RAY SUAREZ: It was a rude end of summer vacation days on Wall Street yesterday as the Dow Jones Industrial Average lost 355 points, or almost 4 percent and the other main indexes had similar losses. Today, it was a different story, as the Dow Jones Industrial Average was up 117 points. Here with some analysis is Jay Pelosky, global strategist for the investment firm, Morgan Stanley; and Marion Asnes, senior editor at Money Magazine.
Jay Pelosky, what is going on? What does it mean when the market is moving multiple hundreds of points in single trading sessions?
JAY PELOSKY: Well, Ray, I think certainly one indication is that markets are not sure of what is going to come. In come. In your prior segment focused on eye, certainly that is an issue for concern of investors both here in the United States and globally. There's the issue of the economy, which of course is also uncertain. The direction, the pace of growth the speed of recovery is not clear to investors and hence the earnings recovery that many have been looking for is not clear. And then you have some other issues of concern such as Brazil and emerging markets and specific countries where the issue of leverage in a very low-growth environment has reared its head and caused concern. So we had a nice rally off the very panicky and uncertain days of mid-to late July. We have now given back a fair amount of that rally. And I at least think that is consistent with a market that is trying to stabilize and hopefully move higher as we progress through the period of the period of the end this year and into next year. But it's a market that is uncertain and as you point out volatile.
RAY SUAREZ: Marion Asnes, many of the factors that Jay Pelosky just mentioned - a possible war with Iraq -- the teetering of Brazil -- have been with us for weeks and in some cases months. Why does it visit the market place and cause what is a tremendous shift like that?
MARION ASNES: Well, I think you have to look at I few things. For instance, there's now the change in the bias on the Fed. What I mean by that is that Alan Greenspan in his latest announcement said that the bias was now towards loosening interest rates further, which is a signal that he considers the economy still very weak. I think people are just nervous. It's very clear to see why. There are a lot of issues that are troubling people. We had some weak numbers that came out. Today we had some stronger numbers. So I do think that when people see a cascade of events, they react in a very sudden way.
RAY SUAREZ: But why is there this tendency, which seems to be showing itself through the summer and now into the fall, to almost discount good numbers and good results when they appear on consumer spending or durable goods orders or housing starts but swoon on a set of bad news?
MARION ASNES: Well, that's more psychology than it is economics. One thing you have to be aware of is when you have the huge swings it's not the small investor calling the broker screaming "sell, sell, sell." That's not really what's going to move the market. That is more the investors in mutual funds. You had a lot of individual investors who took money out of mutual funds, which is going to cause a lot of selling. The other issue is really as an investor as an individual and a human being you see what you want to see. When you are feeling optimistic, you disregard the bad signals and you concentrate on the good ones. When you are feeling uncertain and pessimistic you disregard the good signals. That's really a mood indicator more than an economic indicator.
RAY SUAREZ: Jay Pelosky are some of the things pushing and pulling on American exchanges and indexes really being dictated overseas in places that have nothing to do with the American economy?
JAY PELOSKY: Well, Ray, I'd say first, just to follow up on Marion's point one of the other factors creating the kind of volatility that you spoke of at the onset is clearly a lack of liquidity. Investors across the board particularly in the United States are not participating as much as they used to. The retail base was mentioned, the individual investor. There is also the foreign investor who has been important to the U.S. market --
RAY SUAREZ: When you sack lack of liquidity, you mean people just don't have money to spend on shares in various kinds of financial instruments?
JAY PELOSKY: To some extent but more specifically the professional investor, the large mutual fund, the hedge fund community, the broker/dealing community itself, the willingness to commit capital to participate in the markets on a day to day basis can alleviate via liquidity some of the swings we've seen in the market. That capital has moved to sidelines because of uncertainty that permeates the environment both geopolitical and economic. And I think that one of our themes this year certainly has been that the world is searching for a growth engine and the growth engine of the last several years has been the U.S. economy and in particular the U.S. consumer. We have a tremendous current account deficit where we have as a country are the world's largest debtor. And so far that debt is being funded by the rest of the world. One of the real concerns that we have fundamentally is that over the next several years the U.S. dollar is going to have to adjust or going to weaken as foreign investors, those folks from outside the United States grow less willing to finance the consumption of the U.S. consumer.
RAY SUAREZ: Marion Asnes do you agree with in a analysis? Have people gotten the world that the American consumer is kind of tapped out?
MARION ASNES: I have some issues with that. One of the things that has saved the economy is that falling interest rates have fabled the American consumer to pay less and less for his or her housing and therefore have more disposable income to spend. When you look at the constant waves of refinancing, people are paying less and less on their mortgages on a monthly basis. Even if wages are relatively stagnant, there's more loose cash. So that people are spending. Personal spending continues to rise although slowly. It would take a wave of more layoffs to get people to hold off on spending. On the other hand consumer debt is very high. Credit card accounts and personal bankruptcies are starting to rise again. So I do think we have to be a little more cautious about it but I don't see everybody sort of slinking home and putting their wall yet away, no.
RAY SUAREZ: What about half of all American wage earners who have some money invested in the stock market currently?
MARION ASNES: Well, that's a big issue. Those people are feeling the opposite of a wealth effect. And they are going to be wanting to save more but right now they are not putting it into stocks. They are putting into stocks bonds and into cash and into their homes. Now, when people are putting this money into homes, that does work through the whole economy. Housing starts is usually what proceedings a big recovery. Right now though people have a lot of real estate. You know, it's kind of a 50/50 thing. However, I do want to point out that tonight two big home builders announced that their earnings were way ahead of expectations so people are spending, and as they build the houses they are going to furnish them and landscape them and that wave of consumption pushes thing as long.
RAY SUAREZ: Marion Asnes, Jay Pelosky, thank you both.
MARION ASNES: My pleasure.