Stephen’s Posterous

David E. Adler in his book, Snap Judgment, says that our gut feelings can help us when looking for a romantic partner, but may fail us when making financial decisions.

The Wall Street Journal blog, The Wallet, asked Mr. Adler some questions about the material in his book.

Mr. Adler says that investing is different than everything we do as humans because there is not a evolutionary precedent for investing. Human intuition has evolved more for social situations. He believes that relying only on intuition in finance will lead to poor decisions being made.

In this post recession, Mr. Adler believes that people will gamble and take extra risk in order to stage a comeback.

A common mistake while investing is jumping into a successful mutual fund that has beaten the market. A mutual fund will not beat the market every single year. It is prudent to be nimble.

In his book, Mr. Adler discusses horse racing. Those who watch a horse race who had very specific information about the horses did not do better than those individuals who did nothing.

The odds of a coin toss are not 50 to 50, they are 51 to 49, says Mr. Adler. He also says that Target-Date funds appear to get more conservative as time passes, but is that target the day you retire or the day you die?

Mr. Adler is going to research taxes in his next book.

Snap Judgment by David E. Adler
FT Press, 288 pages, $25.99

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Politics, investment and entertainment inevitably impinge on each other from time to time. But anyone trying to mix them should take care. That is at least one of the lessons from the past two weeks, which have seen US stocks drop to their lowest since August 1996. 

First, President Barack Obama attracted ridicule, and anger, for a foray into investment advice.

“What you’re now seeing is profit and earning ratios starting to get to the point where buying stocks is a potentially good deal,” he said, “if you’ve got a long-term perspective on it.”

He presumably meant price/earnings ratios. The reaction showed that Americans disliked being given investment advice by their commander-in-chief. His obvious discomfort with basic market terminology attracted ridicule among professional investors.

He added that he did not look at the “day-to-day gyrations of the stock market” and that the stock market “is sort of like a tracking poll in politics”. “It bobs up and down day to day,” he said. “If you spend all your time worrying about that, then you’re probably going to get the long-term strategy wrong.”

Critics complained that he was trivialising the damage the stock market had done to people’s savings, and that the market was not “bobbing up and down” under his watch, but falling relentlessly. Can the fall in share prices since he took office be taken as a vote of no-confidence in him, and his activist agenda?

The chart shows the S&P 500 since election day, along with the FTSE All-world index, which is deeply influenced by events in the US. It has fallen. The pattern is complex. There was a mini-crash in November, triggered by the Treasury’s announcement that it would not, after all, be buying troubled assets from the banks. That ended with the rescue of Citigroup.

After that, there was a 17 per cent rally that lasted until February 10, when Tim Geithner, the new Treasury secretary, made his much-trailed speech on his plan for the banks. He was not ready to reveal details, dashing many hopes. Over the next four weeks, the S&P fell a numbing 24 per cent, before staging a rally of 14 per cent this week. It is just above its low from November’s panic.

The latest sell-off was marked by extreme fear. Individual investors, according to one survey, were more pessimistic than they had ever been. From such an extreme it was not difficult to stage a bounce on little substantial news.

Oddly, the tracking poll analogy may be a good one. It is unwise for investors or politicians to pay heed to extreme moves from day to day, but the overall trend should send a clear message. The market has twice panicked when the Treasury has raised its hopes on a policy for the banks and then lowered them.

That stocks are barely higher now than in the November panic implies that the new administration has not won the market’s confidence when it comes to the banks and that it needs to do so before stocks can recover.

Beyond that, this month’s sell-off was driven by very bad economic data, and by the divisive political debate. That debate has played out in the unlikely venue of a late-night comedy show. Rick Santelli, a CNBC reporter, made an on-air outburst against Obama, attacking homeowners facing foreclosure as losers.

Mr. Santelli turned down an invitation to appear in an interview with Jon Stewart, a highly popular late-night comedian. Stewart’s response was to attack CNBC for presenting investing as entertainment, and thereby egging on the bubble in share prices.

