Mud Season on Wall Street

The print edition of today's New York Times offers more food for contrarian thought. In an article appearing on the front page of the business section, Vikas Bajaj tells us that, for the bulls, 2007 may be no walk in the park.

Here is the text of his article. Unfortunately, this link contains neither the headline nor the enormous picture that appear in the print edition. The picture is a photo-shopped depiction of the statue of a bull in front of the New York Stock Exchange (which can also be seen here in an Economist cover in another photo-shopped picture). The bull is mired in the mud. The headline reads: "Mud Season at Hand on Wall St." and the sub-head: For the Bulls, Slogging Through 2007 May Be No Walk in the Park".

Mr. Bajaj tells us to enjoy the bull market while we can. He explains that [the growth in] corporate profits is starting to slow. Presumably he thinks that slower profit growth means falling stock prices. I read this a lot on various blogs and lists, but this supposed causal link is complete nonsense. Today's slowdown in profit growth was priced into the market 6 months ago !

Remember, the stock market is a discounting mechanism. It is always looking ahead and pricing in the probablilities of events that have yet to occur. It is new and unexpected information that affects stock prices, not information that everyone already has.

The apparent slow down we may be seeing now in the growth of corporate profits was already discounted by the drop in stock prices last May, June, and July. The rally since that time is telling us that corporate profits are likely to grow robustly over the next six months at least.

The next significant drop in the stock market will develop when longer time frame traders and investors begin to seen the first signs of another economic slow down 6 to 9 months in the future.

Now let's step back a bit and consider the "meta-message" of this article. Remember, the Main Stream Media are in the business of telling people what they want to hear. This story says in effect: "Sure you missed the rally but, don't worry, the bulls won't have much fun either this year". This message will make people who are outright bearish or still way underinvested feel better.

Well, this must be a pretty substantial part of the investing public since the Times thinks it its readers will like this story. (Contrary to its erroneous self-perception, the New York Times never "speaks truth to power", i.e. to its readers.)

This leads me to conclude that this bull market may well have more staying power than even I have predicted. And, if prices do drop 20% or so later this year as I currently expect, the resulting low will show powerful bearish sentiment that will propel a new bull market that could then easily double the averages in 2 years.