Beyond the ‘Wall of Worry’

There is an interesting article in the Money & Investing section of the WSJ this morning: What Could Topple Bulls’ ‘Wall of Worry’?.

"The "wall of worry" idea is that stocks can still flourish when people
are nervous. Skeptics hold money on the sidelines. As their fears are
alleviated, they put money into stocks, pushing the market higher. The
market keeps climbing only if worries are held in check. Here are some
of the main concerns and what it could take for them to knock the
market down."

Earnings_q2_07While I agree with the thesis, I reach a somewhat different conclusion. All of the issues raised in the article (detailed below) — are at this point, very well known to the market.

1. High-risk investments: The biggest fear now is that some risky corner of the market could blow up.

2. Global growth: Strong global growth sustained by a U.S. consumer who refuses to stop spending, and by strong growth outside of the U.S.

3. Earnings: Investors now widely expect Q2 corporate profit reports to surpass analysts’ lowered expectations of low-single-digit growth.

4. Inflation: Inflation fears knocked down stocks this spring. The worries pushed the yield of the benchmark 10-year Treasury note above 5.0%,

5. The weak dollar: The dollar has been trading around a record low against the euro and a 26-year low against the pound.

6. Liquidity: Cash available to investors has been one of the market’s main drivers. Created in part by low interest rates, by a booming world economy and by big dollar-denominated trade surpluses in the Middle East and Asia.

Are any of these factors likely to derail the markets? Or, is it more likely that the risk factors have been fairly well known, and have become more or less discounted in the overall markets?

And, whatever it is that may eventually derail the overall market momentum — is it more likely to come from the list above? I suspect the markets have discounted most of the impact of those well known, well written about, well blogged factors.

Rather, what is more likely to derail the markets is something not well known or highly expected: Consider a major rally in the dollar, 7% interest rate, collapse of a major trading partner, sudden loss of liquidity, famine in a developed nation, War with Iran, $100+ Oil, Political turmoil in the US — something that is not currently on anyone’s radar screen.

UPDATE: July 16, 2007 7:32pm

Perfect example of the unexpected: The Triple AAAs and Double AAs CDOs got whacked nicely today. So while everyone is focused on the true junk, its the supposedly clean stuff that is the surprise.


What Could Topple Bulls’ ‘Wall of Worry’?
High-Risk Investments, Weak Dollar, Inflation
May Test Stock Rally
WSJ, July 16, 2007; Page C1

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  1. michael schumacher commented on Jul 16

    not to poo-poo what you’ve put up as I do agree with most of your reasoning for this but as an article it does nothing for me as most of these factors are widely known (it depends on how “open” your eyes are)and who is doing the reading. Obviously the large institutions care very little about any of it and are busy trying to make sure that we are getting over that wall that , to them, does not exist.

    Of the eight things you’ve listed at the bottom of the post: four of them (the first four)are all under “control” other wise all the things listed in the article WOULD matter. The last four are by-products of the first four( who cares about War with Iran-especially when $100 oil does’nt really matter to the fed’s calculations on inflation- when there are all these LBO’s to consider-etc.) with famine being so far down as a reason to worry by wall street since (by definition of the fed) the costs to feed people are not rising so what me worry about a famine.

    Neat little story on why “it” matters and when:

    Nixon library in Yorba Linda, Ca. has, for years, described the watergate break-in as a democratic conspiracy to thwart re-election, by calling it a coup. The presentations in the library have all been geared to present that version. They have even described the missing minutes of tape as a “technical glitch”. Now fast forward to 2007…….this library has existed on private money for years and now it requires public money (i.e. gov’t funding) to operate. The catch to getting the said gov’t money?? changing the version of events to reflect what we all know and accept as the truth about watergate. So in order for the fed to fund and thus take over the property the real story had to be told.

    SO when it matters……it all of a sudden matters. Or in the case of the “wall of worry” it does’nt until it does.