This led to a public feud with another CNBC commentator, Jim Cramer, that dominated talk on Wall Street all week. It ended with a confrontation between the two on Stewart’s show, which left Cramer looking chastened. The populist anger, earlier directed against the president, now appeared to be aimed at those who had egged on the market.

This episode shows that there is more than enough populist anger to go around. It behoves everyone to stay calm, including investors. Investment decisions, like all others, should not be made in anger.

And ironically, Obama’s mangled advice was not at all bad. Valuations are indeed getting to the point where, historically, stocks have been a good buy, for those who can wait a while. Cyclical price/earnings ratios are not as low as they have gone at the bottom of history’s great bear markets, but are at levels that typically lead to good returns over the ensuing decade.

Investors should also follow Obama’s advice and ignore day-to-day gyrations. Extreme volatility is common in bear markets, while day-to-day swings are driven by raw emotion rather than rationality.

It is possible that the extreme sentiments in the US body politic reached their cathartic moment in the confrontation between Stewart and Cramer, and that we will come in time to link the incident with the bottom of this bear market.

But on balance that looks unlikely. The mere fact that markets could bounce so sharply this week suggests that confusion still reigns and we are still in a bear market. And that is entertaining for nobody.

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John Paulson is known for his short-sales savvy. But his flair for long positions shouldn’t be underestimated. The hedge fund bigwig is set to take preferred stock in Dow Chemical to help it fund the $15bn purchase of Rohm & Haas it was recently trying to wriggle out of. So is the Haas family. It’s a way to help do the deal without sinking Dow. It also rescues a big Paulson bet, at least for now.

Paulson and the Haas family will together buy $2.5bn of Dow preferred, giving the chemical company enough wiggle room to purchase Rohm without immediately running aground - as it had claimed it would if forced to close the deal and fund it by drawing heavily on risky short-term debt.

The deal came as Rohm's lawsuit against Dow for trying to pull out of the acquisition was about to get under way. Had the court ruled against Rohm or even forced a compromise deal, Paulson’s 18m-share bet on Rohm, a big one, since it represented about 4% of Paulson’s assets under management at the end of December, would not have looked so clever. Rohm's share price was drifting down towards $50 a share before hopes of a settlement resurfaced in recent days.

As it stands, the other shareholders will get the $78 a share in cash that Dow originally offered. And it looks as if Paulson is essentially reinvesting his proceeds in Dow.

The deal allows Paulson to move upwards in the capital structure, where he’ll sit alongside Warren Buffett, providing him a margin of protection against further deterioration in Dow’s business. While he has been quite bullish on the company’s prospects, it faces significant challenges. After all, boss Andrew Liveris’ rationale for walking away from the Rohm deal was that the combined company would not be viable.

And despite the new equity funding and other emollients just announced, such as additional potential synergies and the extension of the term of much of the $12.5bn in debt financing from one to two years, Dow isn't out of the woods. The economic downturn has crimped its business and may do so for some time. Paulson has rescued his bet for the time being, but the game isn't over yet.

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This year marks the 30th anniversary of a famous Business Week cover story The Death of Equities. Along with those scary words, the magazine's Aug. 13, 1979, cover read, "How inflation is destroying the stock market." But starting around that time, investors could have beaten inflation quite handily by snapping up stocks and holding them for five or 10 years.

Buying the stock market at the close of 1979 would have yielded, after inflation, an average annual return of 7.3% over the next five years. An even higher five-year return of 9.47% could have been captured by going long at the end of 1978. The 10-year performance would have been healthier still, yielding 9.52% or 10.75%, depending on whether the investor bought at the close of '78 or '79.

With the stock market in the throes of yet another near-death experience, another rebirth could be in the offing. Five- and 10-year returns on stocks through year-end 2008 have run negative, and would have looked even worse at the lows of last week. But based on the historical record, performances like these bode well for the next five to 10 years.

The historical record shows that for 20- and 30- year periods, inflation-adjusted returns on stocks have never been negative. Over the 137 years from 1871 through 2008, returns after inflation for 20- and 30-year intervals have been consistently positive. Median returns over the 20-year intervals have been 6.85%, and for 30-year intervals, 6.23%.

