Silly season

At the height of the tech boom in 2000, it seemed that even the flush of a CEO's toilet could send the shares of a tech company higher. We have seen similar movements in speculative resource stocks of late particularly uranium. But unwarranted movements in share prices are not the sole domain of speculative issues as last Thursday in New York showed. Dallas Federal Reserve president Richard Fisher has joined the chorus that believes the effects of the subprime mortgage fiasco haven't yet fully played out.

This might sound like negative news but apparently not. The Philadelphia housing sector index gained more than 3%. Leading the charge, Countrywide Financial Corp. (CFC) rose 3.2%, even after its earnings missed estimates. Woes in the subprime market, it said, subtracted 22% from its profits. Elsewhere Beazer Homes USA Inc. (BZH) rose 5% even after warning that

"it has yet to see any meaningful evidence of a sustainable recovery in the housing market"

and withdrew its outlook for the year. Ryland Group Inc. (RYL) said that it swung to a loss in the first quarter, that it does not expect to meet its prior earnings guidance and couldn't provide new forecasts. No wonder the stock rose 4.3% on such upbeat news.

Analyst's estimates of around 3% growth this quarter are looking overly pessimistic as current reports indicate earnings growth of 6-7%. Some market commentators believe that the better than expected results are the reason for the market's rally. However that would imply that markets had built some negative expectations into stock prices - hard to believe as indexes set new highs. In fact the market barely moves on the release of bad news whilst neutral to mildly positive news can produce 100+ point rallies. Another sign that silliness is well and truly back in season and from a contrarian point of view raises a big red flag.