  2. Gary commented on Jul 16

    None of these factors are going to matter until the big commercial players are ready to start selling this market. As of last week the combined large and e-mini contracts in the futures market had the largest net long position in history.

  3. Mo commented on Jul 16

    Its more like,”US Treasury chief Henry Paulson, and former chairman of Goldman Sachs, GS.N, “monitors the financial markets closely,” and has reinvigorated the infamous “Plunge Protection Team,” which comes to the rescue of the US stock market whenever nasty revelations come to the surface. At the moment, Paulson’s grand strategy is to offset losses in the US housing sector with big gains in the stock market, to prevent the US economy from sliding into recession”

  4. Vega commented on Jul 16

    ABX indices are getting WHACKED today. AA paper index is down SEVEN points already. That’s gotta be close to 10%. Major disconnect obviously between stocks and credit. I gotta believe this disconnect cannot last forever.

  5. Fred commented on Jul 16

    I agree with your comments Barry.

    I also believe that a majority of traders/investors need or hope the market will pull back. Given that it’s option experation week, this would make sense as well…the only “problem” with this idea is that it would be a bit too convenient.

    So we wait for the test….

  6. Alex Khenkin commented on Jul 16

    “Major rally in the Dollar” wins my vote for a low-probability high-impact event at this point. I mean, everyone knows the USD is a goner, right?

  7. michael schumacher commented on Jul 16


    I do not disagree with what you’ve said however how is the dollar going to rally when the fed is actively engaged in producing them for no other reason than….well.. producing them. Basic law of supply and demand working on it and it does’nt look likely that the supply will be curtailed anytime soon.

    Looks like someone over at the Treasurey fell asleep for a bit in the last hour or so. “what……NAS and S&P are down??” that will be fixed in due time.


  8. D. commented on Jul 16

    Everyone I know is in the market despite the wall of worry because of the supposed inflation protection. They all know cf the risks but they actually believe they’ll be able to get out in time when all hell break loose.

  9. Peter commented on Jul 16

    US Treasuries are continuing their morning rally and is sending the 10 yr yield to a 1 week low. The only chatter out there is it’s in response to more weakness in subprime paper as the ABX-HE, BBB- 07 is at a fresh record low today falling 10% from Friday’s close.

  10. Turbo commented on Jul 16

    The hyperactive low grade debt market isn’t looking too healthy today. Perhaps lenders actually expecting to get their money back one day will put an end to some of the liquidity and deal mania pushing this market higher?

  11. econ101 commented on Jul 16

    Buy all pullbacks!

    July 16 (Bloomberg) — Manufacturing in New York state unexpectedly expanded this month at the fastest rate in a year as orders climbed and employment rose.

    The Federal Reserve Bank of New York’s general economic index advanced to 26.5, the highest since June 2006, from 25.8 the prior month, the bank said today. Readings greater than zero signal expansion.

    The figures provide further evidence of a pickup in manufacturing and business spending that’s helping the economy overcome a slowdown in consumer spending. A national survey earlier this month showed manufacturing expanded in June at the fastest pace in more than a year.

  12. Josh commented on Jul 16

    “The figures provide further evidence of a pickup in manufacturing and business spending that’s helping the economy overcome a slowdown in consumer spending.”

    That’s a good piece of puffery. If consumer spending is 70% of the economy and it slows by 1%, how much does manufacturing (durable goods) need to increase to make up for it if they represent 15% of the economy?

  13. TexasHippie commented on Jul 16

    Fred – are these sideliners going to be bagholders soon?

  14. nearpass commented on Jul 16

    July 16 (Bloomberg) — Manufacturing in New York state unexpectedly expanded this month at the fastest rate in a year as orders climbed and employment rose.

    Oh, really! This from our Sunday paper, Geneva, NY:
    “GENEVA – International Paper Co. will be closing its Gambee Road plant by year’s end, leaving nearly 80 employees without a job.

    Officials of the Memphis, Tenn.-based paper and packaging company made the announcement Friday, saying the company has been struggling to stay competitive in recent years as manufacturing companies – the corrugated box plant’s biggest customer base – have been declining in the northeast.”

