted for in the newly reduced prices. Or to put it in a way the retail investor gets: Maybe, after Wall Street marks all the merchandise down far enough, someone will be interested in buying something.

James J. Cramer is co-founder of TheStreet.com. At the time of publication, he owned stock in Phelps Dodge, Alcoa, Intel, EMC, and DuPont. He often buys and sells securities that are the subject of his columns and articles, both before and after they are published, and the positions he takes may change at any time.


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