Asia Crisis, Not Impeachment, Is Biggest Threat to Bull Market

Who'd have guessed that rumors of adultery in the White House would be bullish for stocks?

Or so it would seem. The Dow Industrials have gained more than 150 points since January 17, when reports of an affair between Bill Clinton and 21-year-old aide Monica Lewinsky first surfaced on the Internet.

The seeming paradox of a Wall Street rally in the face of a scandal that could lead to Clinton's impeachment becomes even more baffling when you consider that U.S. bond prices were soft and the economic firestorm in Southeast Asia was raging unabated.

A plausible explanation is that the prospect of President Clinton's ouster initially encouraged bears to bet more aggressively than usual on a decline in the stock market.

But when the President flat-out denied the charges of sexual involvement and cover-up early last week, the bears had little choice but to scramble for cover. Their panicked buying to replace borrowed stock that they had "sold short" earlier drove share prices sharply higher.

For the uninitiated, selling short entails selling shares that you have borrowed at a higher price in anticipation of buying that same stock back -- e.g., replacing it -- for a profit at a lower price.

My hunch is that the influence of nervous shorts will linger and that equity averages will consequently remain buoyant, at least until the allegations concerning the President have been settled one way or the other.

But I would not recommend that you rush out and buy stocks until you've considered the big picture, which will remain ominous regardless of whether Bill Clinton remains in office.

Here is my assessment of some of the powerful forces that will be affecting the stock market in the weeks and months ahead.

The most bullish of them is the steady flow of cash into mutual funds. With even the laggards able to tout annual returns exceeding 15% in recent years, it is not difficult to understand why millions of Baby Boomers, crazed for yield and hell-bent on a cushy retirement, would tithe to their IRAs.

Foreign investors have been almost as eager to purchase U.S. securities, since that is where some of the highest, safest returns in the world have been for most of the 1990s.

But it is the bears who have been providing the best insurance against a precipitous collapse of U.S. stocks. They have shorted more than five billion shares on the Nasdaq and New York Stock exchanges, and it is they who must buy stocks whenever the market dips in order to realize profits.

What could conceivably overwhelm the combined buying power of Baby Boomers, foreign investors, and 5.3 billion shares worth of short interest? The mounting economic problems of Thailand, Indonesia, South Korea, Malaysia and the Philippines, is what.

Not surprisingly, the almost-daily currency devaluations and bank failures that have plagued those countries since summer have been shoved off the front pages of U.S. newspapers by the sensational Lewinsky affair.

The last we read was that the International Monetary Fund was readying some eight-figure bailout packages for the region. But what can the IMF hope to achieve?

In fact, very little. Although bridge loans may help keep factories running for a short while in Seoul, say, the net effect over the longer term will be to damage the U.S. economy.

The reason is that South Korea, as well as the other so-called Asian "Tigers," have grown prosperous by exporting very aggressively. To have any chance of recovering, they will have to export and price much more aggressively still.

Which raises the question, Who will buy? Surely not the Europeans, who have staked their economic future on rigid protectionism. If the bailout artists have a buyer in mind, it could only be the American consumer.

Now, dirt-cheap cars, computers and consumer electronics from Asia may sound appealing, but they will come at the expense of American jobs and corporate profits And in the end, even America is not so prosperous that it can absorb the brunt of a deflationary export boom without significantly depressing domestic business.

So count the bailouts as a negative, along with one more body blow that would shake investor confidence: Bill Clinton's possible early departure from the White House.

In the meantime I wouldn't rule out the possibility that stock averages are about to rally to at least marginal new highs. To determine whether shares are peaking keep an eye on Microsoft, the most reliable bellwether for the 15-year-old bull market.

As long as it continues to rise, the bull market as a whole should be considered robust. Specifically, my technical indicators suggest that if Microsoft can exceed nearby resistance at 153, it will be on its way to a minimum 181 3/4. That would imply a rally of about 15% from present levels for the broad stock averages, but look out below when they get there.