Thursday, October 09, 2008

What's the DOW's ultimate capitulation point? I say 6400.


Okay, the pattern continues. The stock market takes a little breakfast in the morning, maybe opens in the green, and during the last 45 minutes of trading throws up several times, like it has Norovirus. During the last fifteen minutes, in real time, one could see the Dow go up and down 150 points every ten minutes in a roller coaster.

Most days there is a wild selloff at the end because mutual fund managers have to meet their own sell orders. This sounds like an additional mechanism in the system that drives down the market. The lifting of the short selling ban probably had little to do with it.

I’m particularly disturbed that bond funds have been sinking, although not as quickly as stocks. Usually bonds provide some safety. Not in this market. I’ve never seen this kind of behavior before. With interest rate drops, I thought the bond prices would rise.

Well, the bonds have to be sold, too, by the end of the trading day. Furthermore, many of them come from companies in trouble, tied in to the mortgage mess.

So, what happened? For a few years executives took money, essentially in our IRA’s and 401Ks and pension funds, and made “investments” into securities based on mortgages that they probably knew would eventually fail. They knew they wouldn’t be repaid. They hired salespeople who were held to quotas, and earned commissions. And they knew they were bad. That’s criminal. That’s theft on a colossal scale.

After “retiring” at the end of 2001, I got calls for various sales jobs (one of them two days after 9/11) for things that I had no experience. I wondered why they were calling me. The business scenarios that they described did not make sense. They would say, “anybody worth his salt can make $200000 a year easy”. And I'm supposed to be a senior citizen role model who manipulates people into buying junk. Yes, I'm supposed to make quotas by selling junk, a legal Ponzi scheme that blows up in five years, in defiance of common sense. It's not sustainable. Forget critical thinking, objectivity. I said no. Yet, Wall Street executives signed off on all this.

What in the world has happened to us? Where has the sense of right and wrong gone?

Would you knowingly invest your own money in selling overpriced homes to people who don’t qualify, with no down payment and negative equity? But somebody else took your money and did that behind your back. The central player in encouraging all this is Fannie Mae, which took the mortgages and bundled them. And Fannie Mae, even before conservatorship, was sponsored by the US government. What did Harry Browne say, “government doesn’t work..”

What happened in the markets today between 3-4 PM EDT is not capitulation. It’s just the way the markets behave in out-of-range, extreme scenarios. It’s like an exponential function in a range where it increases rapidly.

I do find it bizarre that ExxonMobil and other oil stocks tanked by 10% in the last 40 minutes for no reason. (Because of GM? Please. Because crude oil dropped $2? Please!) True, gas prices have come down and airlines are starting to offer specials again. But, China and India oil demand will regroup and grow rapidly. The idea that worldwide demand for oil will tank, in an environment where two months ago we were reviewing books and movies about peak oil (“The End of Suburbia”) does not make sense. XOM’s PE is just 8 now.

In the meantime, we stop drilling, and we slow down investment in renewable energy that we badly need now.

Even so, investors are glum about future profits because a lot of the profits in the past couple of years have been phony, and we're not showing we can create more real wealth right now without living off the backs of the rest of the world.

How low can it go? I say the capitulation point is a Dow at 6400, sustained for a couple weeks. That’s 60% off the highs. If you must time the market to recoup your losses, start buying then.

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