Houdini Does His Wall Street Thing

08/08/2010 08:29 pm ET | Updated May 25, 2011

Call it the great escape, one worthy of Houdini. It recently happened on Wall Street, not once, but twice.

Here's the story. Like a lot of Wall Street pros, veteran strategist Fred Dickson thought this past Friday's market performance was going to be a nightmare due to the early morning disclosure of a disappointing jobs report in July. It was the third monthly mediocre showing in a row.

That disappointment reflected the creation of just 71,000 private jobs for the month, well below the 150,000 to 200,000 needed to reduce the unemployment rate and to accommodate new entries into the labor force, and the overall July loss of 131,000 jobs, largely Census Bureau workers.

Good news, the nightmare never came. The market shrugged off the ill tidings. After a fast 80-point loss in the Dow in early trading, which later grew to a more than 100-point decline, buyers stepped in and by the end of the day, the Dow showed a moderate loss of only 21 points.

It was the second time in the past eight days in which investors managed to escape a nightmare. The last time was July 30, the day we got news of disappointing second quarter GDP growth of 2.4%. Again, the market reacted by heading lower, but by day's end, the Dow wound up with a tiny loss of just over a point.

In boxing lingo, you can say the market--in both cases--was knocked to the canvas, got back up to avoid a knockout and while it didn't win, it made a credible showing by simply winding up with just a bloody nose.

As for Friday's jobs disappointment, Dickson was impressed with the market's response. "I expected a much bigger reaction on the downside," he said.

So, too, did Hong Kong trader Selwyn Ortz, who had told me a week earlier that he thought a disappointing jobs report could produce a "black Friday," with the Dow going down several hundred points on the day. "It was a great showing by the market," he said, "and maybe a sign we'll see a summer rally, rather than the usual summer doldrums." Perhaps, he thought, a rally to Dow 10,800 (from its current 10,653).

Dickson, the chief investment strategist at regional brokerage biggie D.A. Davidson of Great Falls, Mont., told me he thought the lack of a severe market loss on Friday was good news for the market. He also thought the escape largely reflected a spillover effect from some recent good gains in overseas markets, especially Asia; likewise, a rising Euro, versus the U.S. dollar, which influenced trading in various currencies and commodities, in turn favorably impacting the U.S. stock market.

Looking ahead, Dickson sees choppy market action between mid-August and late September, followed by a renewed market rise to about Dow 11,500 by year end on the heels of a somewhat faster rate of economic growth (about 2.5%).

His favorite market sectors: industrials, technology, energy and health care.

Characterizing himself as "a very cautious bull," Dickson said he doesn't see an accelerating economy until there's a noticeable pickup in employment and housing. He also said you can't afford to ignore the wild cards that could play havoc with the market, in particular, pending tax reform, the makeup of Congress after the mid-term elections and potential European debt problems.

Interestingly, some pros suggested the lack of big stock losses on the days of disappointing employment and GDP numbers was really a case of market manipulation, engineered by buyers to goose equity prices and minimize the bad news.

One online investment adviser, Mark Leibovit of VR thought Friday's market recovery from its day's lows was a flagrant example of this manipulation. But he questions whether the unmasked effort to continue to manipulate stock prices can be sustained since the volume trends, he believes, suggest time is running out for the current rally.

Whether there's any substance to the manipulation charges is anybody's guess, but Fred Fraenkel, the vice chairman of Beacon Trust Co. of Morristown, N.J., which manages about $1.5 billion of assets, said he believes a lot of people are concerned that the market is rigged.

In any event, Fraenkel takes sharp issue with Leibovit's view of the direction of the market. He looks for stock prices to be up almost 10% higher by year end from current levels. "I would buy stocks right now because the selling has been greatly overdone," he tells me.

Supporting his positive view of the market, he points to:

--The likelihood of additional jobs creations this fall in a convincing manner, accompanied by perkier consumer spending.

--Historically low price-earnings multiples of 11 to 12 on next year's prospective earnings, relative to interest rates.

--Better than expected quarterly earnings in every quarter since last spring.

--A political upheaval in the upcoming elections, leading to cutbacks in spending, elimination of the need to raise more debt and the use of resources to invigorate the economy.

Fraenkel's three favorite investment themes: Companies that can do well in a slow economic recovery, such as Apple; companies that can do well because the rest of the world is growing, like Cummins Engine, Las Vegas Sands and Yum Brands, and companies that pay high dividends, such as AT&T.

Fraenkel may be right, but the $64,000 question is whether the market can continue to escape additional nightmares. With both housing and employment in a depression mode and the economy displaying increasing softness, some economists say no way.

In the early 1800s, philosopher William James said the art of being wise is the art of knowing what to overlook.

Now, some 200 years later, Ortz echoes such thinking. His basic suggestion is that investors would do well to overlook the abundance of those economic dreamers whose gradiose assumptions, he believes, are bound to generate even more market nightmares.

And that's our bottom line. How long can investors continue to sidestep the additional market nightmares that are surely on the way?

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