Bored and Happy

Barring a last minute sell off, this will be the third day in a row where the market has done little. This is good. Panic selling and buying has subsided (for now?)

Tunnel and Bridge Crowd

On the Times Op-Ed page today, Paul Krugman, on the left side of the page writes about the dearth of consumer spending and he wonders what will fill the gap to get the economy going again. His Op-Ed colleague, David Brooks (who I rarely agree with) answers him on the right: the next administration needs to spend heavily on infra-structure. He writes about transportation infra-structure, but I would add that equality important is energy infra-structure - alternative energy and the electric grid.

Aimless Market

The market continues to be rather aimless. I continue to believe that we do not break out of this trading range until after the election. In the meantime, if you want to understand a short-squeeze, read here.

And for a real sign of the times, J.M Smucker will join the S&P 500 on November 5th. Peanut butter and jelly, the staple of the new economy.

The Ghost in the Machine

It is Halloween and some poltergeist took over my computer this morning. Programs would not load, data was missing, sweat was breaking out on my forehead. The total loss of trading data is my worse nightmare. I do have backups but I first have to diagnose if I'm having a system wide problem or an application specific problem. Two hours later, I seem to be fully restored and functional.

Still in the Range

I'm going out on a three day limb here. Anything or nothing can break the market out of this trading range (see previous post.) It could be bad news, good news (unlikely) or no news. But, I have a guess and it's a pure guess. On November 5th the market is going to react to the election and that is what it's waiting for. If Obama wins we break to the upside and if McCain wins we go down. Why? For eight years we have had a president who is disengaged and knows little about economic policy. All the decisions are left to competing forces within the administration. McCain by his own admission knows little about economic matters. In normal times, a president does not need to be and cannot be an expert on all matters that come across his desk but we are not in normal times. I think the market will react positively to Obama as president because he does care about economic policy and he will be engaged in the issues. More importantly he will bring new people in with new thinking. McCain will be stuck relying on the same people that Bush has relied on. For the first time more money from Wall Street went to a democratic candidate (read here) than to a republican one. That says something.

A Special Voter (off-topic)

Regardless of your political point of view, it would take a hard-hearted soul not to appreciate 109 year old Amanda Jones.

First We Take Manhattan Then We Take Detroit*

First Wall Street and now the automotive industry. Detroit first failed to respond to the 1970's oil crisis, giving the Japanese automakers a chance to establish a strong foothold in the US market. Thirty years later, never having learned its lessons, the US auto industry is teetering on total failure and bankruptcy. I understand that there are a lot of jobs at risk but why should the taxpayers bail out GM, Ford and Chrysler after 30 thirty years of myopic business decision making. Better we should negotiate a deal with Toyota and Honda to take over these companies.

* With apologies to Leonard Cohen.

Dollars to Donuts

At its apex you could buy about 5 dozen donuts for a single share of Krispy Kreme (KKD). Now, a single share gets you 3 donuts, maybe 4 or 5 if you buy day old donuts.

Up or Down?

College tuition, not the market. Here are dueling headlines from today's WSJ and NY Times:

In the Wall Street Journal:

Increases in Tuition at Colleges Slow, for Now by Robert Tomsho

And, from the New York Times:

Downturn Expected to Drive Tuition Up by Tamar Lewin

Funny Picture of the Day (way off-topic)

Here, let me scratch your nose while the milk-maid entertains you.

Picture from Reuters.

What to Look For

After the free fall to the lows of 10/10/08, the market has traded in a range. See the above chart. For the Dow, the intra-day low was 7882 and the intra-day high was 9794 (see the bold white lines.) News has caused the market to react, mostly overreact, both up and down, but it's all been in this range.Until the market decisively breaks one of these levels don't get too excited about anything.

Technical Analysis

Technical analysis is primarily the study of patterns in the stock market. Most so called professionals don't put much credence in the practice preferring fundamental analysis - looking at things like money supply, cash flow, earnings, P/E ratios and the like. I believe that ultimately, the market is all about psychology and herd mentality. Technical analysis is a tool that allows one to measure desperation and conversely manic exhilaration in the market. It allows for the discovery of pending psychological barriers based on past history. For example, since there are so many traders and investors in the market, the law of large numbers, allows us to make some generalized predictions about how much of a loss people are willing to take before panic selling takes place.

Look at the weekly chart for the Dow from 2002 to present. The red horizontal lines indicate the bottom and the top of the market during that period and starting from the top 1/3 loss, 1/2 loss and 2/3 loss. Look at the point I circled, that is where 50% of the gain was lost by an investor who put their money in at the bottom in 2002. Once the market pierced that level, it fell like a rock. This is not a coincidence. It doesn't always happen so dramatically, but it happens enough to bet on.

Fed Action - The Conundrum

Here's the Fed statement:

"The Federal Open Market Committee decided today to lower its target for the federal funds rate 50 basis points to 1 percent.

The pace of economic activity appears to have slowed markedly, owing importantly to a decline in consumer expenditures. Business equipment spending and industrial production have weakened in recent months, and slowing economic activity in many foreign economies is damping the prospects for U.S. exports. Moreover, the intensification of financial market turmoil is likely to exert additional restraint on spending, partly by further reducing the ability of households and businesses to obtain credit.

In light of the declines in the prices of energy and other commodities and the weaker prospects for economic activity, the Committee expects inflation to moderate in coming quarters to levels consistent with price stability.

Recent policy actions, including today’s rate reduction, coordinated interest rate cuts by central banks, extraordinary liquidity measures, and official steps to strengthen financial systems, should help over time to improve credit conditions and promote a return to moderate economic growth. Nevertheless, downside risks to growth remain. The Committee will monitor economic and financial developments carefully and will act as needed to promote sustainable economic growth and price stability."

Not much positive here. With the Fed rate at 1% and a trillion dollars pumped into the economy, one would think growth should take off. The problem is that not only are banks not lending but who can afford to borrow? Consumers are tapped out, so even if corporations with strong balance sheets could borrow, what would they do with the money if no one is buying their products.

I Am Spartacus

First, Goldman and Morgan decided to be banks - not a big stretch. Today, the WSJ reports that GMAC wants to be a bank so it too can get federal money through TARP. And, this afternoon, CNBC reports that Ambac, a bond insurer, wants to be treated like a bank so it too can get federal money through TARP. (When I say federal money I mean tax payer money.)

Don't Be Fooled

Don't be fooled by how quiet the market is this morning. It has nothing to do with markets calming down and getting back to normal. It has everything to do with waiting for the Fed announcement this afternoon. This is a typical trading pattern on the morning of a Fed announcement.