With this consistently strong performance over long periods, it stands to reason that below-par returns over five- and 10-year intervals would tend to be followed by much better results over the subsequent five- and 10-year intervals. And in fact, the historical record shows that, following below-average returns over five and 10 years, subsequent periods of similar length do tend to perform better than average.

An investor whose retirement is drawing near might take heed: Investing in stocks today could help produce the cash you will need five or 10 years down the road. Those who plan to retire in less than 10 years would benefit if the historical trends hold true. Positive returns over the next 20 or 30 years would only make retirement more of a breeze.

Critics of stocks as vehicles for retirement often rig their case by assuming that investors entered and exited with the worst possible timing, buying at peaks and liquidating at bottoms.

But diversification over time, buying and selling periodically, rather than all at once, can be quite effective. Most investors would be foolish to liquidate all their stock holdings on the day their retirement begins, unless they feel endowed with timing skills that few can claim. If they plan to live 20 years past their retirement, they might plan to hold on to at least part of their holdings for 15 to 20 years.

And of course, retirement accounts are set up in such a way that buying can occur in installments over many years. The acquisition of stocks can therefore be diversified over time, along with the process of liquidation. From this perspective, useful insights can be gleaned from the exhaustive record originally pieced together by Wharton School finance professor Jeremy Siegel for his best-selling book, Stocks for the Long Run, now in its fourth edition.

Siegel has amassed data on rolling five-year periods dating back to 1871 (1871-1876, 1872-1877 and so on). He has similar data on rolling 10-, 20- and 30-year periods. Why begin with 1871? Prof. Siegel can also provide data going back to 1802, but prior to 1871, the quality of the data isn't particularly reliable, and data over the past 137 years are more than sufficient to reveal the long-term performance of stocks as an asset class.

The data can track all failed stocks into bankruptcy, so there is no "survivors' bias," a common flaw in historical analysis. And Siegel adds that, even in the 1800s, the U.S. stock market featured a fair range of different industries, roughly similar to more recent eras.

Siegel has analyzed the data in terms of "total returns" after inflation. All publicly traded stocks are bought on a capitalization-weighted basis, with all dividends reinvested. Average annual returns benefit from the magic of compounding. Thus, for example, $1 invested at 6.26% over 30 years becomes an inflation-adjusted $6.13 with compounding.

For any given holding period from year-end close to year-end close, no taxes are assumed, not unrealistic, given the advent of tax-deferred accounts. Perhaps a tad unrealistically, management fees aren't factored in, either. But in the era of index funds and exchange-traded funds, such fees are lower than ever. Some ETFs charge as little as seven one-hundredths of a percent.

Jeremy Schwartz, Research director of WisdomTree Asset Management, a firm with which Siegel is affiliated, updated Siegel's figures. He was asked to line up the worst-performing quartile of 10-year stretches since 1971 and then see how the following 10 years performed in each case. That meant examining about 30 intervals of poor performance.

The result: In each case, without exception, the subsequent 10-year periods performed better and ran positive. The median performance for each was 8.17%, 1.33 percentage points higher than the median for all 10-year intervals.

Schwartz performed the same exercise for the worst quartile of five-year returns. Here the finding was that, in 25 out of the 31 cases, the subsequent five-year periods performed better and ran positive. The median performance for all these cases was 9.47%, 2.50 percentage points higher than the median for all five-year intervals.

Prof. Siegel also compares long-term equity performance with returns in U.S. Treasury bonds, an apt comparison for risk-averse investors seeking reliable income in retirement. Assuming buy-and-hold strategies in Treasuries over 20- and 30-year intervals, how often did the inflation-adjusted income and possible capital gains from bonds prove superior to the returns of stocks?

Answer: Through 2008, stocks have always done better than Treasury bonds over 30-year periods. And over 20 years, stocks bested Treasuries in all but a little over 5% of the cases.

