STOCK WATCH


Will It Be This Easy?

Jeffrey R. Kosnett

Stocks soared on news of the government's plan to ease the financial crisis. That doesn't mean the bull is back, though.



Under normal circumstances, weekends should be a time for worship, relaxation and recreation. But this weekend, you may want to spend a bit more time than usual focusing on the business and economic news.

What happens then could be a tip-off as to how investment markets will behave in the trading week that begins on September 22. If it becomes clear by that day that the economic-rescue plan concocted by Treasury Secretary Henry Paulson has not won widespread acceptance from Congress and what's left of Wall Street, the huge stock-market rally that began the last hour of trading on September 18 and carried over to the next day will get stale faster than a leftover bagel.

If traders dislike what they hear, they'll sell like crazy and the rally will seem like ancient history by lunchtime. On the other hand, if key Democratic legislators, such as Rep. Barney Frank and Sen. Chris Dodd, can get the rescue plan passed quickly, the stock market will do no worse than settle into a wait-and-see phase.

In either case, don't be surprised by some profit-taking in the aftermath of a 9.4% surge from the September 18 low in the Dow Jones industrial average. In fact, savage, momentum-driven rallies tend to burn out quickly. The Dow has risen 300 points or more on 25 occasions since 1998, including back-to-back days in March 2000. The average change in the Dow three months later: plus 0.06%, according to Bespoke Investment Group.

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Durable bull markets take longer to develop and gain traction because they build on confidence-changing trends, not sudden bursts of buying enthusiasm. Usually the catalyst is the topping out of interest rates, the end of a period of high inflation, or a parade of positive economic news. That's not the case this time.

That said, if the government makes good on its plans to relieve the problems of commercial and investment banks, any steps it takes to loosen credit should also improve the mood of investors. Sam Stovall, stock strategist for Standard & Poor's, says that as long as the Federal Reserve says it will do what it can to keep the financial system operating, the worst is over for bank stocks and other financial companies. "Now we're back to Investing 101," he says. "A lot of the fog surrounding the financials has been lifted."

Financial stocks, which were the leading cause of the market's indigestion over the past year, certainly appear to have hit bottom. Shares of important and relatively healthy banks, such as Wells Fargo (symbol WFC), PNC Financial Services (PNC) and US Bancorp (USB), as well as those of dozens of regional banks, hit 52-week highs during the market's surge.

The stocks of American Express (AXP) and General Electric (GE), which got clobbered when Fannie Mae, Freddie Mac, Lehman Brothers and American International Group were collapsing, jumped 22% and 20%, respectively, from their September 18 lows, yet still trade at reasonable price-earnings multiples (GE has a strong financial-services component).

The government's move to severely hamper short sellers is also bullish for stocks. Shorting, which is a way of betting on a security to decline, has its defenders, but it's also widely blamed for accelerating the plunge of some stocks, especially investment banks. "I'm really pumped about this," says Arthur Micheletti, a strategist for BB&K, a California investment firm. "This gets at the root cause. It stops the vicious cycle. Everything else the government did before was like Wack-A-Mole."

Who the winners will be over the next few weeks is anyone's guess. It's fair to say, though, that if the positive tone persists, an all-hands-on-deck rally will mature into a more-targeted one.

Sectors that depend on freer credit, such as construction and energy exploration, could get a boost, although they may have to pay more to borrow, thanks to a sharp run-up in interest rates on September 18. Conversely, retailing and other consumer-related sectors won't catch fire until the jobs-and-income picture improves. The stronger dollar may cool off some of the export trade that's been a big boost to manufacturing. And real estate isn't yet out of danger.

Which brings us back to the original question: Is it that easy? Just hatch a bank-rescue plan and make us all rich and happy again? No, it isn't. During the current cycle, many other government efforts to repel the bear market, such as a string of Fed-engineered interest-rate cuts and the Bear Stearns and AIG interventions, did little to calm investor angst.

But the latest round of federal maneuvering may finally cure what's been ailing investors for a seeming eternity. So even as you scrutinize the papers, TV and the Web this weekend for key developments, try to relax. After this wild and wacky week, we need a breather.




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