    There’s not much manufacturing in this area, but what there is has been contracting this year.

  15. Alex Khenkin commented on Jul 16

    MS, you site “basic supply-demand’, and then proceed talking about supply. Is an explosion of demand for USD due to a credit crunch coupled with inability to expand supply due to same – impossible? improbable? unlikely? I don’t know, but it is certainly not on most radar screens. I am very suspicious of any investment theme that is being beaten to death by everyone and the dog. People in developing countries buy Euros because “dollar is going down”. I wonder…

  16. Fred commented on Jul 16

    Hippie…not in my opinion. The short side is ever brazen…and still in a crowd. The “sideliners” are just starting to notice the market at new highs. I think they’ll start coming in over the next few months.

    BTW…the COT report shows the Smart money went long an additional $2 Bill futures…another all time record long position.

    As I said on another thread, a big pullback would be too convenient — for the shorts (to cover), and for the “sideliners”, to get involved.

    A choppy week, with a stab lower mid week (which gets aggressively bought) would be my best guess. Consolidation of this breakout is just what the bull want.

    Fare ye well…

  17. Estragon commented on Jul 16

    MS & Alex,

    If you’re going to talk about a move up in “the dollar”, you may want to be more specific about which dollar you’re talking about. The USD widely quoted is a rough guide to the relative value of the USD versus other major currencies. A discussion of the supply of USD therefore would have to be mindful of the supply of the various cross currencies.

    A move up in the “dollar” might happen, for example, should other major fiat currency issuers debase their currencies (or credibly threaten to do so) faster than the US does.

  18. Fred commented on Jul 16

    I have basic question to all those that are bearish on the dollar:

    Since the buck is back to the levels where it was in the early -mid 90’s, was the dollar “weak” then?

  19. W.Edwards commented on Jul 16

    While the US trade and deficit fundamentals (ie. large twin deficits) are pretty crummy requiring money to be created at a break-neck pace, other countries have also been printing money at a pretty swift pace as well. If it wasn’t for those countries with large surpluses (ie. China) recycling money back into treasuries and other asset classes instead of broader capital expenditures, there would be significant price inflation instead of the general asset inflation currently observed which has allowed the printing of money to go somewhat unabated.

    The reason why I think that the USD is tanking relative to other countries is not entirely because of the amount of money being printed but is strongly affected by the change in how currencies are being allocated by central banks across the world. As per currency reserve statistics provided by the IMF, the increase in the EUR/USD exchange rate is highly correlated to the portion of EUR that Central Banks are holding relative to USD which has been increasing over the last 6-7 years. In particular, there is 95% correlation between the ratio of EUR/USD assets held by the central banks of developing countries and the corresponding exchange rate. Given the move away from the USD by petro-dollar countries as well as other countries that have been pegged to the USD (China being the most notable), I expect the decline of the USD to continue.

  20. Alex Khenkin commented on Jul 16

    A “major rally” would be across the board, with USD gaining value against a basket of currencies and gold. Otherwise it’s not “major”, is it?
    Again, this may be unlikely, but certainly possible, and would catch a lot of money off guard.
    Oh, one more possible source of instability: upcoming Russian presidential election.

  21. alexd commented on Jul 16


    tsk tsk

    if you put your money in a foreign bank in 1990 versus a local us bank lets say Toronto versus Chicago (seem close enough but if you want to us Akron be my guest).

    Assumming equal amounts take the other countries currencies (in 1990) and buy BIG MACS. Note number of big macs you get then eat the food (ok share it).

    Now assuming you then replaced the orig. sums and let them accrue intrest in what ever the banks gave you in an equiv account) do the same with the money in the current accounts.

    Who gets more Big Macs?

    The point being is we have to go by what we get in other markets.

  22. guest commented on Jul 16

    “Consider a major rally in the dollar, 7% interest rate”???? that is not very promising with dovish Fed holding interest rate and pumping liquidity.

