You’re gonna need a bigger boat

Bernie McSherry Contributor
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This week marks the 35th anniversary of the release of “Jaws”, the smash hit film that dramatically altered America’s movie and beach going habits. Recognized as the original summer blockbuster, “Jaws” was the first film that opened in wide release and its stunning success ended the traditional staged-release practices that had previously predominated. After “Jaws”, big summer films would henceforth be opened upon a thousand or more screens simultaneously. So in case you were wondering, you can thank “Jaws” for providing you with the opportunity to view “Toy Story 3” on 10 screens at 5 different multiplexes within a fifteen minute drive from your home this weekend.

Steven Spielberg’s thriller undoubtedly changed film industry practices, but it was on the nation’s seashores that its impact was most clearly on display in the summer of 1975. I vividly recall going to the beach shortly after “Jaws” was released and noticing that hardly anyone was venturing into the surf. The handful of folks who were able to summon up the courage to enter the water were huddled into small groups a few feet offshore and periodically groups of teenage girls would shriek and run from the surf, inciting a mad scramble for the shore by the remaining bathers.  Clearly the film had struck a primal fear deep within the human imagination.

Investors have resembled those frightened beachgoers in recent months. Many of them refuse to dip a toe into the stock market, choosing instead to remain beached in money market funds. The few brave souls who have taken the plunge remain seriously underweight stocks, preferring to wade into the supposedly safer waters of the bond market. When interest rates inevitably rise, the value of those bond holdings may drop faster than the tide at the Bay of Fundy, but for now bonds are attracting those most afraid of getting in over their heads.

One of the most effective parts of the movie was John Williams’ famous score. Spielberg deployed the “shark theme” to condition the audience to expect the arrival of the shark onscreen and it famously succeeded in ratcheting up tension whenever it played. In much the same way, just when the investing public thought it was safe to get back into the water, the Euro crisis erupted. The reprise of official reassurances that followed sounded an awful lot like the noises emanating from American officials two years ago. As those familiar tones played in the background, trader’s sphincters tightened globally and the markets sold off.

(Spoiler Alert)

Traders should recall that the “shark theme” was used in the movie to set up an underwater fright that proved to be benign and unrelated to the shark. It may turn out that Europe is the head of the corpse bobbing out from the hole in the sunken boat.  We have been conditioned by experience to expect a panic when we hear of stress in the banking system, and in that context Europe may just be a distraction to the real threat facing the market. The stock market crash of 2008 was set in motion by the American subprime crisis, and signs of renewed weakness in the American housing market may be the dorsal fin of the great white lurking just beneath the surface of America’s economic seas. Expect housing to set the tone for markets as the summer of 2010 unfolds.

Investors have been trying to stay afloat amid crosscurrents of conflicting economic data, yet it all boils down to one key question: Is the decline in housing a statistical anomaly related to the expiration of the first-time home buyer credit or is it a leading indicator of another sharp decline in the housing market?  If housing stabilizes, things in the market should go swimmingly, but should a housing double-dip swim along to bite investors in their own dorsal regions, look out below: the S&P could be headed for Davy Jones’s locker.

I can almost hear the familiar theme music swelling in the background now.

Bernie McSherry is senior vice president for strategic initiatives at Cuttone & Company.