Last week we saw more bad news about the economy and choppy trading action in the market. The market had two brutal down days to begin the week as it dropped into the GDP numbers due out Friday and then bounced back a little towards the end of the week.
That GDP number shows that during the 3rd quarter the economy contracted, thanks to a further collapse in corporate investment spending. Consumer spending actually held up during the 3rd quarter, but it too looks like it will now falter thanks to Friday’s unemployment report. In October unemployment jumped to 5.4%, almost a whole percentage point, as 415,000 people lost their jobs.
But despite the bad news the market is hanging in there for now.
All year long the operative word on Wall Street has been bailout. Back in January the consensus opinion was – yes the stock market bubble popped, but Alan Greenspan won’t let the market drop anymore because he is going to bail it out so we can make more money. He has cut rates 9 times so far to do that and the battle cry “bailout” has gotten louder and louder. And why not? He bailed out the big banks on Wall Street when their investments in Russia, Asia, and Latin America went sour in 1998. He bailed out the Long Term Capital Management Fund. “His bailouts always work so why not again,” people thought. And again he tried. But so far there had been no effect.
But the hope of a Greenspan bailout has kept people in the stock market all year. Investors simply decided that they would ignore high stock valuations and a sinking economy and just put all of their trust in the Scared Crow.
Fundamentals no longer matter. Bad economic news means nothing. All that matters at the moment is bailout. And the cries for bailout have become a shrill lately.
The big businessmen and corporate CEO’s, who gave political contributions to politicians who decry food stamps and point at welfare queens as social parasites, have been descending on Washington to get their own piece of the tax money in what they say is a necessary war bailout. They expect Washington to give them your money in an act of patriotism. They want you to pay for their management mistakes. Forget that they over invested in technology and are laying people off left and right. They are working to make sure any economic stimulus that comes in the form of tax cuts and government spending will go to them. Greenspan taught them that if they make mistakes then they deserve a bailout. But if you run a big tech bubble company that went from making a few bucks or losing a few to losing millions and sold your stock to put millions of dollars in your pocket due you deserve a bailout program? People need to learn from their mistakes not have them reinforced.
The activities of their lobbyists have prompted Gretchen Morgenson of the New York Times to write, “Where’s Frank Capra when you need him? Surely, he would know how to make entertainment out of the greed and rank opportunism that has characterized behind-the- scenes Washington since Sept. 11. The moment it became clear that lawmakers would be bailing out troubled industries, passing a stimulus package to restart the economy and putting some teeth into money-laundering laws, the lobbyists moved in.”
“Alas, with Mr. Capra gone and his kind of movie a thing of the past, Americans may never enjoy the spectacle of wealthy corporate lobbyists swarming the Capitol steps, lunging for handouts at the whiff of crisis. Instead, they'll suffer through it. Whatever happened to the idea of everybody pulling together, setting aside self-interest for the sake of a wounded country? Is grabbing for all you can now so imbued in corporate culture that executives don't remember what it is to act with honor,“ she concludes.
The problem with bailouts is that they do not fix the real problem that caused this recession and I am not talking about terrorist attacks. I am talking about the reckless and irresponsible management and investment behaviors that were encouraged by the string of bailout programs created by Alan Greenspan. Bailouts create what economists call moral hazard. When someone believes that they are insured from the risk of loss – that they will be bailed out – then they lose the incentive to prevent further losses from occurring. This is in effect how the stock market bubble was created in 1999. People did not worry about high stock valuations because they believed that Greenspan would never let the market drop. He came in and saved it in 1998 and then saved it again from the phantom Y2K computer bug by flooding the monetary system with money. He has again been trying to save it this year, but with little luck so far.
What bailouts really do is temporarily forestall an economic crisis or recession and make sure that when it does come it will be worse than what it would have been. Their effect is to allow the smart money a chance to exit the market before a real downturn comes. They transfer wealth from small investors, who labored for it, and transfer it to Wall Street manipulators and corporate insiders. Greenspan did not stop the stock market from crashing when he bailed it out in 1998. He held off the crash for another year and half and made it worse when it came.
Another problem with the bailout stimulus programs being advocated from corporate America is that they simply focus on the short-term and don’t focus on the long-term needs of the economy. The real issue is investment spending. Investment fuels economic growth. A stimulus program that has the danger of creating a budget deficit will eventually create inflation and higher interest rates. Greenspan’s hyperinflation of the money supply and Bush and the Congress’s return to big government spending will eventually create inflation. Bailouts do not come for free. They may provide a lift for the economy, but in the longer run they come with a heavy cost.
Right now people aren’t worried about this. Every stock analyst and economist on TV is promoting bailouts and the notion that they will create a V economic rebound next year that will make the stock market explode. This is the same thing that they were saying back in January. Right now the notion is catching on and is causing people to pile back in the stock market in hopes that we hit a bottom for real this time. But we are not going to return to the go-go years of the late 1990’s. When the economy does bottom it will be more like the late 1960’s and early 1970’s: years of inflation, low economic growth, and a choppy range bound stock market.
This coming Tuesday Alan Greenspan will cut interest rates again. The Fed futures market is factoring in a 60% chance of a 50 point cut. The market is likely to trade on low volume on Monday and Tuesday until the announcement comes. Don’t expect any big moves tomorrow, although the market is likely to close up with earnings due out for Cisco after the close and bailout excitement. The volatility will come on Tuesday at 2:15 PM.
After Tuesday, there will be a lack of news in the market for the next few weeks. Earnings season will have winded down and most important economic reports will already have been released. Market will probably just trade choppily on light or medium volume. We’ll find out if this rally is for real once the earnings warnings begin by December.
We got nice gains out of our PETM, EEFT, CKR breakouts this past week. CKR and PETM are the types that I really like. Breakouts that come out of a long bases tend to much better than short term triangle patterns, such as BBI, and can often become long term holds. We’ll be looking for more of these in the coming weeks and will also look for some shorts, to position our selves for the possibility of a market drop, in a week or two.
TraderMike – timingwallstreet.com |
