Are You "Handcuffed to a Corpse"?

Throughout the day, CNBC is on in the background of my office. For the most part, its roundly ignored -- muted or set with the volume extremely low. On very rare occasions will something intelligent and worth repeating break through the clutter of hype, hope & despair to catch my ear.

That happened last Wednesday.

Art Caishen is the director of NYSE floor operations for UBS Paine Webber. (Disclosure: We clear through UBS). He's a real no-nonsense, salt-of-the-Earth type of guy, who calls 'em as he sees 'em. He's also been a fixture on CNBC as far back as I can remember, occasionally offering his homespun wisdom from the floor of the exchange.

I credit Art (whom I've never met or spoke with) with this week's most cogent observation: According to Art, too many people are "handcuffed to a corpse." I'm paraphrasing, but here's the essence of what Art is suggesting. So many investors own stocks purchased at $50, $75, even $100 dollars -- which have become "teenagers," or have even single digit prices -- that their owners refuse to sell.

The expectation (hope, really) is that one day, the stock will get back to breakeven and THEN they will sell. They fear that if they finally dump these jumbo losers, they may miss the 20% dead cat bounce from the deeply oversold condition.

That squares with my experiences with many investors. People were paralyzed as the market came down --they did not have a plan, and now they know not what to do. They are fearful to "take the loss."

To make matters worse, they are not effectively redeploying that capital. Its tied up in old favorites. So not only are they still dying the death of a thousand cuts as their equity values continue to skid, they are missing other opportunities in the non tech sectors of the market. And, they already have taken the loss -- due to drop in equity value.

Are you handcuffed to any corpses? If you review your portfolios, I'll bet you'll find corpses to cut loose. See if you can redeploy your capital in a more advantageous manner.

Angst in the Marketplace

Todd Harrison, hedge fund trader extraordinaire, recently described all the contradictory crosscurrents as "Angst in the Marketplace." That phrase cogently sums up these many divergences in a shrewd way; It recognizes not only the fundamental and technical issues, but the importance of the sentiment factors.

We have discussed several of these ourselves in "The Blind Men and the Elephant"

To quote Todd:

"Stochastics, for instance, are firmly treading water in "buy" territory, and while they have "pretzel twisted" in this zone before, it's proven to be a matter of time before a "coiled spring" exploded to the upside . . . BUT, the oscillators, -- the stochastics in particular -- offered a similar signal in February, (we all know happened from there)."

Todd wrote this before Fridays' impressive looking rally; when we look at the internals of that liftage, we see that it lacked the internal strength to generate real follow through. Technicians like to see a better up/down volume ratio, stronger advance decline ratio, and larger overall volume before believing that the "rally is for real."

Follow that set of contradictions with another: the Arms index and put/call ratios have made unique buy signals. We discussed the importance of both of these signals back in late March in "Ten reasons to Start Getting Bullish"

On the other hand,

"the technicals have clearly broken key support levels, which suggest further weakness. Over the last year, "the market traded as a function of support and resistance. We trade in a zone, and when it's breached to the downside, the floor becomes the ceiling."

That suggests to me that we continue the grinding process, both upwards and downwards, until a clear breakout occurs. "Once the lift starts, and any rally begins, the masses will migrate (fear of missing) and the buyers will emerge higher." Add to the mix the looming preannouncement season and imminent tax selling, and you have a fine recipe for Angst in the Marketplace.

And if YOU were Fed Chairman?
Free advice worth every penny of what it costs.

There are perhaps two jobs under more scrutiny than that of Fed Chairman Alan Greenspan: 1) POTUS, and 2) Corporate Chieftain Flavor of the Month. So in addition to Dubya, pick either Bill Gates (MSFT) or Jack Welsh (GE) or John Chambers (CSCO) as the 2nd most scrutinized U.S. employee.

Leading up to the most recent Fed meeting, Alan Greenspan got all sorts of "good" advice. You could practically see the talking heads thinking: "Well, if I were the Fed Chairman . . ."

