Wall Street Is War Street

Why it’s worrisome that the markets love the war.

In the past two days, the stock of Boots & Coots has been one of the market’s best performers. On Friday, the company, which sounds like a toy store but actually fights oil-well fires, closed at 59 cents a share. It has more than tripled in two trading days, closing Tuesday at 1.90.

Sure, the company could benefit if it is called upon to snuff out conflagrations in the Persian Gulf. But a look at Boots & Coots financials suggests that current shareholders of the down-at-the-heels company may never see the benefits of this business.

As of last Sept. 30, Boots & Coots was down to $127,000 in cash. Last November, it announced that it “does not have sufficient funds to meet its immediate obligations” and was “unable to pay its debts as they come due.” Just four weeks ago, the company suggested  that it might have to file for Chapter 11 bankruptcy. In the vast majority of cases when public companies go bust, the common stockholders find their shares entirely wiped out.

The willingness of Boots & Coots buyers to overlook such basic financial data is an extreme example of a trend evident in the market this week. In this odd time—war declared but not yet started—the first casualty is the fundamentals. Market watchers had long predicted that the market would rally once the uncertainty about war in Iraq was resolved. When the Bush administration ended the doubt with its Monday ultimatum, a massive rally followed. The S&P 500 rose 3.54 percent and the Nasdaq rose 3.88 percent. The rise was particularly impressive since it came in the face of the sort of data that, in ordinary times, likely would have dragged the indices down. On Tuesday, the markets were placid and rose modestly—again disregarding the basic economic and company-specific news that would usually have kicked stocks down.

Sure, the past few days have seen bits of good news for the economy and stocks. The price of oil is drifting back to earth, for example. But the same unappetizing mix of lousy profits, a sluggish economy, and exhausted consumers remains—the very same factors that have been weighing on the markets lo these many months. The rally defies logic, as though investors said: Nothing has changed, the economy is getting even worse, so let’s buy!

During the rally and the couple of days preceding it, there was a bonanza of dismal economic news. On Friday, the University of Michigan’s preliminary index of consumer sentiment for March fell to 75.0, the lowest level since October 1992. The same day, the sober-minded Economic Cycle Research Institute reported that its weekly index had fallen to a nine-year low. Today, Instinet Research Redbook retail report showed sales at major U.S. chain stores fell 1.3 percent last week from a year ago.

As for the torrid housing market that has been propping our economy up, this morning the Commerce Department reported that housing starts, hurt by the weather, fell 11 percent in February to an annual rate of 1.62 million. That drop was larger than Wall Street expected and was the largest single-month plunge since January 1994. On Monday, the National Association of Home Builders reported that its monthly index—which measures homebuilders’ outlooks—tallied its biggest drop ever in March.

Nor is recent profit news any rosier. Just after the market closed on Monday, chip-making equipment manufacturer Applied Materials said it would slash 2,000 jobs, or 14 percent of its work force, and abandon 2 million square feet of office space. An hour later, Gateway said it would cut 1,900 jobs, 17 percent of its employees, and shutter almost one third of its Gateway stores by next week.

Of course, you shouldn’t make too much of one or two days’ news. If the market simply rose on good economic data and fell on poor economic data, we’d all be making a living day-trading. And the optimists among us can surely find some fundamentally positive signs for the market. Procter & Gamble, for one, guided earnings estimates higher on Monday and then bought German hair care company Wella for $5.7 billion on Tuesday.

In contrast to the bull market of the ‘90s, when one could grow wealthy simply riding the broad indices higher, this is supposed to be a stock-pickers’ market, in which shrewd money managers make money by betting on stocks that work and betting against those that don’t. What’s disheartening about Monday’s rally was that it had nothing to do with that basic principle. On Monday, when the rising tide lifted even leaky boats, it seemed like 1999 all over again.

Conspiracy theorists argue that the war is intended to shift attention away from our ailing economy and anemic markets. As all good sober-minded centrists do, I reject that line of reasoning. After all, it’s going to take a lot more than a swift triumph in Baghdad to restore the 2.5 million jobs, trillions of dollars in market capitalization, and the sense of confidence lost in the past few years. But for two days running, at least, the war seems to be having precisely that narcotic effect.