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Business Week : Five Reasons to Sell, Sell, Sell !!
Business Week ^ | 07/20/2007 | Ben Steverman

Posted on 07/23/2007 8:33:24 AM PDT by SirLinksalot

U.S. stocks are at record levels. Earnings season is under way, with many expecting a modest rise in corporate profits. Unemployment is very low. So far problems with housing haven't infected the rest of the economy, which seems poised to bounce back from slow growth in the first quarter.

So what is there to worry about? Plenty. No matter how wonderful things look, the good times won't last forever. Even as most market observers remain bullish, we asked them what could derail this bull market. Stocks could keep setting records for months or even years, but it pays for investors to know what dangers are lurking out there. This Five for the Money lists the five biggest threats to the stock market rally.

1. Earnings

Will any stocks and sectors step up to the plate to push the market even higher? Investors are closely watching corporate earnings for clues.

Earnings season began this month and so far it's not clear whether corporate profits will keep pace with expectations. Expect a lot of volatility in the market as big players surprise investors with good or bad news. David Scott, chief investment officer of the Chase Large Cap Growth Fund, expects less support for the rally from financial and health-care stocks. So he's watching tech stocks closely. "They're a large enough part of the market that they can provide solid leadership," Scott says. Disappointments from big tech firms or key players in other sectors could scare the bulls in a big way.

2. Consumer spending

Consumers drive the U.S. economy, and so far they've held up well despite housing problems and high gas prices. Perhaps that's because unemployment is low -- at 4.5% in June.

What are the risks for consumer spending? Charles Dumas of Lombard Street Research believes the U.S. economy is growing much more slowly than many on Wall Street think. One reason is weakening consumer spending. "Gas prices are really knocking the stuffing out of people's buying power," he says.

Some think Americans, who save very little and borrow a lot, are about to be hit by the realization that they need to cut up the credit cards. "We've been addicted to spending and borrowing, and we need to stop that," says Peter Schiff, president of Euro Pacific Capital.

Watch closely for data later this summer on the back-to-school season, which is an important time for retailers. "If this back-to-school season is bad, it could really highlight some weakness in the consumer," says Neil Cataldi of Susquehanna Financial Group. High energy prices might also catch up to consumers later this year, if heating costs rise as the weather turns colder.

3. Inflation

"Inflation is still a concern out there," says Sam Stovall, chief investment strategist at Standard & Poor's. Several factors could push inflation higher, including rapid global growth, the tightness in the job market, or higher commodity prices. For example, S&P forecasts oil, now about $75 per barrel, could be headed above $80.

Why are rising prices such a big deal? "The Fed has said, 'We will stop at nothing to defeat inflation,'" says Richard Sparks of Schaeffer's Investment Research. The faster prices rise, the more likely that Federal Reserve policymakers could decide to hike interest rates later this year. That would cool off the economy. The biggest worry is that the Fed is forced to raise rates while the economy is still growing only slowly, forcing the economy into a recession.

4. Subprime and housing

O.K., here's the really scary one. Many on Wall Street believe the problem with subprime mortgages is limited and under control. They may be right, but it's impossible for anyone to predict how many debtors will ultimately default on their obligations. Many home buyers used creative financing to buy expensive houses in the years of booming home prices. "It's a tough one to get a handle on because we're not really sure what's truly at risk," Scott says. "It could spring on us suddenly."

What other forms of risky credit threaten debt markets beyond subprime? Bill Larkin, portfolio manager of fixed income at Cabot Money Management, believes he's already seeing signs that subprime worries are spreading, rocking other areas of the credit market. He sees a "flight to quality," with many bond investors fleeing not just subprime but anything with a hint of risk.

If the trend accelerates, it becomes even tougher for home buyers to get mortgages, pushing home prices lower. It also becomes more expensive for companies and hedge funds to borrow. That could cut off the flow of money into stock buybacks, mergers, and acquisitions, especially the private equity buyouts that have fueled the bull market. "Just like raising rates, this acts as an economic brake," Larkin says.

