Market Review: Bullish Easter Egg Hunt

With her cafe tables now spilling out onto the bustling
sidewalks, Paris has traded in her winter coat for a
spring dress. We wonder if those picturesque Parisian
tables will be serving as much rabbit stew so close to
the Easter Bunny’s arrival.

Meanwhile, as kids of all ages wonder what the Easter
Bunny will bring them this weekend, so the kids on Wall
Street wonder what kind of eggs they can expect in their
second-quarter baskets. With the first quarter drawing
to a close on Thursday, bullish analysts such as Gail
Seneca are expecting the fattening, creme-filled Cadbury
kind. "Eventually the stronger influence on the market
is going to be economic recovery and profit recovery,"
said Seneca, the chief investment officer at Seneca
Capital Management LLC, as quoted by the International
Herald Tribune (IHT). Seneca believes the threat of
higher interest rates has been exaggerated and that
investors will increasingly focus on the strength of
corporate profits.

We here at the Daily Reckoning like our Cadbury eggs and
profit-filled baskets as much as Seneca and the other
kids. We also believe in the Easter Bunny. However,
while the legendary lepus has been quite generous over
the years, a quick recovery for corporate profits is a
hair too much to expect from the big-hearted hare.
Looking for such a recovery while stocks are already
expensive (relative to their earnings) and while
interest rates look set to rise is a not an Easter egg
hunt in which we wish to participate – it’s a wild goose
chase.

Interest rates and corporate earnings fought to a draw
on Wall Street during the first quarter. Sure, the
economy continues to strengthen. But even though the
Standard Poor’s index of 500 major American companies
has fallen 25 percent from its peak in 2000, and even
though the Nasdaq composite has slumped 60 percent, the
plane fact is that stocks are expensive. By year’s end,
we suspect the only thing we’ll find in our tattered,
beat-up Easter baskets will be crushed eggs shells, the
legacy of heavily-overpriced stocks, rising interest
rates, and bullish expectations.

Still, much of the mainstream financial news continues
to be what our friend the Mogambo Guru likes to deride
as "all bullish all the time." Many of those mainstream
industry analysts expect earnings to rise 16.5 percent
this year after falling 17.3 percent in 2001, according
to First Call/Thomson Financial, which tracks analysts’
forecasts. In addition, the Commerce Department reported
Thursday that the U.S. economy grew at a 1.7 percent
annual rate in the fourth quarter of last year. That’s a
modest upward adjustment from the department’s previous
estimate of 1.4 percent.

Even with all the rosy forecasts, at the end of the
first quarter, stocks were caught in a tug-of-war,
pulled upward by higher earnings while being weighted
down by rising interest rates. "In the first quarter
[which ended Thursday]," reports the IHT, "greed and
fear were almost perfectly balanced." The S&P’s index
fell slightly, despite making a small gain Thursday.
Since January 1, the Dow Jones industrial average has
risen 3.8 percent, but the technology-heavy Nasdaq
composite index is down 5.4 percent, according to the
IHT.

Finishing up with the week’s developments, on Thursday,
the Dow lost 22.97 points to close at 10,403.94; but it
still managed to end the quarter up 3.8%. The S&P gained
just 2.81 points Thursday to close at 1147.39. The index
missed its second consecutive quarterly gain by just
3.51 points. The Nasdaq composite rose 18.60 points to
1845.35. Despite that lift, the index still declined
5.4% during the first quarter.

Addison will be back from his egg hunt down under next
week. In the meantime, since we don’t expect any from
the market over this next quarter, we’re going to go
look for some Cadbury eggs.

Cheers,

Stuart Crampton
March 30, 2002

P.S. Be sure to visit the discussion page at our web
site to voice your opinions.

THIS WEEK in THE DAILY RECKONING

by Bill Bonner

03/29/02 CONFIDENCE GAME

"…The confidence of American consumers and investors
is taken as good news throughout the world. People think
it means good things to come. Taking a contrary view, as
usual, we believe it is merely a sign of good things
that have already come and gone. Confidence is a
trailing indicator, we think. The more there is of it…
the greater the boom we are leaving behind…"

03/28/02 PUTTIN’ ON THE RITZ

"…What a dull world it would be if man really worked
the way economists think he does! What would I write
about each day, if markets were as perfectly rational as
Nobel prize winners think they are? And what kind of
drab history would the world have if people acted as
reasonably as they are supposed to?…"

03/27/02 NEVER GIVE UP!
By Marc Faber

"…"Never give up" seems to be the leitmotif of
consumers and investors alike. And "shop ’till you drop"
and "buy stocks because the recession and the bear
market are over" are the guiding principles of the
day… Never mind that, in order to consume and to
invest more, Americans have to go deeper and deeper into
debt…"

03/26/02 ORDINARY MEN

"…Give a man a big idea – a New Era, a Master Race, a
Domino Theory – then put a throng of morons at his back,
and he’ll do almost anything. You can dress him up in a
business suit or a military uniform. You can put
bullets, ballots, or a day-trading terminal in his
hands; there is practically no way to anticipate the
mischief he’ll get up to…

03/25/02 ESSENTIAL MATTERS

"…The Daily Reckoning sneaked into philosophical
discussion over the last two weeks, dear reader – like a
teenager who takes up smoking. We sputtered and coughed
out existentialism, relativism and descriptivism. But
just talking about them made us feel cool…"