Investor's Business Daily, June 14th, 2007
Journalism: The Dow had just pierced 13,000, but TV news anchors couldn't fathom why. All the data, they noted, showed the economy doing worse, not better. But therein lies a problem with media market analysis.
Now, we'll gladly stipulate that knowing why the stock market is acting the way it is on any given day is difficult, if not impossible. Yes, you can guess, as many do, but no one knows for sure. The real reason doesn't usually become clear until months later.
But that's the point. Daily market action usually doesn't reflect current conditions, let alone old government data. Investors are buying or selling based on their perception of conditions six to nine months in the future, not where the GDP was last quarter, the CPI was last month or bond yields are this week.
But don't tell that to Katie Couric. On April 25, the day the market breached 13,000, she fretted on the "CBS Evening News" that "even as investors are making money in the market ... there are concerns tonight about the rest of the U.S. economy."
CBS reporter Anthony Mason seconded the motion. "Wall Street and Main Street appear to be headed in different directions," he said, according to transcripts provided by the Media Research Center. "While the stock market's been racing ahead, the economy has been slowing down. Housing is mired in a slump."
Mason then turned to a Charles Schwab analyst for confirmation -- and got it. "We have seen economic growth get cut in about half in the last year," observed Liz Ann Sonders, "so clearly the economy is not as strong as it was a year ago."
Then Mason again: "Rising gas prices, up 70 cents already this year, could slow the economy down even more."
Over on ABC, Charles Gibson played the same theme. "Tonight, the Dow moves into uncharted territory, zooming past 13,000 for the first time. But is the economy as hot as the market?"
Providing the answer to his question was reporter Betsy Stark, who flagged "fresh signs of trouble in the housing market" and a dollar rise in gas prices that would "only add to consumers' woes at the pump." As for the stock market, Stark agreed with Gibson that a correction was "overdue."
It was the market itself, however, that was supplying the real answer to Gibson's question. With its 136-point gain that day, extending a rally in which the Dow had closed higher in 26 of 30 sessions, the market was saying: "No, the economy is not as hot as the market -- not now. But it could be in a few months."
And sure enough, the growth that Gibson, Couric et al. weren't seeing -- because they were looking at data describing months-old conditions -- would soon return.
Today, only seven weeks after that move through 13,000 (and some 450 points above where Gibson and Couric were calling for a correction), there are signs the economy is picking up again.
After an increase of 1.9% (year over year) in the first quarter, the consensus among economists is that GDP will grow 2.4% this quarter, 2.6% next quarter and 2.9% in 2007's final period.
The re-acceleration is so striking that Wall Street's latest concern, leading to a sharp three-day sell-off last week, is that interest-rate cuts anticipated earlier this year, when growth was decelerating to that 1.9% level, will not come about.
It is this growth that the market was anticipating during its April run. But the TV anchors couldn't see it because they were too busy looking in the rear-view mirror.
With stock and economic coverage like that, it's no wonder that 63% of Americans feel economic conditions are no better than "fair" or "poor," and that most expect a recession in the next 12 months, according to the latest IBD/TIPP Poll, results of which were featured Monday in the first part of this series.
Not everyone, of course, relies on Katie Couric or Charles Gibson for market analysis. But millions do watch them every night.
Nor, we should add, is the pessimism confined to viewers of network news. More-active investors, who presumably get their market information from other sources, are also down on the market.
A little-noticed feature of the current rally is that short-selling -- a way of making money if the market goes lower -- has reached new highs on the New York Stock Exchange.
The NYSE short-interest ratio -- the number of shares sold short and not yet repurchased divided by average daily volume -- stood at 7.63 on Wednesday and got as high as 7.74 on June 1. That's higher than at any time during the crashes of 1987 and 2000-02 or at the outset of either war in Iraq.
This, of course, is music to the ears of sophisticated investors. Short sellers -- speculators who sell shares borrowed from their broker with the expectation of buying them back at a lower price in the future -- are often wrong. High short-interest ratios are usually followed by rising markets.
The fact that so many shares have been sold short gives the market extra oomph. If the market continues to move higher, all those short sellers will eventually have to buy stock to repay the debt to their brokers. This increases demand, helping to push prices still higher.
All of this isn't to say the current rally will continue indefinitely. No one knows that, which is why IBD doesn't spend a lot of time gathering opinions of people who are only guessing about the future.
The only way to follow the market, in our opinion, is to watch it on a day-in, day-out basis. It is acting healthy or isn't it? If it is, there's even more upside for those who have ignored all the bearish nonsense in the media.
