Market Mania: Why it Makes Sense to Stand Back - Way, Way Back

Here are some assorted headlines from my current Bloomberg screen:

• "Stocks in U.S. Rally After MBIA Says It Expects to Keep AAA Credit Rating"

• "U.S. Personal Spending Slows, Jobless Claims Rise, Boosting Rate-Cut Bets"

• "MBIA Says Capital is Adequate, Rejects Bankruptcy Speculation; Shares Rise"

• "Bristol-Myers Posts Loss as Subprime Investments Overshadow Palvix Gains"

• "Google Succeeds in Effort to Open Airwaves After Bids Exceed $4.6 Billion"

Oh, and by the way, the Dow is up about 1.5%. Now do most of these headlines have any basis in reality and, if so, what are they really telling us? What it's telling me is that messing around with the stock market with a short-term time horizon is a very, very dangerous proposition. The words "caveat emptor" should be on investors' minds right at this very moment.

Stocks rally based upon MBIA's statement that it expects to stay AAA? If that is true then whatever smidgen of rationality I thought might exist in the U.S. stock market is simply an illusion. Does MBIA management have any credibility? And on a day when Bill Ackman, who has been tracking this firm and business model for over five years, places his financial model on the Internet for all to see and urges others to contribute data and insights in order to deepen understanding of the bond insurance business? And the conclusion he has come to is that the two biggest players in the space, AMBAC and MBIA, are likely to incur losses exceeding $11 billion - each. Yeah, this is the basis for a market rally. If we are living in some parallel universe where up is down, right is wrong and bond insurers make money. I think not.

Spending slows and jobless claims rise, getting investors excited about future rate cuts. This has always been a puzzler for me. I am acutely aware of the impact on lower rates on discounted cash flow models, and on the hoped stimulus effect on spending arising from more accomodative Fed policy. But such policy moves also indicate deep fear about economic fundamentals, and a falling US dollar together with rising budget deficits aren't really helped by lower short-term rates. And if the yield curve steepens, that may be good news for banks trying to rebuild balance sheets but potentially less good for non-financial businesses trying to fund long-term capital projects. Anyway, I wouldn't be dancing in the aisles after hearing about a drop in spending and rising unemployment claims. But hey, that's just me.

MBIA says? Stock rises? Are these investors kidding? Unless someone believes that they are going to be bailed out - and in size - by state and federal agencies, what is the basis for a rising stock price given what we know? How much more right does Bill Ackman have to be before his thesis and supporting analysis is taken seriously? Inquiring minds want to know.

A drug company getting whacked by subprime. This is not good. I believe it was Mr. Stein who was tossing around a number like $100 billion in losses this weekend; didn't S&P (another firm with questionable credibility at the moment) just come out with a figure like $265 billion - or more? Let's just cut to the chase - the bottom line is that nobody really knows. Bristol-Myers is one of the largest companies on the planet that got nicked in their investment portfolio on a small amount of their holdings. Sure, it sucks, but who cares as it relates to their core business, the R&D, manufacturing and distribution of pharmaceuticals? Apparently the market does. And this type of fearful and irrational behavior will dominate trading until we can see a bottom to the subprime losses. But when we might see this is still very, very uncertain.

And amidst the sea of crap there is Google, forcing the winner(s) of the C-block wireless auction to open their networks to any and all mobile devices. This is good for consumers. This is good for device makers. This is pretty much good news all around, as open access sparks innovation and freedom of choice. So even when things are looking pretty bad, Google is a catalyst for something really good. Thanks Sergey, Larry and Eric.

I don't know, maybe I'm just getting old and cynical. It's just that so many headlines I read these days are so irritating, either because they make no sense or because they reflect some sort of a twisted reality illustrative of investor stupidity or awful market conditions. What it really says to me is that being a voyeur at this time is just about right. And that's where you'll see me. On the sidelines. Watching.

 

Comments

[Yaser Anwar]

With all due respect to Bloomberg and other MSM, it's in their best interest to keep people tuned into the markets.

After all, who will visit their site, stream their videos, read their articles and switch on the TV if we're in a recession (which the US is pretty much in)? At a minimum 10% lower than when market bulls are raging.