Bad news is good newsThere is a rally on Wall Street Tuesday despite weak guidance from Wal-Mart, another bank writedown and surging oil prices. Are investors no longer afraid? Video
NEW YORK (CNNMoney.com) -- Wal-Mart Stores (WMT, Fortune 500) issued tepid guidance for 2008. Credit Suisse (CS) said it was writing down nearly $3 billion worth of asset-backed securities. Oil prices are heading back toward $100. If I told you last week that you'd wake up on Feb. 19 to all those negative headlines, you probably would have expected that it would be a bloodbath of a day on Wall Street. But stocks were pushing higher Tuesday morning. "I'm a little surprised by how strong the markets have opened today," said Vincent Boberski, portfolio strategist with FTN Financial in Memphis. So what's going on? Brian Stine, senior portfolio manager with Allegiant Asset Management Co., in Cleveland, said that investors may be thinking that the worst may soon be behind us. Stine said that "too much doom and gloom" had been baked into stock prices. He thinks a combination of the tax rebate checks being sent to consumers and the Fed's series of rate cuts will get the economy - and stocks - back on track in the second half of this year. "Investors might have been pricing in the likelihood of a serious recession. But the economy may have bottomed out in the fourth quarter of 2007 or will do so in the first quarter," Stine said. Stine said investors may be heartened by signs that the financial sector, despite the Credit Suisse news, may be turning things around. In particular, troubled bond insurers MBIA (MBI) and Ambac (ABK) both had what could be viewed as encouraging news Tuesday. MBIA ousted its CEO and replaced him with its former chairman and CEO Joseph Brown. Meanwhile, according to a report in The Wall Street Journal, Ambac is said to be considering raising at least $2 billion in capital to help maintain its AAA credit rating. Boberski said it's possible that short-sellers with big bearish bets on financial stocks may be covering their positions - i.e. buying stock to limit their losses or lock in gains, and that this could be fueling the rally Tuesday. Big banks Citigroup (C, Fortune 500) and Wells Fargo (WFC, Fortune 500), as well as insurer American International Group (AIG, Fortune 500), were all up sharply early Tuesday morning and were among Wall Street's most actively traded stocks. But Boberski cautioned that financial stocks are not out of the woods yet. "There will be more bad news to come out related to subprime, another couple of quarters of bad news from financials. And it will be difficult to see a sustained rally until we get passed that," he said. But both Boberski and Stine agreed that chatter about the Fed's upcoming meeting on March 18 is likely to be what will be most prevalent in the minds of traders and investors for the next few weeks. Along those lines, Minneapolis Federal Reserve Bank president Gary Stern said in a speech Tuesday morning that the Fed plans to "remain sensitive to evolving financial conditions and to incoming information on business activity" when making future decisions about interest rates. Stern has a vote on the Fed's Open Market Committee, which sets monetary policy. Stern's comments could be interpreted as a signal that the Fed is likely to cut interest rates again at the March meeting. And Stine said that this is good news. He believes the Fed's actions over the past six months, including the introduction of auctions to loan money to banks that need short-term funding, have helped the banking sector. As long as the Fed continues to do what it can to keep banks from imploding due to their bad mortgage bets, this, Stine argues, will eventually lead to a turnaround in the markets and economy. "If you look back at what the Fed has done since last year, it was more for the banking system than the overall economy. Financials will bounce back because the Fed is showing it won't let things get out of hand," he said. And for at least one day, the market seems willing to be more hopeful than fearful. What do you think? Have we seen the worst for stocks this year or is there more pain ahead? |
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