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The Market Rap
William A. Fleckenstein
06:00 PM 11|12|2001
Veterans of the speculation wars report to work, as usual.
Today, our market looked as though it was going to have an up day until the American Airlines plane crashed. At this point, a violent sell-off ensued that tanked the Dow for roughly 2% and the Nasdaq Composite for about 3%. We then had a spirited rally that eradicated two thirds of the losses. As a matter of fact, the Sox was up about 1%, and the Nasdaq 100 futures contract was only down about 0.5%. The swings in the individual stocks were not all that dramatic. So, in the first couple of hours, buyers were putting on a very brave face as they apparently assumed this was a mechanical problem. The fact that after a few hours the losses could be contained to the percentage moves just described was fairly impressive.
Chips, The Perfect Garnish For Any Meal After the market stabilized in the first couple of hours, it backed off once and then surged higher over the next few hours. Then it kind of flopped and chopped at the top of the range, which was about where it closed. The box scores show a mixed bag, with the Nasdaq doing better, and the S&P and the Dow down slightly. The Sox managed to close up 2.5%, so its strong performance in the early going was a harbinger for the whole day. I don't think there is too much to read into the action other than to say that once again, the first stocks that were bought as the market sorted through the news events surrounding the crash (and concluded that a mechanical problem was the likely cause) were the fastest-moving stocks, namely, the chip stocks. (Of course, the biotechs can move pretty fast when they want to, as well.) It is interesting to note that for a semi-holiday, today's volume was pretty decent, about equal to last Friday's. So as we put the Rap to bed, it looks quite likely that the American Airlines crash was not terrorist-related, one consolation in an otherwise tragic event.
Away from stocks, news of the plane crash caused an initial flurry in the metals, with silver up a couple percent and gold up about 1.5%, but then they backed off to close only slightly higher. The bond market was closed for Veterans Day. I think the holiday reduced the number of participants in the currency markets, which saw the dollar down against both the euro and the yen.
Barking Up The Wrong Bonsai The Rap will be a little shorter than usual because of the day's events regarding the American Airlines crash. But I must comment on a couple of items in the papers. First off, thanks to my friend Marshall for forwarding an article from the Lex column in today's Financial Times. It is now being proposed that the Bank of Japan take some radical steps. The most staggering suggestion is that maybe the BOJ should buy stocks. The article says, "There is little demand for credit because real interest rates are too high -- about 2%. The Bank of Japan can create inflation through unorthodox means, if it is prepared to go far enough. An inflation target alone would lack credibility; what is needed is large-scale repurchases of government debt, followed if necessary by corporate bonds, equities, foreign assets and land. The Hong Kong Monetary Authority (albeit, in a very different circumstances) bought securities without creating crippling distortions in the economy."
A Harebrained Scheme Only An Easter Bunny Could Love Now, not only is it terrible advice to suggest that government authorities begin buying stocks, but this shows the generalized lack of understanding that seems to pervade the globe. Buying stocks will not solve the problem. The problem that we have globally, and in Japan and America specifically, besides excess capacity, is too much credit for too long, to the wrong entities. The markets need to clear. Let me repeat: The markets need to clear. This harebrained scheme won't work and will just prolong the agony. The central banks/governments cannot "fix a bubble." They can only stop one before it occurs, which neither Japan nor we did. Now we must deal with the aftermath. There is little they can do to make it better, but plenty they can do to make it worse.
Aging Soap Bubble Opera Queen Turning to today's New York Times, there was a priceless article by Jim Rutenberg entitled "CNBC Struggles to Stay Relevant." (Registration required.) It chronicles the problems that CNBC is facing from a ratings perspective. As most people know, stock speculation became the national pastime in the mania, with CNBC being the cat's pajamas. But as people discover that investing is about investing, and controlling risk and doing research, the whole idea of play-by-play announcers on TV will become less and less relevant. The writer begins by saying, "CNBC was something more than a business-news cable channel. It was the winning team's locker room, a cultural phenomenon of the heady 1990s and a mainstay in bars, sports clubs and offices." The article had another great quote that describes CNBC's popularity: "It rode to prominence by treating each day in the stock market like a sports event, sandwiched between pre-game and post-game shows. Wisecracking anchors had just the right pitch for the hyperventilating economy." In any case, I myself will feel much more comfortable being bullish somewhere down the road when one of these outlets such as Bubblevision goes off the air. And furthermore, I think it will be much safer to be bullish when they stop running the television ads for stocks or financial services companies that we see now.
What Does A Treasury Faucet Sound Like? Drip, Drip, Drip Lastly, in the It Ain't A Level Playing Field, or the Gee, Who'da Thunk department, today's Wall Street Journal has an interesting article by Gregory Zuckerman called "Goldman Says It Got Early Word of Plan to End Sale of Long Bond." (Registration required for a two-week trial.) The writer says, "But the fact that Goldman, one of the most prestigious securities firms on Wall Street, had access to the leaked information and may have used it as part of its trading strategy suggests that the unauthorized information was more widely shared throughout the bond market than was initially known, and could lead to the most wide-ranging investigation of the bond business in years." Not that anyone could possibly be surprised at this. |
