Will the Dog Days of Summer Give Way to an Autumn Slump?

NEW YORK - When you call your investment adviser for help in making money (or in the case of a journalist, to help your readers not to lose money), which of the following answers is more frustrating?

"Everything's going up now and I really don't have time to talk with you. If you want to buy something, I have a very interesting security here that the development department of the bank created. It gives you a return of 150% over the rise in the dollar, but if American bonds dip below a certain floor, that will offset your profit."

"The market is declining now and we don't know why. The folks in London are selling off big time. But I wouldn't sell, or sell short today because it may just be temporary. I wouldn't buy either because why go against the flow?"

"Nothing's going on. There are no deals. The market's dead. Everyone is on vacation or on the way to the beach. I'm the last one left in the office. You know, after the declines and increases in the market, again the market's down a little and now the market has to adjust to its current level. I think it will move from side to side now without a clear trend up or down."

Saturday in New York, after the close of TheMarker's economic conference in the world's financial capital, I mostly heard the third response from bankers, economists and commentators. Truth is, their answer is on target, and supported by numbers and data. The stock markets finished the trading week with a whimper, almost unchanged on Friday and for the week, too.

Trading volume was low, and there was no significant movement on the bond and currency markets. The financial news was such that the effect of one story canceled out the next and there was no change. Some of the news was good, like the rise in the American consumer confidence index, and some not so good, like China's proposal for a new global currency for international trade, which would replace the dollar.

The mood in New York this week wasn't at all "financial."

The financial advisers, those that still have work, had already left for the weekend and for summer vacations which start next week ("We've finished the second quarter"). On the side-streets near Wall Street in downtown Manhattan not many people were around, and only a few of them were wearing suits. On the sidewalk, the bankers in their ties walked by at a leisurely pace, unlike the sprinting that you would see during the time of the bull market.

New York and America as a whole are mainly preoccupied with the death of Michael Jackson and the marital infidelity of the South Carolina governor. The stock market, the economy and even the sentencing of Bernard Madoff in his huge fraud case, which took place yesterday, aren't big news.

But the quiet is deceiving, and those who deal in finance for a living - and in New York there is no shortage of such people - know it. Ther e is a feeling in summing up the wildest financial year which the financial workers have ever gone through (none of them personally experienced the 1929 crash), of a kind of cautious pessimism.

The world was not destroyed. The sun still comes up every morning. After the financial atom bomb, there are new signs of hope that have begun to take root. For some reason, and no one has a really convincing explanation why, the stock and credit markets have shown exceptional signs of recovery over the past three months.

Now everyone in New York is going on vacation - and they think they need it. "At the height of the crisis, we would start work at two in the morning, work until nine at night, go home to sleep a few hours and come back again to the trading room," one of the traders told me, but the dealers aren't relaxed. The vacation that they are about to take is more like a tired boxer resting between the ninth and tenth rounds after sustaining a volley of punishing punches.

Everyone is worried about the prospect of returning to work. The central banks, for example, sent messages to the markets at the end of the week that the risks are still great - and the increases in commodity and stock prices are moving in the direction of a bubble.

"Our concern over the past month has been that investor hopes of a sustained recovery have gone so far ahead that economic reality will cause a painful correction at the end of the summer," Lena Komileva, an economist for brokerage house Tullett Prebon, told the Financial Times.

Commentators note with concern the rise in savings rates among Americans. Why concern? Because a large portion of this additional income is from government stimulus packages, and the public simply refuses to spend it for fear about the future.

The traders at the banks and the speculators, who know the mood of the investment funds and the speculators better than anyone, are already prepared to return from vacation right into the next financial crisis.

"At the end of the summer, in September or October, there will be a wave of declines that won't be pretty," we were told in one trading room. "People see the recovery of the stock market and they think it's all over, but it's not. Banks are trading with 10% of the capital they had before the crisis. People's portfolios are still down 30% or more compared to the peak, and will not run out to buy risky securities. The situation at the banks is still bad. Real estate is on the skids. I think the market will wake up to the situation at the end of the year, and again it won't be very pretty," one of the traders said.

These reactions from so many corners of the financial sector don't bode well. But if that's the story, why have the markets gone up so sharply and why aren't they going down already rather than settling into place? "If you are a financial adviser, underperformance compared to your colleagues is the kiss of death," said one trader. "So you have to stick with the herd."

Just like in Tel Aviv, in New York everything is relative, and people in the market mostly watch one another. The money is from the customer or the bank, and the accepted recipe for success is to achieve returns that are a little better than the average performance of everyone else. The recipe for failure is to gamble on what you believe in and then pay the price.