Wednesday, October 21, 2009

The Stock Market Has A Promising Future Behind It

Every once in awhile, I'll get some anonymous comment or email wherein a reader labels me a "pessimist" or "angry" apparently assuming that somehow I must have overlooked those qualities while examining myself in the mirror that morning. Feeling vastly perceptive or superior, they point this stuff out to me (and I am assuming this) because clearly they have my better interests at heart. Being the loving creatures that they are, they are clearly concerned for my welfare thinking perhaps that I am so unconscious that I might stumble into a speeding train.

Now, I have been scratching my head trying to figure out this seven month bull market rally that Wall St. has been throwing. Oh sure, I know the basics. Uncommitted funds on the sidelines, better quarter over quarter comparisons, and an absolute dearth of competing investments that can bring a yield above 3%. Mutual fund managers are paid to invest. Yada, yada, yada. I am also aware of the "B" line rally which occurred on Wall St. the year after the great market collapse and depression. (1930)

Apparently most people on Wall St. don't understand that there is a complete disconnect between what Wall St. is doing and what Main St. is enduring. And in the end, Main St. is going to seize the day.

You see on Main St., 17% of the workers are unemployed. They have lost their homes and their 401ks. If they have managed to keep their homes, the bank has chopped all of the equity or available credit out of it. And consumers drive recoveries.

The other problem is a mountain of debt, oil hovering at 80 bucks, more bailouts, banks not fully disclosing liabilities, a collapsing dollar (good for a lot of companies, bad for others) and a Frankenstein Government poised to steal as much in taxes as they can. Maybe throw in socialized medicine to boot. Worry about wars, social security and medicare later.

Now I don't know if any of you have heard of the "Curse of Dow 10000" which is real. In the past, every time the market hit 10,000-it suffered a pullback. That happened just days ago. I saw a sweet article about that very curse and I swiped a great quote which I am gonna paste in here shortly.

You see public companies sell you paper. You buy their paper (stock certificates) with your paper (money) hoping some other sucker will pay more for that paper (stock certificates) than you did. The game ends when they run out of suckers. They have just about run out of suckers. Seventeen percent of them are sidelined, trying to scrape together enough money for rent.

A beautiful description, purloined as promised...

John Cassidy explained this kind of market behavior very well in his recent article on “rational irrationality” in the New Yorker: Keynes’s jaundiced view of finance reflected his own experience as an investor and as a director of an insurance company. Every morning, in his rooms at King’s College, Cambridge, he spent about half an hour in bed studying the financial pages and various brokerage reports. He compared investing to newspaper competitions in which “the competitors have to pick out the six prettiest faces from a hundred photographs, the prize being awarded to the competitor whose choice most nearly corresponds to the average preferences of the competitors as a whole; so that each competitor has to pick, not those faces which he himself finds prettiest, but those which he thinks likeliest to catch the fancy of the other competitors, all of whom are looking at the problem from the same point of view.” If you want to win such a contest, you’d better try to select the outcome on which others will converge, whatever your personal opinion might be. “It is not a case of choosing those which, to the best of one’s judgment, are really the prettiest, nor even those which average opinion genuinely thinks the prettiest,” Keynes explained. “We have reached the third degree, where we devote our intelligences to anticipating what average opinion expects the average opinion to be. And there are some, I believe, who practice the fourth, fifth and higher degrees.”

Right after the Great Depression's B line rally, deflation set in because government and the Fed hadn't figured out how to manipulate the money supply which they have henceforth figured out.
Japan's market collapse was followed by the lost decade as all that credit had to unwind. What banks did in Japan was eerily similar to what occurred here last year.

The stock market has a promising future behind it. Never have I wanted to short or put a market as badly as this one. But ya know what, I'm just going to sit this one out. Greed and money just don't matter that much to me and I simply can't afford to gamble-trying to figure out which chick is the ugliest. But what matters even less to me is some brainiac trying to tell me that I am a pessimist. An optimist would be buying put options.

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