"People are starting to get nervous," Larkin adds, but it takes a while for these trends to show up. "It doesn't just -- boom -- happen." Are there lots of other forms of bad debt out there? Are lenders -- as Larkin jokes, "using their garage door as collateral?" No one knows. "That's where the risk is," he says. "There's not a lot of transparency here."

Pimco bond guru Bill Gross has warned investors not to think subprime is only a problem for a few hedge funds or investment banks. The problem affects millions of home buyers who financed their houses with cheap money but are now seeing mortgage payments rise along with defaults. Gross wrote in his July investment outlook, "This problem -- aided and abetted by Wall Street -- ultimately resides in America's heartland, with millions and millions of overpriced homes and asset-backed collateral with a different address -- Main Street."

5. Shiny happy investors

As markets rise, the bulls' success may be their biggest weakness. Too much optimism can derail a rally as quickly as too much gloom and doom.

It's a cliche on Wall Street that markets like to climb a "wall of worry." The more doubts about a rally, the more headwinds it faces on the way up, the more likely a bull market has a firm foundation. "We like to see some pessimism in the market," Schaeffer's Sparks says. Concerns about interest rates, terrorism, gas prices, or inflation? "Those are the bricks in the wall of worry."

Despite the index's record-breaking pace recently, experts like Sparks still see signs of skepticism. To gauge this, investors can look at the amount of short-selling -- trades betting stock prices will fall -- or ratios between puts and calls.

Sparks also keeps an eye on the media, including articles like this. Be on the lookout for articles proclaiming "happy days are here again," Sparks says. If the media is sounding too positive about stocks, it may be a sign that retail investors are jumping into the market. And if the average investor is buying again, you can bet the "smart money" is selling, and stock prices are near peak levels.

For another look at whether the bear is on the bull market's heels, see BusinessWeek's slide show.


TOPICS: Business/Economy; Editorial; News/Current Events
KEYWORDS: businessweek; democratmedia; mediabias; sell; socialistmedia; stockmarket; thisisabuysignal
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1 posted on 07/23/2007 8:33:27 AM PDT by SirLinksalot
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To: SirLinksalot

if this starts to be the new MSM meme it’ll happen. they’ve proven to be great to creating self fulfilling prophecies - see the housing market and Iraq as examples.


2 posted on 07/23/2007 8:37:40 AM PDT by enough_idiocy (Get the troops out of the Iraqi civil war and send them to the Sudan civil war. Biden '08 /sarcasm)
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To: SirLinksalot
So which shares have you shorted and why?
3 posted on 07/23/2007 8:38:06 AM PDT by .cnI redruM (Memo to M. Vick: Your money will never pinch-hit for your personal integrity.)
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To: SirLinksalot
No matter how wonderful things look, the good times won't last forever.

Nominee for Stating the Obvious award.
4 posted on 07/23/2007 8:40:40 AM PDT by ChocChipCookie (Homeschool like your kids' lives depend on it.)
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To: .cnI redruM

Heinz would be a good start.


5 posted on 07/23/2007 8:40:47 AM PDT by steve8714
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To: steve8714
Yeah, that John Kerry will never quite Ketchup.
6 posted on 07/23/2007 8:42:00 AM PDT by .cnI redruM (Memo to M. Vick: Your money will never pinch-hit for your personal integrity.)
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To: .cnI redruM

I’m still in a buying mode for energy stocks.


7 posted on 07/23/2007 8:42:57 AM PDT by Eric in the Ozarks (BTUs are my Beat.)
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To: SirLinksalot

Stocks are safer storehouses of value than dollars, right now. Bernanke can’t print billions of stock certificates every month. ;)


8 posted on 07/23/2007 8:46:47 AM PDT by Mr. Jeeves ("Wise men don't need to debate; men who need to debate are not wise." -- Tao Te Ching)
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To: enough_idiocy

Watch CNBC and they’ll lay out the future in front of your eyes.


