Almost Everyone Is Breathing A Big Sigh Of Relief…
…after a dramatic 11%, nearly 1,000 point rise in the Dow (and similar gains in the broader markets). The credit crisis has not been solved overnight, of course, and the bear market may be only taking a breather (plus profit taking will almost surely result in a decline tomorrow). Still, it’s nice to put a big gainer on the books after eight straight days of double-digit declines, and the worst single week in the history of the American stock market.
Why the gains? Many reasons:
1. Pent-up buying sentiment. Many investors believe that there are some incredible bargains out there at the moment, after the recent carnage. Such investors were itching for an excuse to buy…and they had several, including:
2. A further commitment to worldwide banking bailouts. I’ve laid out the case elsewhere for retaining our trust in the markets, but there is no doubt investors cheered a further commitment from European central bankers to prop up the financial system, vague though the promises were (though England quickly followed through on its promises by essentially nationalizing several banks today).
3. The Morgan Stanley Deal. Mitsubishi Financial needed some additional prodding and guarantees, but they followed through on a commitment for a multi-billion dollar investment in Morgan Stanley, in a closely-watched deal that resulted in an 87%(!) gain for MS shares today.
4. The GM-Chrysler merger talks. Never mind that the talks are on hold and given only a 50-50 chance of success, and never mind that the proposed merger may be a terrible deal in the end – Detroit is so desperate for good news that shares of GM (and Ford) were up big today, at around 30% in the plus column.
5. A change in emphasis in the primary bailout. Paulson is coming around to the view of many that the $700 billion he has been given by Congress to play with is best spent on equity stakes, rather than purchases of troubled assets. Naturally, the financial sector rallied on the new emphasis.
…and I’m sure there are others. Regardless, some much-needed good news for a world that has been on pins and needles for several weeks now. Let’s hope the credit markets, largely closed down because of Columbus Day, respond positively tomorrow…
I don’t think the GM-Chrysler thing had much to do with it, and I would add the enormous amount of liquidity the Fed and other central banks are throwing at the world economy. However, I think the main reason the market rose is that it exists to make fools of the greatest possible number of people.
Shortly after the turn of the century, the Economist did an analysis which asked how much money you would have if you started with $1000 on 1/1/1900 and rebalanced on 12/31/1900 with the best performing asset class of that year, and then repeated the process for another 99 years. You would have ended up with a gazillion dollars.
They then ran the numbers to see how much money you would have if you bought the worst performing asset class of the year just ended, and found that you would have had four gazillion dollars. The contrarian approach outdelivered the rear view mirror approach by 4x.
In investing, when everyone is on one side of the boat, it usually pays to get on the other side. When the world thinks that nobody will ever buy another car or get another mortgage, it’s usually a pretty good bet that everybody who wanted to sell their shares already did so. While the other factors played a role, I think that the main reason the market went up today is that fear of a market cataclysm was replaced by fear of missing out on the nascent rally.
Well, GM is part of the Dow, and it rose 30%, so I don’t see how you can possibly overlook it…but I largely agree with your post (I did point out that there was a lot of pent-up buying demand in my #1 above). However, I remain concerned that the rally will be a brief respite…we shall see…
Particularly to this.
They are investing in, essentially, all the big banks, even if they had to strong arm some of them into going along. This means that any stigma associated with a government investment, which could have driven away “regular” investors and depressed values, is reduced and so the market value is protected (so we the people can get our money bank). Finally a smart-ish move.