14 Nov 2007

No Nightmare on Wall Street

No Nightmare on Wall Street

by Ben Stein

Posted on Thursday, October 25, 2007, 12:00AM
http://finance.yahoo.com/expert/article/yourlife/50659

As I write this, the markets are in turmoil. Stocks have fallen considerably since their recent highs. There's growing gloom on Wall Street, and the newspapers are filled with scare stories.

The upshot: Now is the time to buy. Not for tomorrow, not for next month, maybe not for next year. But for the long term, it's absolutely time to buy.

Beware of Doom and Gloom

Here are a few reasons why I think the sky isn't falling:

1. The Fed isn't going to allow the big-money-center banks to fail.

There's such a thing as "too big to fail." If the really big banks in New York start to look genuinely shaky (a farfetched possibility in and of itself), the Federal Reserve has all kinds of tricks up its sleeve.

The Fed can buy assets -- even junky assets -- and replace them with good, solid cash dollars. (Well, pretty good cash dollars.) The Fed's done this before, and can and will do it again. The Fed can also push large banks toward merger, with explicit and implicit promises that it won't let the merged entity fail.

No, the Fed isn't about to allow a rash of big-money-center bank failures -- and in a way, that's a shame. It probably means the fools who run those banks into the ground won't suffer one iota, and they'll get to hold onto their mega-paychecks. But the cost of the failure of these big banks to the nation and to the world would be prohibitive, so they won't be allowed to fail. That, by itself, removes a large element of terror.

2. The merger-and-acquisition business is reviving.

Several very large private equity and public mergers and acquisitions are getting financing, among them First Data and Allison Transmissions. This is requiring higher interest rates than were originally forecast, but they're still getting done when some pundits predicted that the whole M & A flow would dwindle to a trickle.

M & A is a significant prop under Wall Street -- not the biggest prop, but a prop. If it stays even fairly strong, that's a support of the market and a benefit to investors.

More than that, if the spread between low-rated debt used in mergers and acquisitions and risk-free Treasuries remains as low as it is (far below recent highs), it's a sign that the credit markets are nowhere near "frozen," as some papers and commentators would have us believe. If the channels of credit are open -- even if they're not as open as they were a few months ago -- it's a good sign for commerce.

3. The housing sector is being partially offset by a surge in exports.

The housing sector, down drastically from where it was a year and a half ago, is correcting dramatically in part by a surge in exports.

This correction still has miles to go, and exports aren't a big enough portion of the economy to completely offset the losses in housing. But they are an offset, and in a section of the country -- the upper Midwest -- that's really been suffering.

4. Federal and state spending remain extremely strong.

This is an "automatic stabilizer" that keeps a huge segment of the workforce employed and buying products and services. The defense sector is especially strong, alas, and will continue to be very strong for some time to come (maybe for all time to come).

5. There's still a severe labor shortage in almost every area of the nation.

White-collar jobs and sales jobs are going begging in the Southwest, Northwest, Southeast, and Mid-Atlantic states. Only in the upper Midwest is unemployment a real problem.

As a general rule, recessions don't occur in periods of acute labor shortage. Indeed, one indicator of a recession would normally be serious unemployment.

Where the Fun Is

Those are the reasons I don't see a recession brewing. Or, if one is brewing, it doesn't strike me as a long, strong one.

Given that, if the market is pricing stocks as if there'll be a major recession, and pricing financials as if there'll be a collapse in New York, you might do well to buy broad indexes of stocks and indexes of financials.

The road ahead will be bumpy. Fine -- "mama, that's where the fun is," as Bruce Springsteen sang long ago. But if times are better than Wall Street is betting, you may want to bet against Wall Street. They're in it for a day or an hour -- you're in it for life. And you have an immense advantage: You can take advantage of their panic.

They take plenty of advantage of you, so now it's your turn. Buy and hold.
-O-



"O"

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