9 posted on 07/23/2007 8:49:18 AM PDT by BlabItGrabIt (Get Away from the Blind Side of Life--S.R. Vaughn)
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To: SirLinksalot
Anyone who might be under the impression that Business Week is a conservative publication just because it has "Business" in its name would be quite mistaken. They have leaned to the left for years.

Caution on the part of investors may be warranted at this point, but BW overlooks, intentionally in my opinion, the biggest hazard: the probable Democrat takeover of the White House, and Dem gains in both the House and Senate after the 2008 election. The Democrats haven't even been subtle about their war on the achievers who fuel the economy. Unless there's a major change in the political landscape -- and, try as I might, I can't see it -- look for a taxation and regulatory nightmare beginning in 2009. And that's what is likely to end, at least for a while, the bull market in U.S. equities.

10 posted on 07/23/2007 9:00:59 AM PDT by southernnorthcarolina (These are my principals. If you don't like them, I have others.)
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To: SirLinksalot

They just can’t stand the Bush economy :) and need to bring it down so the Dems can win next year.


11 posted on 07/23/2007 9:02:33 AM PDT by cinives (On some planets what I do is considered normal.)
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To: enough_idiocy
see the housing market

So in your world, over building and over pricing, and bogus appraisal value, when there is no correlation to the time and value of money is the result of the MSM. LOL

12 posted on 07/23/2007 9:26:43 AM PDT by org.whodat (What's the difference between a Democrat and a republican????)
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To: SirLinksalot

Please sell. I’ve got a few years left of buying for my retirement, and it would be helpful if you all could sell all your stocks so I could buy them cheaper.


13 posted on 07/23/2007 9:34:49 AM PDT by CharlesWayneCT
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To: Eric in the Ozarks

I sold some alternative fossil fuel energy stocks last week —

Though a promising technology, Canadian tar-sands will be saddled with the horrible carbon “tar-baby” syndrome as the energy needed to produce the oil releases a lot of heat and CO2, which is a no-no for the enviro-politicians and will require imposition of additional stiff taxation.


14 posted on 07/23/2007 9:55:44 AM PDT by CedarDave (Only Republicans commit crimes. With Democrats it's a misunderstanding or baseless Republican charge)
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To: CedarDave
Not if the Canadians retain their normal clearheadedness.
15 posted on 07/23/2007 9:58:58 AM PDT by Eric in the Ozarks (BTUs are my Beat.)
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To: Eric in the Ozarks

OIH...VLO...


16 posted on 07/23/2007 10:04:04 AM PDT by dakine
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To: southernnorthcarolina
the biggest hazard: the probable Democrat takeover of the White House, and Dem gains in both the House and Senate after the 2008 election

Right, and a good reminder.

17 posted on 07/23/2007 10:04:54 AM PDT by Veto! (Opinions freely dispensed as advice)
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To: SirLinksalot
"The Fed has said, 'We will stop at nothing to defeat inflation,'" says Richard Sparks of Schaeffer's Investment Research.

This is probably a misquote. A more likely version:

"We will stop an nothing, except slowing down the printing presses, to defeat inflation.

18 posted on 07/23/2007 10:05:17 AM PDT by InterceptPoint
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To: SirLinksalot; All
IT'S 1999 AGAIN!!!

WE ARE DOOMED.

MARKETS ARE GOING TO CRASH

AAAAAAAAAhhhhhh


buy my book
buy my book
buy my book




19 posted on 07/23/2007 10:10:55 AM PDT by longtermmemmory (VOTE! http://www.senate.gov and http://www.house.gov)
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To: CharlesWayneCT

Right, if everyone else is selling, that sounds like a buying opportunity, and being it’s for retirement account, buying below record levels would be the preference.

The big down turn will be when the Democrat Majority Press will tell us how stupid we were to elect Democrats, who will only raise taxes, and use lawyers to fight terrorist.


20 posted on 07/23/2007 10:14:53 AM PDT by Son House (>Every Democrat plan leaves Troops in Iraq, they need to answer for that.<)
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