Despite the bear market of 2008, long-term returns through year end were fairly good, running 5.17% annually for the previous 20 years and 6.6% for the previous 30. But what if the investor had the bad luck to liquidate at of the close of February '09? Add these two disastrous months to the 20- and 30-year holding periods, and returns would have been 4.09% and 5.86%, respectively.

Why do stocks tend to do better over the long run than either bonds or inflation? Mainly because their returns are driven by rising profits, which in turn are driven by real growth in the U.S. economy. That's why stocks can be indispensable for retirement planning.

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In House of Cards, William D. Cohan calls the collapse of Bear Stearns a "tale of hubris and wretched excess on Wall Street."

Of course, tales of hubris and excess on Wall Street are nothing new, fueled by large bets with other people's money. What was new in March 2008, and what still amazes even former Bear employees, is that government officials somehow talked themselves into rescuing the bettors.

A year ago next week, the Federal Reserve committed $30 billion in taxpayer funds to engineer the sale of Bear Stearns to J.P. Morgan Chase. The Fed's action protected all of Bear Stearns's creditors against losses and ultimately allowed Bear stockholders, who might have received nothing in bankruptcy, to receive $10 a share.

The taxpayer exposure was later reduced to $29 billion. The Federal Reserve estimates that, as of Dec. 31, 2008, taxpayers are sitting on a paper loss of roughly $3 billion.

That America could not survive the loss of Wall Street's fifth-largest investment bank was a fairly novel idea. Investment banks were traditionally seen as riskier enterprises than commercial banks, which hold FDIC-insured consumer deposits. It was generally understood that investment banks could go bust and sometimes did. In 1990, the government allowed Drexel Burnham Lambert to fail, and markets continued to function.

Ranked by assets, Bear Stearns was not even in the top 10 of U.S. financial firms. But in Washington there were fears of so-called systemic risks, even if such risks were not completely understood. Mr. Cohan quotes Timothy Geithner, then the president of the New York Fed and now Treasury secretary, opining that "there's no rulebook for these things. By their nature, they're always different. They occur in areas where nobody's got some terrific plan for dealing with them."

But while Bear's top executives aggressively sought the federal lifeline, not everyone at the firm thought that such help was deserved. "There were voices," reports Mr. Cohan, "that the free market should be the one to render judgment on the firm's years of strategic and tactical choices, among them the decisions to finance itself with short-term borrowings, to pack its balance sheet with hard-to-sell and hard-to-value mortgage-backed securities, and not to diversify its revenue either geographically or by product."

Mr. Cohan quotes a senior managing director at the firm: "My personal view is that [Bear Stearns] should have been made more of a victim. I don't think it should have been saved. I don't buy the argument that the whole system would have unraveled and collapsed. I really don't. I think it's a terrible precedent. I don't think the Fed should be in the business of assuming this kind of risk. I think it would have been a much better wake-up call for everybody had things followed their course."

Meeting the characters in "House of Cards," it's not easy to conceive of people less deserving of federal assistance. In 1997, Bear Stearns helped pioneer the subprime mortgage-backed security by serving as co-underwriter on a $385 million offering.

By the mid-2000s, Bear was the leading issuer of such securities and a leader in collateralized debt obligations, which offered even less transparency to investors. Bear was a vertically integrated manufacturer of mortgage chaos, making individual loans to home buyers, servicing the loans, bundling them into pools for investors, marketing the securities and also borrowing huge sums to finance internal hedge funds that held onto these dodgy assets.

Mr. Cohan describes the succession of government policies that encouraged Bear and others to invest so heavily in mortgage finance, from the Fed's easy money to Clinton-era changes to the Community Reinvestment Act requiring more loans to low-income borrowers. But the firm itself deserves the lion's share of the blame for its own collapse. Suggestions to sell some of its risky mortgage assets, or to raise capital, or to consider merger partners were brushed aside in the years and months leading up to the debacle.

Paul Friedman, chief operating officer of Bear's fixed-income division, tells Mr. Cohan that "we did this to ourselves. . . . It's our fault for allowing it to get this far, and for not taking any steps to do anything about it."

