The Street This Week: He Who Hesitates

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In retrospect, the fleeting nature of Friday's big bell-to-bell rally was obvious. Home sales up again? Cisco's business "stabilizing"? Gee, home sales have been an encouraging consumer prop since January, and Greenspan first used the S-word about the economy in July. And look where that's gotten us. No, anyone with at least an arm's-length worth of objective distance from this market had to figure this was another "sucker's rally," a wild and temporary burst of optimism from traders and investors who closed their eyes, crossed their fingers and bought on Friday because, well, it's August and the boss was already in the Hamptons anyway.

But we objective types (it helps if you haven't a dime to invest) have been fooled by the Big Board barbarians before, and while we were completely prepared to scoff knowingly at any Monday follow-up to Friday's misplaced giddiness, we weren't quite prepared to say it couldn't happen. Yes, it did seem that a sustained rally now, based as it would be on nothing at all, would make suckers of any who expected it to bridge the gap between now and THE RECOVERY, and what's more, the aformentioned recovery would be a lot better, a lot smarter, if it looked for a few more quarters before leaping.

But who knew the traders knew that too? With some party-pooping help from existing home sales, which fell off 3 percent in July, on Monday the Dow and NASDAQ made moves you could count on one hand, and volume was so thin as to cause some to wonder whether all the pros who had bought into Friday's run-up had, via cell phone from the Hamptons, been fired.

But if glum hesitation — the defining feature of this post-apocalyptic wasteland known as summer 2001 — is back in fashion and most of the big money remains on the sidelines, the season's last week will be a test of will for the few unfortunates in there slinging.

Tuesday brings us the Conference Board's consumer confidence measure, an index distinguishable from the University of Michigan's consumer sentiment survey in two ways. The UM number is bi-monthly, the CB is monthly; and the UM is proprietary, which means some paying customer has to leak it to Reuters before we can hear about it, while the CB's numbers are free to all. (This explains why the UM number is considered slightly more credible, though for my money the reports on consumers' emotional states have been singularly useless for most of this year.) That said, folks are expecting a slight bump.

Wednesday brings the mother of all backward-looking indicators, the Gross Domestic Product number for the second quarter. The forecaster consensus — however likely that is to be slightly off — is a full-moon, goose-egg, love-love 0.0 percent, which at this point should be as much of a relief as anything. Smart economists will be leafing through the report for seeds of what we can expect going forward, namely the points taken off the GDP by hand-over-fist inventory liquidation, theoretically a good and fertile development for the seasons ahead. Here'll be the really scary news: The Commerce Department reports on Q2 profits, with Merrill Lynch predicting a precipitous 16.3 percent year-one-year drop.

Thursday is the day of the consumer, on whom — getting tired of hearing this yet? — the hopes of the economy to avoid a recession are still resting, and will probably rest until Christmas. Personal income is expected to inch up along with personal spending; hair splitters will try to figure out how much of that was tax cuts/rebates, and how much of that went straight into the bank. Also, the ECB has a chance to cut rates (it's not shown nearly the desperation so far that Greenspan's outfit has) and some say the relatively strong euro makes that likely.

The great thing about Friday is it's the last day of August, and the last day before the three-day Labor Day weekends puts the kibosh on this turgid trading summer and brings the real money back from the Hamptons and into play. July factory orders and the Chicago Purchasing Managers' manufacturing report for August are expected to show that sector in continuing decline, though there's some hope that the trend is headed back up to zero after last week's durable goods number. Dare we look for another Friday pop? Well, on a day likely to be peppered with statistics showing this August to be the worst for equities since 1992, pie-eyed optimism should be at a premium. The bond markets have it right — they've got the day off.

So as these sleepy dog days come to a close, what giveth for the crisper climes down the road? Patience, my friends, patience.

The word this week is that the economy will be lying very still for at least a few more quarters. In an interview published Monday, super-economist Milton Friedman predicted a recession followed by a Fed-sown snap-back: "With the very unusual Federal Reserve policy of successive interest rates cuts...the key problem once the recession ends in 2002 will be how to control inflation," Friedman was quoted as telling Italian newspaper Corriere della Sera." And Manpower Inc. released a quarterly employment survey finding U.S. employers likely to keep hiring in the deep freeze through the fourth quarter (Oct.-Dec.). Which should at least help keep inflation at bay.

The Fed's next meeting, meanwhile, comes in early October, and here's some free advice, stipulated on the assumption that things look as flat and featureless in late September as they do in late August (not a big leap): Cut 50 more points, bringing the Fed funds target to an even 3 percent, and make the message very simple: We're done until further notice.

Which will put a much-needed stop to both the prospect of the Fed saving us from the significant correction we all know we need, and the disappointment over the Fed's not having done so already. Businesses will invest again when they think they can do so profitably, and investors will do so profitably when they see businesses do it too. In the meantime, we're all be better off waiting for this to happen on its own, or else we'll just get stuck with a bunch of junk — be they overbought stocks or overbought goods — that we'll spend 2003 getting rid of.

Not to mention a lot of Friday rallies that don't mean a thing.