The following are some thoughts I had on the markets Thursday and Friday, which I posted on my service web site. At the end I added my two cents on the S&P downgrade.
After an absurd day with a 400 point swing in the Dow, the Dow closed with a gain of points 61 points. The S&P closed almost unchanged and just decimal points below 1200. The NASDAQ closed down 1%. Volume was huge! (Read updates for reasons) For the week the Dow closed lower by 700 points. At the beginning of the week, with the debt ceiling bill passage, I reminded everyone that after the 2008 TARP passage the Dow was 1,000 points lower thirty days later. At the low this morning, the Dow was in fact down 1,000 points in just one week. The S&P lost 7% this week, and the NASDAQ gave up 8%. The all-important Nonfarm Payroll number was forgotten after the first 15 minutes of trading.
A day like today makes you want to sell every stock you own and never buy stocks again. We have some serious problems, but I’ll just give you two. First, the credit crisis in Europe will eventually overtake everything. If the EU follows through with bond purchases next week the crisis will be postponed but remain inevitable. They have no long-term answers, and their short-term answers have shrinking credibility. It’s like tossing doggie bones at traders. Stock trading today alone tells you this will be a problem for the market. The Dow went from +170 to -230 at least partially on Europe. The news of purchases caused the Dow to go from -230 to +150 points. That ain’t right folks. Plus, at least half of the entire recent downturn in stocks was Euro based. Money was fleeing European banks, and my bet is that we haven’t seen the last of that.
Second, high frequency traders have not gone away. We haven’t heard much about them as they pulled back after some scrutiny. They were obviously still lurking on the street corner. While most of the activity today was from leveraged traders who were forced to sell and from big bargain hunters, we saw instantaneous 100 point swings. That can only come from those high frequency computers. One of these days, those computers might get stuck on the sell signal. The economy is the least of our worries.
No one knows what we’ll walk into Monday. European markets were closed when the news of the bond purchases broke. Those markets should open up huge. But, if European traders get any whiff over the weekend that the bond purchase plan is not completely credible, the markets could be in a freefall. What a choice.
If I ruled the world (I’ll be happy to just start with the U.S.), I would tell everyone “Get a grip!” Every television and radio newscast, website, newspaper etc. led Thursday night with dire stories of the stock selloff. The most common headlines were “America in Crisis” and “Global Meltdown.” Hey, so stocks have sold off for a few days. Big deal. In the U.S., the markets are down just slightly on the year. Many of the articles written said that governments needed to do something to avert another recession. Really. Is that what you want? Government and central bank tinkering has done nothing but put band-aids on wounds that need open air to heal.
This hardly qualifies as a crisis. More importantly the economy isn’t in crisis either. Yes, the economy has slowed, but we’re not burning up jobs at 500,000 jobs per month, and our financial institutions aren’t under attack. The stock market was simply breathing thin air and living on QEII money, and traders weren’t thinking clearly. Leverage amplified everything. Now, some of that has come out. Could it get worse? Yes. And I believe there will be a “real” crisis sometime in the next twelve months in Europe, but I don’t believe this will lead to another economic meltdown in the U.S. The economy will slow again and stock prices will fall. This is just the cycle we’re stuck in. Relax.
Finally, a couple of thoughts on the S&P downgrade. First and foremost, this will mean nothing to interest rates for a variety of reasons. Frankly the world cannot do without our huge market to use as a giant liquidity pool. Plus, where the heck would they put all those dollars they have? Rates will move on fears or lack thereof, economic conditions, and inflation. The world knows we can pay our debt. We have a printing press.
Second, S&P is looking pretty dumb on this one – even dumber than usual. These are the same guys who never saw the mortgage crisis coming. While that is their most spectacular failure, the history books are littered with corporations and municipalities that S&P had highly rated just before the entities dove for the cheap seats. The S&P also admitted they had missed estimates by $2 trillion, but that made no difference to them. They ended up claiming the big reason was they didn’t like our political atmosphere after witnessing the debt ceiling fiasco. Well who does! No one. But it’s hardly S&P’s place to base financial analysis on their limited view of politics.
S&P also rates France AAA, but it’s clear to everyone that France’s own social program costs will be much worse than ours in the years ahead. They have the Germany and France AAA although those two will be taking huge hits on Greek debt et al, as Germany and France are the primary funding source of the ECB purchases of bad debt. And, by the way, S&P still rates Italy and Spain AA although their numbers are looking more like junk bonds. S&P seemed determined to make a political statement regardless of facts. I don’t like our fiscal outlook either, but I know the U.S. will pay although the process of getting there is ugly.
S&P needs to take a hard look at itself and clean up its own house before it gossips about the U.S. having the messiest house on the block.
dwightjohnston.com
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