Apparently there were opportunities to take those steps until almost the moment of collapse. According to Mr. Cohan, Bear rejected a significant investment just hours before it received its Federal Reserve bailout via JP Morgan Chase. Cash was flying out the door on Thursday, March 13, 2008, as large hedge-fund customers pulled money out of Bear's prime brokerage and the firm struggled to line up the $75 billion in overnight loans it needed every day to stay in business.

That morning, a Bear Stearns managing director received an email from a colleague in Saudi Arabia saying that the Saudis were willing to make an immediate investment in the firm. The gist of the message, according to the Bear executive: "They want to give us a significant amount. We can set it up. They want to do it now. They can act quickly."

Struggling to get senior managers to focus on this potential lifeline, the banker decided to approach Bear Stearns's chief executive, Alan Schwartz, after the regularly scheduled lunch with the firm's top 50 executives.

Mr. Cohan quotes the banker: "I said, 'Alan, I just want you to know, the Saudis want to give us money.' He said, 'We don't need capital.' " That night, officials from the Fed and the SEC began arriving at Bear Stearns. SEC staff members determined that the firm's cash balance had dwindled to $2 billion from $18 billion during the day. It was clear to all that the firm would be broke the next morning, barring a massive new source of liquidity.

At 2:00 a.m. on Friday, Mr. Cohan tells us, Mr. Geithner called Donald Kohn, the vice chairman of the Federal Reserve, and told him that he "wasn't confident that the fallout from the bankruptcy of Bear Stearns could be contained."

Taxpayers reading this fascinating tale may wonder whether the fallout from the government's intervention can be contained and, if so, at what cost.

House of Cards
by William D. Cohan
Doubleday, 468 pages, $27.95

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 The 651,000 decline in US non-farm payroll employment last month is nasty, but the rate of job loss has stopped accelerating.

The Obama administration's stimulus package should provide a short-term economic boost soon, so a bottom to the economic downturn may be approaching, but that doesn't mean an upturn follows quickly, sorting out the budget deficit and inflation will come later.

Upward revisions in job loss figures for December and January mean that February’s decline was less severe than in previous months, suggesting a slight decrease in the rate of job loss. Moreover, the Institute for Supply Management’s February manufacturing and non-manufacturing indexes, respectively flat and down only slightly compared with January, also suggest that the pace of economic decline may be slowing.

However, that doesn’t suggest the economic bottom is imminent, but it does lessen for the moment fears of accelerating decline on the trajectory of 1929-32.

Whatever its long-term effects, the US economic stimulus should produce some bounce in the second quarter as modest tax cuts flow into low and middle-income wage packets and public sector hiring creates jobs. There is thus some possibility of a bottoming-out of economic activity by mid-year.

Whether or not that occurs, a slowing of job losses would help boost confidence in the consumer and small business sectors, further lessening the chance of decline becoming self-reinforcing.

The prospects for a rapid return to economic growth are less reassuring. Labour productivity, which declined by 0.4% in the fourth quarter last year, is likely to remain weak, with tight credit conditions correcting the excessive capital investment of the bubble period.

Consumption will probably remain subdued in spite of extensive government attempts to revive it, as savings rates return towards or even rise above their long-term average of around 8%.

Excessive budget deficits and the possibility of resurgent inflation caused by over-stimulative monetary policy may well raise interest rates considerably, further holding back recovery. That could result in an L-shaped recession, with no real recovery for several years. But even that would be better than a seemingly bottomless economic pit.

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It’s (almost) half-official. To avoid the horror of out-and-out public ownership, the US government will swap up to $25bn of its $45bn preferred shares in Citigroup for common equity.

Other holders of $27bn of preferred stock can also convert, with $12bn worth already on board. If everyone falls into line, Citi gets $52bn in common equity without additional investment by taxpayers and saves about $3bn in dividend payments.

The government is left with a 36 per cent stake, existing shareholders are diluted to 26 per cent and non-government holders of preferreds get the remainder. Citi’s shares, having inexplicably rallied this week, on Friday swooned 39 per cent. This may still not be enough.