  23. TexasHippie commented on Jul 16

    W.Edwards – Do you believe the theory that politics is behind USD devaluation so as to reduce the burden of Social Security obligations? If so, wouldn’t that require widespread price inflation instead of simply asset inflation?

  24. michael schumacher commented on Jul 16

    Over supply is the problem of the dollar, what else explains the $USD movement relative to all other forms of payment? There has been plenty of micro decisions that have caused the dollar’s demise. The single biggest problem with the dollar is that our gov’t is in the business of producing them from thin air and hurling them at the stock market, relatively speaking.


    I’m not talking about shorting the $$….I think you are. Over supply….


    Our gov’t “does’nt” (or it should’nt) have the capacity to physically create other monies out of thin air. Our’s is which is why the current problem is less about those than our dollar

    W. Edwards-

    Well put….I could not agree more.

    texas hippie-

    and people label me a conspiracy theorist- LOL… Very plausible as the denial of inflation and credit tightening would suggest that as the case. It’s most likely very low on radar of people it will affect the most starting in about 4 years.


  25. TexasHippie commented on Jul 16

    MS – conspiracy theories are very entertaining, as is cognitive dissonance :) But it seems fairly certain that we have tremendous liquidity and high monetary expansion, so naturally the discussion should point to why and how. The new secrecy behind M3 only fuels speculation.

  26. The Big Picture commented on Jul 16

    WTF is going on in the ABX Markets?

    Its one thing when we see that the BBB- bonds — the junkiest sub-prime crap in the Residential Mortgage Backed Securities (RMBS) universe — getting shellacked due to foreclosures. But today, we see that the AA and even the AAA are getting whacked. It…

  27. Winston Munn commented on Jul 16

    No exporting country wants to have a currency that is stronger than the USD. One of these days, BoC, BoJ, and OPEC may wake up and realize that instead of debasing their own money to keep it low versus the dollar, they have in their hands total control over the value of the USD – and simply stop buying U.S. treasuries until their target rate is reached.

  28. W.Edwards commented on Jul 16


    First question: Politicians generally lack a long-term focus and the necessary acumen in finance to actually orchestrate or promote the type of inflationary environment that you suggest (purposefully, anyway). More bureaucratic functions such as the Fed have a greater capability but why would they? Economic suicide = political suicide.

    Second question: I found this question more intriguing. It’s been a while since I studied the US Social Security system but here are my thoughts. The ideal situation for the government to devalue their Social Security obligations is to have the rate of money growth through increases in the fiat currency be greater than the rate of growth of the benefits that need to be paid. Therefore, if anything, this is almost counter to traditional price inflation since the government wants benefit costs to stay low (eg. Medicare/Medicaid drugs and hospital benefits). In the meantime, an increasing money supply will directly and indirectly give the government more money with which to pay those benefits. This is how those obligations become devalued over time. Similarly, retirement benefits are indexed based on average weekly wage indexes. The lower these indexes remain, the more likely than an increasing money supply will be able to fulfill those obligations. Significant price inflation that translates into significant wage inflation will only guarantee that the whole system goes bust!

  29. Winston Munn commented on Jul 17

    In the NFL, the critical position on the field for a team with a right-handed quarterback is left tackle – this is the area of pass rush where the quarterback can be blindsided, crushed by a 300+ pound lineman the quarterback never saw coming.

    I can foresee a similar blindside sack of the market based on CDS, Credit Default Swaps. They have all the makings of a great market crusher….opaqueness, OTC transactions, huge leverage, not well understood, little noticed or written about…and a great topic for both a future book and future Congressional investigations after the markets collapse.

    “Banks and money managers bought and sold about $50 trillion of credit derivatives in 2006, more than twice the total in the previous year, Fitch said. The market has grown 15-fold since Fitch started the survey in 2003, the ratings company said. The contracts, based on bonds and loans, are used to speculate on the ability of companies to repay debt.”

    And some of the biggest players are some of the biggest names.

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