Barrons
UP and Down Wallstreet
Goldilocks? Not
Exactly
By RANDALL W. FORSYTH
LIKE AGE, THOSE LONG and variable lags eventually catch up to you.
It takes months and even years for monetary policy to affect what
happens in the real economy, Milton Friedman taught an entire generation of
economics students. And although every central banker on the globe pays lip
service to this verity, they still are guided more by backward-looking
indicators, such as how many people found jobs last month, than forward-looking
ones, such as markets. Quarterbacks know to throw where the receiver will be,
not where he is. Central bankers don't get that.
Mark Turner, who probably didn't play what we call football
growing up in
Since then, crude oil is up more than two-thirds, hitting a
record $67 a barrel. And Goldman Sachs in effect said, get used to it; $60 oil
is the new normal. Of course, crude sold off on that forecast, not unlike when
the firm predicted a spike to $105 earlier this year. What seems more apparent
is that while $40 and $50 oil didn't crimp the indefatigable American consumer,
$60 crude finally seems to have pinched, as evidenced by last Tuesday's doleful
news from Wal-Mart, which allowed how its customers have little left to spend
after being drained by filling up their gas tanks.
Greenspan & Co. also have steadily notched up the
fed-funds rate to 3½% in the past year or so, which siphons even more cash from
the pockets of borrowers on top of what they're paying at the pump. One of
those weird and wonderful interest-only adjustable-rate mortgages that cost
$750 a month last year now might cost $1,250 a month. Fueling a couple of SUVs
costs maybe an extra 50 bucks a month. Just wait 'til heating season.
What we're seeing now is the delayed impact of the Fed's
formerly easy policy, combined with the first twinges from its belated
tightening. The worst of both worlds -- rising prices (check out the latest CPI
and PPI readings) colliding with monetary restraint. Does this sound like
Goldilocks?
Even the auto sector has not been able to escape this vise.
While GM and Ford are clearing dealers' lots with their employee-discount sales
gimmick, their former supply arms are bearing the brunt of the doleful state of
the car market.
Markets around the globe duly took note. Tuesday's
triple-digit drop in the Dow also was emulated by other bourses, notably those
in
UNTIL RECENTLY, INVESTING in small-capitalization
stocks was a different ballgame than in big stocks. Large-caps trade more like
commodities, especially with index funds, futures and options being whipped
around like currencies or bonds. Even individual traders can buy and sell the SPDR 500 Spyders
(ticker: SPY) with a mouse click and for about a penny in commissions for each
stock in the Standard & Poor's 500 fund. And they can do so any time of
day, as often as they like, unlike with mutual funds.
By contrast, small-cap investing has meant digging for
estimable companies with solid prospects and finances, as our small-stock
maven, Rhonda Brammer, does with such aplomb. And once you find one of these
overlooked gems, you have to be patient. It may take time for the virtues of
these small fry to be appreciated. It's hoped that in the fullness of time,
these companies will continue to grow and graduate into the ranks of mid- and
large-caps. And institutions can't whip in and out of smaller, less-liquid
stocks without disrupting their prices.
Or so it used to be. In recent years, folks have jumped on the
small-cap bandwagon with the same alacrity as they once did with the Spyders,
or QQQs (as aficionados of the Nasdaq 100 Trust
refer to the ETF, even though its symbol is QQQQ since moving to the Nasdaq
last year). Their vehicles of choice are the iShares Russell 2000
(IWM) and, to a lesser extent, the iShares S&P SmallCap
600 (IJR). As the chart here shows, the Russell 2000 ETF's size has risen
pretty much in lockstep with the small-cap benchmark index.
Which is driving which? Good question, says Satya Pradhuman,
Merrill Lynch's chief small-cap strategist. "The popularity of [the ETFs]
is symptomatic of the classic small-cap cycle," he says. Previously,
however, when a large-cap manager wanted some exposure to smaller stocks, he'd
walk across the hall and ask his small-stock counterpart for his best ideas.
Now he can just punch in IWM to get exposure to the sector, Satya adds. Which
points up an important point about ETFs: While they were originally aimed at
individuals, institutions, notably hedge funds, count for much of the volume.
That can be a two-edged sword, Satya also points out.
"The way markets act today, it's more dramatic. Any reversal, as in the
January-April period, can be violent because the base or investors can get in
and out more quickly." He adds that the fundamentals for small- caps still
are positive, with the investor base continuing to broaden.
That said, it seems likely that moving masses of money into,
and out of, the small-cap ETFs is apt to have an out-sized impact on this sector.
Large as S&P index funds and ETFs are, they pale against the capitalization
of those 500 stocks, whose value exceed three-quarters of the
And indeed, this hypothesis is about to get an even more
extreme test with the debut of two micro-cap ETFs last week, iShares Russell Microcap
Index (IWC) and PowerShares
Zacks Micro Cap Portfolio (PZI). The former consists of the smaller half of
the Russell 2000 while the latter consists of 300 to 500 highest-ranking stocks
out of the 2,500 smallest names, based on a Zacks quantitative formula.
John Montgomery, manager of the top-performing Bridgeway Ultra-Small
Co. (BRUSX) and Bridgeway
Ultra-Small Co. Market (BRSIX) micro-cap funds, says that while he welcomes
the competition from these ETFs, he's concerned about the disruption they can
cause. And because of bid-asked spreads "wide enough to drive a truck
through," transaction costs could eat up the excess returns investors have
reaped in tiny stocks.
Those lush gains, of course, are what has attracted traders to
small-cap ETFs, especially while large-caps basically have gone nowhere as
their fans await the long-predicted "up-in-quality" trade. Whatever
the recipe, it will be interesting to see if the momentum players who have
piled into the small-cap ETFs barrel into the micro-cap numbers. And what the
effect will be if they all try to make for the exits at the same time.
FROM BIANCO RESEARCH comes a daily compendium of
articles that the eponymous Jim Bianco and his cohorts think might be of
interest to their institutional clients. Among the running topics is Your Daily
Installment of "Picking a Top in the Real Estate Bubble," which
features the seeming parade of stories warning of the impending collapse in
property prices. A confirmed contrarian, Jim doubts that the end of the housing
bubble could be at hand if the media are all over the story. After all,
virtually every TV outlet and publication (with the exception of the one you're
reading) fell all over itself heralding the New Era of Tech -- right until the
bubble burst. This time around, the media are making damned sure we won't get fooled
again.
And also in keeping with the tradition of the summer silly
season, when editors (and columnists) will grab any story to run during the
dearth of real news, we hereby offer our contribution to Jim's Top-Picking
collection: the Mr. Hou$ing Bubble T-shirt. A takeoff on the kid's bubble-bath
package, it has established itself as the top-selling number at
T-shirthumor.com in just a week, according to Reuters. The inflated house
cheerfully allows, "If I pop, you're screwed!" A disclaimer further
avers, "Not affiliated with Mr. Internet Bubble."