True, the extra loss-absorbing capital (at the top end) will boost Citi’s tangible common equity to 8.1 per cent of risk-weighted assets, but scepticism about banks’ risk models suggests investors are likely to focus on the ratio to total tangible assets at 4.3 per cent. That looks pretty healthy, with JPMorgan’s, say, at 3.8 per cent. But further losses on real estate-backed assets would deflate that cushion.

The latest plan does nothing to address the question of how those assets are valued on Citi’s books. The authorities’ forthcoming stress tests could yet mean Citi returns to trade in more government preferreds.

Anger that chief executive Vikram Pandit remains at his desk is to be expected, but it makes little sense to replace the boss now. Installing a new face would hardly denote a fresh start or lessen the likelihood that Citi winds up fully nationalised.

The board shake-up is positive, though attracting heavyweight directors will be challenging. The deal is structured to give preferred holders an enormous incentive to convert. Taxpayers are short-changed, but that was expected. Half-measures, half-baked.

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Blackstone’s fourth-quarter earnings show the day of reckoning for buyout firms is nigh. Its abysmal results and plummeting asset values reflect the industry’s woes. But Blackstone’s diverse business strategy may make it better positioned than its rivals to ride out the storm. Still, that bodes ill for other buyout shops.

Blackstone’s earnings make for grim reading. It wrote down its real estate investments by a whopping 30%, and its private equity investments by 20% in the quarter. Blackstone also stopped paying out on its traded units, and posted negative economic net income – the private equity firm’s preferred earnings metric. More writedowns are probably on the way. Blackstone officials, during its earnings call, even had to field a question about liquidating its funds, reflecting just how concerned shareholders are about its prospects.

Though Blackstone assured analysts that liquidation was unlikely, president Tony James said that things would get worse before they got better. Buyout investors are scared, don’t have an appetite to invest more money and many are having liquidity problems, he said. Blackstone also may face further writedowns – several of its investments are teetering.

Still, there’s a bit of a silver lining. James said Blackstone realized the market was peaking in 2006, and reined in its investments somewhat – though that didn’t stop the firm from going public the following year. It is also raising a new fund and it has other businesses, like its GSO hedge fund, that give it a degree of diversification.

Firms that focus solely on buyouts may suffer more pain. And Blackstone hasn’t had any big blow ups – yet – unlike, say, TPG’s $1.3bn Washington Mutual deal or Cerberus’s auto investments. Blackstone may survive private equity’s day of reckoning, but the outlook is less certain for others.

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Financial markets are supposedly driven by two competing forces: fear and greed. Fear just made another grab for the steering wheel.

Disappointment with the U.S. government's planned credit-market bailout and concerns that the $787 billion stimulus plan won't jolt the economy fast enough snuffed out the budding U.S. stock-market rally. Now investors are worried that stocks could fall back to their November lows-and possibly even further.

The Dow Jones Industrial Average finished last week at 7850.41, down 5.1% in the four days since the Obama administration unveiled its latest efforts to aid the credit markets and just 4% above the November low of 7552.29. A drop below that level would send the benchmark toward the 7286.27 low of the previous bear market, hit in October 2002. The market was closed Monday for the Presidents Day holiday.

"The hope balloon is losing air," says Henry Herrmann, chief executive at Waddell & Reed Financial Inc. in Overland Park, Kan. "It points to how on-edge everybody is and how much emotionalism is still involved."

In late 2008 and earlier this year, Mr. Herrmann's firm was betting on a revival. It had cut its cash holdings to around 11% on average from about 17%, increasing exposure to stocks. His money managers now have boosted cash back to around 14%. They are a lot more comfortable with safe Treasury bonds than higher-yielding junk bonds.

Many money managers, including Mr. Herrmann, still live in hope that any declines from here will be modest, but they also worry that a heavier drop to new lows can't be ruled out. With the road ahead looking rocky at best, many are turning more defensive.

Analysts have been disappointed that market upturns in 2009 have been wimpy, short-lived affairs. The upturns haven't had the strong trading volume and duration that would signal the investor confidence normally seen at the start of a lasting stock recovery. Instead of ratcheting higher, the Dow keeps slipping downward. That has reinforced the fears of new lows.

