Tuesday, October 14, 2008


"First" of the Day: The Dow takes a leap

After eight consecutive drops and the worst weekly loss in its 112-year history last week, the Dow Jones industrial average registered its biggest one-day point gain in history and its biggest percentage gain since the depths of the Great Depression. —Walter Hamilton reporting in "A rally for the ages: Dow leaps 936 points"

I was tempted to title this post "No-brainer of the Day." Last week a friend called, who's been worried about her credit union deposit. Breaking with my native reluctance to voice an opinion, I suggested she might risk a few ducats in a stock index fund. (A stock index fund invests your money in the stocks contained within the index such as the Dow Jones Industrial Average or the S&P 500.) And whoop-de-doo! Look what happened!

Technical considerations

I didn't make my recommendation based on such nonsense as "the market is undervalued" but on the belief that (1) a portion of the investing class would feel that the market has no place to go but up and (2) that the remaining portion of the investing class would believe that the other investors would believe that the market has no place to go but up and would hop on for the ride, even if they had to borrow money to do it. I myself called my banker to see if I might borrow some money to get in on the action. Unfortunately he was tied up in a call to his broker whom he was trying to convince to accept his bank shares as leverage for a purchase. After all, they had no place to go but up.

Many financial correspondents appear not to share my view of the rally. They are looking for a genuine change of heart on the part of the investing public, which means we must endure yet another wave of hopefuls asking "Is the crisis finally over?"

Writers for the Richmond-Times Dispatch burbled

Stocks soared yesterday, with the Dow Jones industrial average climbing 936 points, as investors took heart that the worst of the financial crisis could be over.

"It looks like the stock market might have found the bottom," said Buford Scott, chairman of Scott & Stringfellow Inc.

That said, the bottom will be tested, Scott said. Investors should expect to see the Dow to return to the 8,000 level in the next couple of days....

The market usually corrects by a third of the gain, meaning it could drop 300 points today, Scott said. "Once the low is tested three times, then everyone feels the lows are behind us, and they can look forward to a rising market."1

Unfortunately the story, which was headlined Dow leaps 936 points on aid to U.S. banks, included the subhead INVESTORS FEEL WORST MAY BE OVER; PRESIDENT DETAILS PLAN TODAY. Market cheerleaders forget that every time the President is allowed to peak out from behind the curtain it's bad for the market, not to mention John McCain.

Now comes the revolution

Other writers attributed yesterday's market exuberance to the greatest nationalization of banks since the Russian Revolution. British Prime Minister Gordon Brown waved the red flag and led the charge on "the City," as financiers like to refer to London's version of Wall Street.

Robert Winnett and Andrew Porter wrote that—

The Prime Minister unveiled an unprecedented bail-out for RBS [Royal Bank of Scotland], HBOS [Bank of Scotland, which is Britain's largest mortgage lender] and Lloyds TSB [Trustee Savings Bank].

Under the emergency package, more than two-thirds of Britons will become customers of government-controlled banks that have more than £1 trillion in savings.

The announcement of the £37 billion bail-out – expected to become the blueprint for similar government schemes around the world – was welcomed by the City and the stock market rose sharply.

The Revolution swiftly spread across Europe, with one country after another scrambling to nationalize.2

And today George Bush has proclaimed that the U.S. Treasury will follow suit, buying up bank shares, as the Congress quietly authorized it to do in the $700 billion bank bailout legislation.

Investors are now encouraged, or so we are told.

Is there any meaning in the hubbub?

What does the market rally really mean? Is the market near the "bottom"?

If we were to survey the many problems of the U.S. economy, such questions must fade in importance. But if we are to focus upon the stock market, as the media insist, I would urge you to consider the date of the previous record-holding leap of the Dow: It fell on the Ides of March in the glorious year 1933.

10:28 pm — Correction: I originally wrote "Market cheerleaders forget that every time the President is allowed to peak out from behind the curtain ..." I should have written "Market cheerleaders forget that every time the President is allowed to peek out from behind the curtain ..."

Though Bush may very well be peaking out from behind a curtain, it is only when he peeks out that damage is done to the market.

Related post
"First" of the Day: Crash of the Dow (10/13/08)



1This is a rudimentary form of what is called "technical" market analysis, which is itself an offshoot of numerology. [back]

2Free-market capitalists have long insisted that governments should not be involved in business because it would put them in the position of deciding winners and losers, which governments are "unqualified" to do. Such decisions should be left to "the Market," they argue.

These concerns were put aside when it was realized that all the major banks are losers and there is really nothing left to decide. [back]

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