- Investors are walking on eggshells amid relative calm, fearing another shoe will surely drop in the credit crisis as markets rebounded in recent weeks.
- Such skepticism is bullish for markets looking ahead to the rest of 2008.
Almost a year into the housing-inspired financial crisis, folks are pervasively skeptical about the recent market recovery (see yesterday's cover story, "A Suckers' Rally," for more). They're cautious, like someone approaching a lit firecracker that didn't blow—not sure if it was a dud, or if it's gonna go POP! in their face at any moment. Is the worst really over, or is the next shoe about to drop?
Fannie Mae's announcement Tuesday only makes the issue murkier:
Fannie Mae Has Loss, Cuts Dividend, to Raise Capital
By Dawn Kopecki and Jody Shenn, Bloomberg
Such intent focus on negatives that ultimately have little impact is too common these days and perpetuates needless worry—which to us isn't a bad thing. (For instance, where were the attention-grabbing headlines about the service sector's unexpected strength?) Such worries are bullish and indicate there's more room for the market to run. Another bullish sign is the widespread dismissal of positive developments like the Fed's announcement last Friday:
Central Banks Take Aim at Elevated Libor
By Joellen Perry and Greg Ip, The Wall Street Journal
Does anyone even remember hearing about this last week!? Most headlines were buried. The Fed's response to continued impairments in the LIBOR market—which negatively impacts interbank lending—is another evolutionary and supportive move. Most importantly, it means credit card- and student loan-backed securities will now be viable collateral for the Term Securities Lending Auction Facility (TSLAF) alongside evil mortgage-backed securities. Similar to illiquidity in the mortgage market in months past, the student lending and credit card markets have also seen some turbulence. This move, in particular, is likely to help stem the tide of any "other shoe dropping."
This type of news is positive, but awfully yawn-inspiring and therefore won't garner the spotlight. C'mon, admit it—hints of doomsday are much more titillating to read than the hum-drum, day-to-day stuff that makes our economy work. Keep this in mind before you begin reading the next "worst financial disaster in history" article.
Whether or not we're over the troubles and out of the woods is anyone's guess. But so far, relative to catastrophic predictions, the troubles haven't been too troublesome and the woods haven't been too woodsy. Given the fact corporate earnings and economic data continue to beat far too dour expectations, we believe stocks are headed higher this year. Remember, an investment community focused on the negatives and dismissive of the positives provides a bullish environment for stocks.