"Rally, What Rally?"

Sydney M. Williams

Thought of the Day

“Rally, What Rally?”

July 12, 2010

From the depths of gloom, the market, surprising most pundits, sent a message of optimism which carried stocks to their best weekly performance since the week ending July 17, 2009, with the Dow Jones covering more than half the loss incurred in the second quarter. Yet the Press, on Saturday, was surprisingly circumspect. Investor’s Business Daily was the exception, carrying a story on the lower half of the front page: “Street Adds to Win Streak, But Volume Remains Low.” However, the New York Times, the Wall Street Journal, the Financial Times and Barron’s apparently decided that the rally was not worth a front page location.

Alan Abelson, writing in Barron’s, is perennially bearish, so it was no surprise that he wrote that stocks remain in a “bear market that has some years to run.” Paul Lim, in Sunday’s New York Times, quoted Sam Stovall (of Standard & Poor’s): “The chances of the correction morphing into a new bear market are definitely rising.” Mr. Lim added that, “the underlying economic optimism that spurred the stunning rally seems to be subsiding.” Echoing that same theme, Alan Beattie and Robin Harding headlined their piece in the weekend edition of the Financial Times: “Optimism on Hold.” The writers blamed “uncertainty” in the economy.

Declining volume does not, typically, lend support for a change in price trend. With the exception of May 6 (the 6th heaviest volume day ever), volume has been gradually declining since the hectic days of September-October 2008. Despite the fact that last week was holiday-shortened, an average daily volume decline of 13% from the previous week is significant. However, with such a large percentage of volume now coming from program trading, high-frequency-trading and various algorithmic platforms – up to 70% of total volume, according to some estimates –- it is difficult to assess the meaning of changes in volume. As proprietary trading desks undergo more scrutiny, and may become subject to regulation once the finance bill is enacted, the value of volume analysis will become increasingly complex. Nevertheless, the fact the market rose on declining volume cannot be construed as a positive.

Sentiment remains cautious, as a front page article in today’s Wall Street Journal makes clear: “Small Investors Flee Stocks, Changing Market Dynamics”. That attitude is mirrored in Barron’s, with Bulls in the Consensus Index at 37% versus 43% two weeks ago. Market Vane, was virtually unchanged with Bulls at 39% against 40% two weeks ago. Regardless, the rally was broad, with the NYSE Index rising 5.8% and all major indices up more than 5%.

It all suggests we are far from a “Goldilocks” environment, one in which stocks get priced to perfection. The financial crisis and the ensuing recession are still fresh in the minds of people, minds which were already numbed by the market decline of ten years ago. Whereas skepticism, when it comes to investments, is healthy, fear and cynicism are not. And extended bear markets – and the market today is lower than it was a dozen years ago – breed fear and cynicism, conditions increasingly common among individual (and professional) investors. However, as Jim Grant writes in the current issue of Grant’s Interest Rate Observer, “Armageddon is usually a no-show.”

For a long time I have believed we are in an environment similar to the 1970s, a period when the market traded within a relatively narrow range for sixteen years. I believe we have been in the current period for the past twelve years. No one knows how long it will last, but we are most likely in the last few innings. What is important for investors is to keep one’s emotions at bay and to seek values when and where they exist.

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On an unrelated matter, I cannot let the opportunity pass without recommending the reading of Naomi Schaefer Riley’s wonderful interview in Saturday’s Wall Street Journal with Wendy Kopp, the founder of Teach for America. What Ms. Kopp has achieved over the past two decades is truly remarkable.

There is no better way to preserve and enhance the pre-eminence of our Country and culture than by improving elementary and secondary education. The domination of teacher’s unions has created an environment in our public schools that has riveted them to the past, fostered mediocrity, with seniority taking precedence over meritocracy.

Graduating from Princeton in 1989, Wendy Kopp found it easier to get a job at Morgan Stanley than one in the public school system in New York, as she lacked a traditional teacher certificate. Teach for America, as a concept, emerged from her senior thesis and, in lieu of working at Morgan Stanley, she began the program. This fall Teach for America will send 4500 of the best college graduates to 100 of the lowest performing schools in urban and rural America. Those 4500 teachers were chosen from 46,000 applications, which included 12% of all Ivy League seniors.

Funding for the program – this year the operating budget is $180 million – is mostly private, with $21 million in Federal appropriations. In contrast, the Peace Corps, created by Congress in 1961, received $340 million in 2009 and $400 million in 2010. This year they sent 7,671 volunteers to 77 countries.

The mission of the Peace Corps is to bring American ideals and technology to undeveloped parts of the world and for the volunteers to bring back to America a greater understanding of that world. It has proven successful for almost fifty years. But the comparison to the Peace Corps makes the success of Teach for America even more extraordinary. One woman’s idea has morphed into an organization that today deploys more than half as many people as does the Peace Corps for only a fraction of the cost to the Federal government. Teach for America is a program that serves perhaps the most critical need of our Country – improving the education of our youth. It is good to know that one individual with vision, optimism and determination can continue to play such a meaningful role in America.