Seeing the Other Side: The Bull's Case  

THE BIG PICTURE:  Written Monday, May 19th, 2008

Let’s make the three-pronged bullish Big Picture case this morning.  About time, right? 

1.        The bullish argument starts with the assumption that the “worse financial crisis since the Great Depression” is behind us.  Many Wall Street CEOs say this is the case but since they have so much skin in the game we have to look askance at what they say.  Sort of taking a large dose of salt with what the Federal Reserve Banks says, we know they won’t outright lie but spin, jawboning and moral suasion is the name of that game.  Still common sense tells us the flash point for the credit crisis was the run on Bear Stearns back in mid-March.  Before that another critical juncture was when MBIA and Ambac Financial were on the verge of losing their AAA ratings and the negative ripples that would cause and before that the danger was were Fannie Mae and Freddie Mac were under severe pressure.  And before that came Washington Mutual and Countrywide.  You get my point. We’ve been through a heck of a lot, through multiple quarterly billion dollar bank write-offs, the commercial market paper seizing up, Libor rates heading higher, the auction-rate market collapsing, losses from banks all over the globe, a run on an English bank and one on an American investment bank.  The troubles have gone on and on, starting last July and continuing for the last nine months.  So from an extent and duration perspective, it does look like we could be past the worst of it.  Of course, there will be additional write-offs and bearish surprises but still will it get worse than it was?  Maybe not.  So there is a case to be made that the worst is over.

2.        Next we have an US recession to handle.  But this is quite a slow-motion, economic slowdown.  The “R” word continues to loom out there on the horizon but hasn’t hit us full force.  This is probably because of the balming effects of globalization having gained much traction in the world economy over the last couple of decades.  As a result, today, the United States is just one part of a much larger one global economy or marketplace.  Thus our economic weakness and financial problems here in America isn’t putting the kibosh on the whole world like has been the happenstance in decades past.  While America’s housing market has gone bust and while our financial firms have lost billions and while the US consumer is getting severely squeezed, things are different, much better elsewhere.  Chinese, Russians, Brazilians, Middle Easterners, Eastern Europeans all have more, not less money, in their pockets today and are thus feeling and indeed are wealthier than just a couple decades past.  Indians are seeing their incomes rise 10% to 15% to more each year as are others in today’s more shared wealth.  Yep, the wealth on this planet gets, and has been, redistributed when trade barriers come down, when communication is instantaneous and when transportation is positively effected by miniaturization and other new breakthroughs like “just-in-time” inventories.  Bottom line, as former Federal Reserve Chairman Alan Greenspan remarked, America’s economy is much more resilient, flexible, open, deeper and stronger than ever before.  So why wouldn’t it also be logical that big layoffs, suddenly bloated inventories and other signs of past recessions don’t happen this time?  Couldn’t we just skirt along the fringes of a recession this time around?  I suppose that could unfold and end up being the case today.

3.        Finally we have the value proposition.  Many value investors and others see stocks as representing solid, even great value today.  Big time, long term, value players like the richest man in the world Warren Buffett, mainly look past the economy’s ups and downs, they forget what’s going on in the economy today, and thus see stocks are cheap.  Mr. Buffett, the “Oracle of Omaha,” in point of fact increased his holdings in a number of stocks in the first quarter and says he’s now on the lookout to buy more.  Another value guy this morning, on CNBC, says many financials, I assume not the banks, have been pounded down for no discernable reason, and are incredibly cheap.  Net, net, if we put current concerns aside, forget where we stand on the business cycle time line, etc. stocks can be looked upon as undervalued and a great opportunity. 

Schwartz View:  The bulls argue that stocks are now going to resume their upward movement.  That what we’ve just gone through was just another financial crisis, the latest in a long line of crises, like the S&L problem in the late 1980s, the Asian Contagion, the 1987 worst one-day-crash in history, even for you market historians out there, the Eisenhower heart attack, Kennedy versus Big Steel, etc.  And that because of much market and economic strengthening evolvement over the years, the stock market and economy can handle this hiccup as well.  The argument goes that even that looking back in a few years, the credit crisis of 2007-08 will just be a faint memory.  And that stocks will be much higher in price.  Maybe, maybe not.