All of this has thrown a cloud over the optimism at the start of February, when some were betting that stimulus plans would move the global economy toward recovery.

Investors got a reminder of reality during Treasury Secretary Timothy Geithner's widely criticized speech last Tuesday. Details of his plan to get lending markets working normally again were unconvincing, and Mr. Geithner stressed in testimony to Congress that there would be no easy solutions. Some investors and analysts also worried that President Barack Obama's separate stimulus plan mightn't be able to spend enough money fast enough.

"Things are going to take longer, and that means the economy is going to be softer longer. It is hard to make a cheery story out of that," Mr. Herrmann says.

Such doubts were reflected in last week's market moves. Industrial commodities and junk bonds, which some investors had been buying in hopes of an economic upswing, dropped. Gold and Treasury bonds, widely perceived as havens for scared money, rose.

Gold futures rose 5.5% over those four unhappy days, finishing Friday at $941.50, just 6% below the New York record finish of $1,003.20 hit last year. The yield of the 10-year Treasury note, which declines as the note's price rises, slipped to 2.900% from 3.028% late Monday.

Copper futures, which had been recovering so far this year, fell 4.5% from Tuesday to Friday. New York oil futures fell 5.2%, wilting beneath the economic worries. And Brazil's stock market, which had been on the rise because of that country's clout as a raw-materials exporter, began falling again.

"There is a general feeling that we are a ways from the bottom of this recession. In fact, the bottom isn't in sight," says Edgar Peters, co-director at investment-management firm First Quadrant LP in Pasadena, Calif. That leaves few people feeling they can see far enough into the future to invest confidently. "There are very few long-term investors now. Everybody is a short-term investor," Mr. Peters says.

Stocks appeared to stabilize on Thursday, as some investors once again began betting that the government's recovery efforts, notably to slow foreclosures, would keep indexes above their November lows, at least for now. Still, setbacks like last week's are making it harder for optimistic money managers to convince weary investors that stocks will rally in the second half of the year and that they should increase their stock holdings in preparation.

"I feel a little like Charlie Brown. They keep taking the football away," says Jim Dunigan, chief investment officer at PNC Wealth Management in Philadelphia, a unit of PNC Financial Services Group Inc. While he has been urging clients to gradually return to stocks in anticipation of better days, he acknowledges that it hasn't hurt anyone to steer clear of stocks so far.

"There still are some clients who are very fearful about the prospect that the recession will get worse or continue," Mr. Dunigan says. "As long as we keep looking to Washington for something that will move the market, history would tell us we will get disappointed by that."

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Picking fruit off the ground is a chancy affair. After the collapse of 2008, Research In Motion’s shares have rallied strongly this year, helped by the popularity of its new BlackBerry Storm mobile phone. Unfortunately, a warning that margins and earnings for the fourth quarter would be at the low end of expectations sent the stock tumbling 17% on Wednesday, February 11, erasing half the recent gains.

RIM’s problem is that profits are not growing at the same pace as sales. Turnover in the year to February will be almost twice that of 2008, which was in turn double that of 2007. Operating income will have merely tripled during the same period, and it is not clear at what level those shrinking margins will stabilise.

While new subscribers are signing up at a record rate, economic weakness appears to be hitting the level at which existing customers, mostly businesses, are choosing to replace their BlackBerrys. It is also hard to avoid the suspicion that as RIM targets a greater share of the consumer market, discounting and marketing support for its telecoms operator partners is being used to generate subscriber growth.

Operating margins are likely to fall to about 20% this year, typical for makers of smartphones, from 29% in the previous financial year. If RIM can hold the line at this level then, trading at a 16 times earnings multiple, RIM would be cheap for a company still expected to increase sales by a third this year.

However, the smartphone market is becoming highly competitive as every handset maker trumpets this niche as the only source of recession-proof growth. As fancy touch-screen phones proliferate, prices will necessarily suffer, and RIM shares are unlikely to move in the opposite direction to its margins. Watch out for the thorns.

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