Lloyd’s Wall of Worry
Long a part of Wall Street lore, the Wall of Worry is a quick, handy way to gauge the emotions of investors. As interpreted by money manager Lloyd Khaner, a low wall, with seven or fewer blocks, indicates a complacent, even overconfident market. Time to take profits. A high wall, with 15 or more blocks, suggests a squeamish market: Look to buy at bargain prices. In the middle range, reading the wall gets tricky; knowing not only where the wall stands but whether it’s headed up or down is the key.
this month’s wall:
November cooked up some early holiday cheer. The recipe: a decent earnings season, some low-growth and low-inflation numbers and a heaping helping of nervous cash that had nowhere to go but into stocks. As a result, the Wall drops for the third month in a row, landing at eight blocks. We are just a block away from entering the greed zone, so think about taking profit on overvalued stocks. Sadly, this season isn’t serving too many deep value plays, but, hey, there’s always next year.
The worries
1. U.S. economy: It’s clearly moderating but not in a free fall, as some fear. An early-2007 kick-start to the Katrina rebuild would sure be a timely boost.
2. Interest rates: No cuts in sight, and the Fed’s constant jawboning about bumps is keeping the market on edge.
3. Inflation: Slowly and conspicuously moving through the system, like a pig in a python.
4. Oil prices: OPEC is fighting to keep them up, while the rest of us are rooting them down. All I know is that with gas at $2-plus per gallon, I still feel like I’m filling my tank up at a hotel room minibar.
5. Consumer spending: Just like the dreaded office party, it always pops up at this time of year. The hand-wringing begins as the market prays for gloriously out-of-control buying. (PlayStation 3 is selling for upward of $2,000 on EBay? Not a bad start.)
6. Housing prices: Thanks to incentives like builder concessions, mortgage payment breaks and furniture allowances, prices are holding up quite nicely. But the market worries about any attempt to tear a page from the disastrously ineffective playbook of the U.S. auto industry.
7. Iran: Boldly boasting the finishing touches on its nuclear "fuel" program — and sticking it in the ear of international diplomacy.
8. Stock option pricing: As the tally of bullet-dodging, spring-loading companies nears 1,000, the corporate fugitive list remains in the single digits. Some advice: Communicate by carrier pigeon only. E-mail and cell phone calls have proved traceable and antithetical to your ability to enjoy your ill-gotten gains.
Looking ahead
Free trade: Messing with this is as inadvisable as someone over the age of 40 eating an entrée that begins with the words "three cheese." Here’s hoping the wise lessons of the late Milton Friedman are not lost on the this-is-my-first-rodeo U.S. Congress.
Presidential election 2008: About as exciting as unbuttered popcorn, and more likely to make you choke. But the market is already jittery at the prospect of the Dems controlling all three branches of government.
Iraq: A new direction is coming, but which way is anyone’s guess.
Recession: With U.S. GDP growth under 2 percent and the yield curve returning to inverted form, the psychological risk of recession creeps back into our collective consciousness.
