January Market Notes

On Thursday, the Dow was down over 300 points and GOOG dipped under 600. BIDU (the Chinese GOOG, as it’s known) was down about 9%. Even AAPL is breaking. These are the high-flyers, the lead indicators of whether the future looks bright or not.

Merrill reported $10bil in losses and was down 9%. Housing starts were down 25% this year from last year. Bernanke spoke about the market (that link is highly recommended reading), citing that inflation was a growing problem but that it’d be moderated next year. He does not believe a recession will occur but thinks growth will slow down considerably.

On Friday, President Bush gave weak commentary on proposed fiscal stimulus packages. I’m not against fiscal policy, but I don’t really think the evidence for success of a tax rebate is conclusive enough to pursue as strongly as the politicians suggest.

What was interesting was daytrader sentiment online. For starters, they’re at their worst when they discuss monetary policy. I’ve always recognized that, even as a kid trading in college during the dotcom bust. But after taking two econ classes over the summer and trade and finance classes last semester, it’s easier to see their arguments’ logical fallacies. The daytraders in particular link Fed decisions as reactions to stock market movement. Their opinion of Bernanke is that he’s at best moving too slowly to combat inflation (which the Fed has clearly stated it is not as worried about) and at worst perpetuating criminal fraud against the American people.

Probably helpful to see what Bernanke is actually saying.

The stock market’s performance overly influences peoples’ perceptions on politics, the economy, war, and basically everything. As long as the market is going up, people perceive things to be fine even if the economy is crumbling. The market is seen in the general perception as being a direct reflection of the health of a country, even to a nationalistic extent. There is indeed a strong relationship but it does not show itself day-to-day, as daytraders and those who read the newspaper see it. Chinese and Indians feel confident about their countries because of stock market performance, to a large degree.

Now that the stock market has taken a bit of a hit, people are more responsive to news about what has been a tumultuous crash in real estate and a massive sucking sound out of the financial sector as banks have been getting walloped. As the first link above states, “Because of fractional reserve lending, most banks are leveraged 10 to 1. A destruction of $100 billion in bank capital will result in reduced lending power of $1 trillion.”

The US has not even been able to comprehend the transfer of wealth to the rich under Bush yet, but it probably will as it begins to adopt more protectionist policies in international economics as a defense against foreign encroachment.

My personal take on the American economy is that it’s for the most part fine. I don’t know of people getting laid off like I did in 2000. In fact optimism for getting jobs is high. Wages are promising. This is anecdotal but it was anecdotal during the dotcom bust too when many people I knew were being laid off in less than respectable circumstances. Money seems to be flowing just fine in the tech companies and in most businesses. Philanthropy and venture capital funding seem to be growing despite problems localized in finance, real estate, and outdated businesses.

What I don’t know as much about is whether these problems can contaminate everything else. They are linked to everything, after all. How I feel about it is that both real estate and finance got overzealous and that older businesses need to continue restructuring to fit into a far more competitive world market.

Some countries clearly seem to be adapting better than the States. But they will be hurt by any sort of large downturn by the US and its brethren. The US, despite the nightmare of the Pacific Rim glut and subsequent Japanese recession, is still the world’s buyer of last resort. If the US suffers, many other countries suffer even more.

So to what extent will the American problems go? Will the next president change economic tack to be proactive about the US’s role in the trade rounds and globalized markets? According to a study conducted by the Heritage Foundation and the Wall Street Journal:

“While Europe was moving more greater economic liberalization, the prevailing sentiment in the United States was protectionism, said Mary Kissel, the editorial page editor of the Wall Street Journal’s Asian edition.

“We have Democratic candidates coming out against free trade agreement and for higher taxes,” she told reporters. “On the Republican side too, there’s talk of protecting American jobs. Meanwhile, you have a Congress which is considering a clutch of bills aimed at punishing China for exporting too much to American consumers.”

I am all cash in all my accounts. I think the public is just beginning to feel the hurt (retail numbers have been sluggish, hence stimulus package talk) and it will take some time for everything to wash out.

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There will a great opportunity for a big short-covering bounce. But it will just be short-covering. You can see it as you watch the tape day-in, day-out. Thin bids, sharp moves upwards for no reason. Just as the tape showed no interest the day I sold.

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Ugly ugly ugly.