Market Madness

My father once said something to me when I was in my teens. These are not his exact words, but they are pretty close.

“Son, if you continue to act like a half-wit and hang out with half-wits you are going to learn to your sorrow that two half-wits do not have the same brain power as one full-witted person.”

The truth of that adage is being demonstrated this week as we have a very large group of half-wits buying and selling stocks, and causing the stock market to rise and fall, based on the most flimsy and idiotic reasons a full-witted person can possibly imagine.

July 15, 2008, ABC News
In light of recent bank closures and market downturn, financial planners across the country are fielding questions from worried investors, who want to know how to protect themselves, their families and their futures.
…
The plummeting stocks of mortgage giants Fannie Mae and Freddie Mac, as well as the government bailout of IndyMac Bank on Monday, rocked the markets and consumer confidence to the core. The Dow Industrial Average had dropped 93 points by the closing bell today.

And down goes the stock market, like an express elevator.

July 16, 2008
Wall Street at least temporarily shrugged off some of its many concerns Wednesday and bounded higher thanks to a drop in oil prices. The Dow Jones industrial average rose 276 points, or 2.5 percent, posting its best daily gain in three months.
…
Light, sweet crude fell $4.14 to settle at $134.60 a barrel on the New York Mercantile Exchange, bringing its two-day decline to $10.58.

In addition to sinking oil prices, investors found relief in a decision by Wells Fargo & Co. to boost its dividend that helped counter some of the market's concerns about the health of banks. The San Francisco-based bank's move to raise its payout, along with its tamer-than-expected profit decline, was seen as a bullish sign for the troubled sector.

Meanwhile, on the same day and in the same news cycle:
Inflation for June was 1.1%, putting us at a double digit for the year and implying something close to disaster economically.
More bank failures along the lines as IndyMac are expected, perhaps as many as 100-150 banks by year’s end.
Home values are continuing to decline at a record pace, and foreclosures are soaring along with them.
The credit crisis is by no means over, as failures are still expected in credit card and home equity debt.

But up goes the stock market because the half-wits are thrilled that while people are standing in line to get their money out of one failed bank, another bank lost less than expected (but still lost) and oil is only $135/barrel. The gasoline the half-wits put in their cars did not decline, only crude oil.

On July 17th the market shot up again as the half-wits were further thrilled when oil prices dropped yet again. ABC News was swooning about the largest drop ever in history, which may be true in terms of numbers of dollars. I suspect that in terms of percentage there have been larger ones in the eighties when oil companies were going bankrupt. They had some "guru" who was gushing about how we could soon see oil at under $90.

What the half-wits who are buying all of this stock and raising market value fail to consider is that the price of oil is dropping, not because there is some sudden increase in supply, but because the people trading it, who are probably not half-wits, believe that the economy is declining and that oil is going to be less in demand.

That does not make the price drop good news for the market.