It's become sport to second guess Greenie. A few years ago, he was lauded as a hero -- despite saying that stocks were grossly overvalued way back in '96. Now that the blush is off the rose, and Greenie has become a toothless tiger, pushing on a string, an old school theorist. He was too slow in reacting to the economic slowdown, some complained. Others kvetch that he caused it in the first place, by raising interest rates at the first hint of inflation last year.

Still, even his most ardent detractors will admit he has let the air out of the bubble in a remarkably controlled, measured way. Its hard to imagine describing a 65% drop in the Nasdaq as orderly, and yet, in its own odd way, it has been. We are not experiencing the massive dislocations of the 1930's, and that's no small feat.

Working in a fishbowl has created a fascinating dichotomy, as everyone offered up their "sure-fire solutions" for "fixing" the economy.

The chatter before the last Fed Meeting was remarkable in its breadth, a sign that there is little consensus on Wall Street going forward. Some were advocating that the Fed do nothing. This would be taken as a sign that the Fed Economists were confident that the economy was on the mend, and a rebound was at hand. Not cutting rates would be a grand gesture.

Meanwhile, others impatiently said "Cut a Half." Let's get this entire this part of the rate cutting cycle over with, and get on with our lives.

No cut at all would crush the equities market, as a 1/4 point was already well built in. Of course, a half point cut would spook the bond traders. "Maybe its much worse than we thought," the bond ghouls would say, as they then cratered bonds in anticipation of still more cuts.

Damned if you do, damned if you don't.

Still others -- L.K.? -- took the opportunity to snipe at the chairman, hoping to further their own personal political ambitions. They took advantage of the fact that no Fed Chairman could or would respond to personal barbs. Of all the commentary out there, I found this "bullying" approach to be utterly cowardly, and had the least contribution to the dialogue.

Now for Reality: Adjusting the world's largest economy is like turning a supertanker. I know, its cliche, but its true. It takes planning, it takes intelligence, but most of all, it takes time. Its a fiction that the Fed only needs to push a button, and all can be right in the world again. The reality is that the Fed cannot eliminate the normal business cycle. There will be ups and downs in the US, indeed, the global economy.

Any Human endeavor which must be planned over not days and weeks but quarters and years is guaranteed to try our patience. But that's the nature of economic cycles, and all the whining in the world won't change a thing. Its gonna take some Time to heal the global economy, regardless of what everyone else wants.

Get used to it.

Our Investment Conclusions?

So what's the significance of these three diverse observation, and all this technical mumbo jumbo?

Its simply this: We still may have some softness ahead, perhaps another 10% downward, as we enter the preannouncement period. The V bottom is already out of the question and Bear markets end with a bang, not a whimper.

But after the enormous selling we saw over the past 18 months, another 10% down or so seems almost minor. At this point, there is much more upside potential than downside risk.

We are not unaware of the preannouncement season and fiscal year end tax selling coming up. We will not be throwing money around foolishly, nor will we try to bottom fish the tech or telecom sectors.

The markets are cyclical in nature, and the groundwork for the longer term recovery is very visible. In fact, many signs of the bottom are firmly in place. Its a safe bet that the indexes will be appreciably higher 6 - 12 months from now -- Think where we will be in March 2002.

The short term rally we were seeking late June did not materialize, as the Nasdaq breached the 2000 level to the downside. As I wrote then:

"Come September, we may see a very different story unwinding as the Street gets wise to this [preannouncement] pattern, and other factors come to the fore . . . And as always, if the market does not play out as we envision, we use our stops to limit the damage and wait for the next opportunity to redeploy . . . " (from "Here We Go Again . . ." )

We have done just that. We are sitting on some cash, and we will be gradually redeploying that cash over the next month, starting here.

Those of you in the States, have a nice holiday weekend.

Barry Ritholtz
Market Strategist, Weatherly Securities

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