- The media seems to have moved on from fretting subprime's fallout to speculating on a possible fix. In our view, subprime requires no fix, and increased regulation is the greater risk.
- Meanwhile, economic fundamentals are largely positive, and any negative is already well known.
- The media's dour outlook means the positive impact isn't reflected in current stock prices, and the market likely has further room to rise.
Is subprime past its prime? Hard to say—it's had such sticking power this year, but we note since this week's Fed rate cut, front pages of major world publications are no longer crowded with predictions of impending subprime-induced doom. Sure, we're seeing some grousing that it was "too late" or "not enough"—but more common are headlines like these:
Subprime Plan? No Problem
By Nina Easton, CNNMoney.com
Accord Seen on Revising Mortgage Rules
By Edmund L. Andrews, The New York Times
What's this? Just this past Monday, the nearly universal media view was the four horsemen were out of their stable, and there was no conceivable "fix" to subprime woes. In our view, new regulation is the far greater risk, but we're relatively at ease this Congress won't be able to get much material passed. (See past MarketMinder commentary "Do Nothing Market Heroes," 04/04/2007.)
Does that mean our journalist friends' sentiment has suddenly vastly improved? Heavens no! An interesting feature about this year has been that very positive economic fundamentals have gone largely unnoticed by a media seemingly fixated on finding reasons to be gloomy. For example, unless you were diligently looking (or a MarketMinder faithful), you'd be hard pressed to know earnings are walloping expectations this year. Yet, it's as if the media collectively put a moratorium on that subject. You only hear when Company XYZ missed earnings—with no mention of how the market in aggregate is doing. Some handful of companies will always have a disappointing quarter (subprime—hello!) but that says nothing about the health of the economy as a whole.
Rather than report on legitimate economic fundamentals, the media stokes its already dour outlook with headlines like these:
Economic Indicators Drop the Most in 6 Months as Confidence Ebbs
By the Staff, Bloomberg News
Try as we might, we'll never quite grasp the media's love affair with backward looking indicators that have no track record for accurate stock market prediction. This is akin to being afraid you'll crash your car because you see a Hummer in your rearview mirror. Heck yes you're going to make a critical error—because your eyes are glued to what's going on behind you! Incidentally, since the last time economic indicators dropped this much, US stocks are up 8.6%. Hooray!
Here's another stubbornly gloomy headline:
Stocks Drop on Weak Outlooks, Inflation Fears
By David Bogoslaw, Businessweek
Correct us if we're wrong, but two days ago everyone was euphoric about the rate cut. Now, inflation's a big fear?
Aggressively cutting rates is one good way to stoke inflation. So how can investors cheer the cut but jeer inflation? (Tuesday's cut wasn't aggressive, by the way, but you get the point.)
Under a tight deadline, and need another scary headline?
Gold Hits 28-Year High as Dollar Struggles
By Lewa Pardomuan, International Business Times
This is a two-fer. The implication is gold is signaling increasing inflation and a weak dollar is bad. Wrong and wrong. A developed nation's currency's relative strength doesn't dictate stock direction. Point in fact, over the past five years, the dollar's been largely weakening against our major trading partners (most of the time—it strengthened in 2005), all during a bull market. Weak dollar, strong dollar—stocks can rise either way. And, we're not sure what's scary about a 28-year gold high. Over the long-term, gold price movements are predictive for stocks. All you might conclude from a relatively high gold price is now might be a lousy time to buy. (Then again, historically, gold has been a lousy long-term investment anyway.)
Ignore these baseless fears—but note a bullish feature. That fundamentals are so strong (economic growth, earnings, benign interest rates) and the media is ignoring them means the positive impact isn't yet priced in and stocks have further to go. So the next time you see a journalist give him a hug. First, he can probably use it. Second, his grumpiness signals now's a beautiful time to be bullish.