Stocks Soar — Climbing a Wall of Worry

Kurt Brouwer July 29th, 2008

U.S. stocks soared today despite a long list of negatives.  There is an old term on Wall Street term that applies in this situation — that stocks are ‘climbing a wall of worry’ as they rose today despite plenty of potential problems.  Actually, though we can’t really make this claim unless and until stocks enter a protracted upturn.  So, maybe we’ll just say that investors have been whipsawed over the past couple of days as this stock market tries to figure out what it wants to be when it grows up.

The DJ Industrials rose 266.48 points, which is +2.39%

The S&P 500 rose 28.82 points, which is +2.33%

The Nasdaq Composite rose 55.40 points, which is +2.45%

There were plenty of negative stories such as the continued decline of home prices, a huge writeoff of assets at Merrill Lynch, news of bankruptcies at retailer Mervyns and restaurant chain Bennigan’s Steak and Ale.  And, finally, even Starbucks is hurting as it announced the layoff of 1,000 employees.

In other words, there was plenty of negative news such as that which triggered yesterday’s market decline. Yet, stocks went up.  What’s going on?

  • First, there has been a significant pullback in commodity pricing, particularly in oil. Oil prices fell again today and are off roughly $25 per barrel from the high point of $147.
  • Second, there was a bit of strengthening in the dollar. These two pieces are connected and for much of the year, a declining dollar has exacerbated the soaring price for oil.

Assuming this trend — falling oil prices and a stronger dollar — continues, we will see the reverse situation as we pay a lower price for oil because of strength in the dollar.  This is a big if though, so I’m not making too much of this trend.  If you want to dig deeper, see Declining the Dollar and Oil Prices — Too Low For Too Long.

  • Another factor that has clearly helped stocks is that corporate earnings are growing at many companies. Obviously, financial stocks and housing-related companies are spewing red ink, but many publicly-traded companies have announced surprisingly strong earnings. Earnings or corporate profits drive valuations of publicly-traded companies and these announcements are - well - a bit of a surprise for many who focused on all the bad stuff that is happening in financial stocks.
  • A related point to the earnings picture at non-financial companies is that valuations are pretty darn good. In fact, some portfolio managers seem to be pretty excited about these valuations.

For example, in a recent interview in Barron’s, hedge fund manager, Lee Cooperman, said this:

…[Barron’s]: Are there any particular pockets of the market where you have been finding opportunities?

Cooperman: To some degree, I feel like a kid in a candy store. We find a tremendous number of values in the stock market. Consider that Anheuser-Busch [ticker: BUD] was trading at 47 when it got acquired by InBev [INBVF.Belgium] for $70 a share in cash, or 22.4 times 2008 earnings. That’s about a 45% premium. Hercules [HPC] was selling at $16 when earlier this month it agreed to be acquired by Ashland [ASH] for $23, or 14.1 times earnings — a 40% premium. Rohm & Haas [ROH] is getting acquired by Dow Chemical [DOW] for 21 times earnings, a 74% premium. These are cash deals, so there is plenty of money around. We have two markets, one being the financials, where companies are losing tens of billions of dollars that they are equitizing to replace their losses. And you have the industrial economy, which has done fairly well; its assets are selling at well below replacement cost…

I have heard similar statements from other smart, savvy portfolio managers.  However, we are still in a bear market for stocks (real estate too obviously).  Good days like this one are nice, but they do not mean the trouble is behind us.

For a more in-depth treatment on the state of stocks, see The Kitchen Sink Stock Market.

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