I'm sure everyone is getting tired of me talking about the market going down. I certainly am!
Down Monday, down Tuesday, and down again Wednesday. The first three days cost the Dow 660 points, or 7.4%. Thursday started out looking much the same, and by lunch time the Dow was trading below 8,000 again, a decline for the first half of the day of about 315 points. And then the switch got flipped. The second half of the day was pure rally, climbing 870 points out of the hole, and closing up 554 points on the day.
Going into the weekend, some of Thursday's gains were "reclaimed" by the market at the open this morning, but in the next hour the Dow tried to climb back to positive territory. The steam ran out after that first hour, and by lunch we were down over 300 again. I went into a meeting just after lunch, and when I came out the market was in the black! But alas, it was not to be. Two minutes before market close, the Dow stood at 8,892, struggling to get to 8,900. In the last two minutes, it fell 395 points... will the volatility never end?!?
The market's gyrations were not the only news for the week though. And none of the news has been good. Henry Paulson's speech to Congress on Wednesday was the official announcement of the Treasury's change of direction for the TARP funds (the $700 billion rescue plan). The plan was originally sold as a purchase of troubled assets from financial institutions. In fact, that's what TARP stands for: "Troubled Asset Relief Program". However, instead of buying the troubled assets, they are now going to use the money to buy preferred stock of banks. They are basically using the funds to recapitalize the banks. This is not necessarily bad, but it's not what they said they were going to do with the money, and a number of the Congressmen are not happy.
Worse yet, Congress is now pushing for a bailout of the auto industry using the TARP funds. GM, Ford, and Chrysler that are about to collapse. In fact, DeutscheBank analysts set their price target for GM at $0. Those analysts are saying that GM is going to have to file bankruptcy. GM itself has stated that at the current burn rate, they'll be out of money early next year. Do these companies need a bailout? While the bankruptcy of any or all of them would result in hundreds of thousands of jobs lost, allowing them to continue to operate under the status quo would only delay the inevitable, and cost taxpayers real money. That would not be an investment, it would be a further drag on the economy.
Many of the politicians talking about it have said that they would tie bailout funds to "green" cars, essentially forcing the auto manufacturers to build more efficient vehicles. That makes a great sound byte, but it wouldn't fix the problem. The small vehicles (the little fuel efficient cars)have no profit in them, and the hybrids are too expensive in terms of technology for widespread adoption. Either way, the manufacturer would not make enough money to dig themselves out of the hole they are in.
So why the big bounce on Thursday? There have been a number of reasons put forth, including the G-20 meeting this weekend (the hope for another coordinated round of...well... anything to fix this mess!). I believe that it was pent up demand for stocks. The Dow got below 8,000, and people saw opportunity. The same thing happened a month ago. Stocks got to absurdly cheap levels, and buyers stepped in. Once the buyers begin to outnumber the sellers, the frenzy starts. On Thursday, was there anything different in the world at 3 PM versus at noon? There was no good news, no announcements, nothing. In fact, any news that was coming out was to the negative. But buyers perceived cheap prices, and stepped in. I believe that this is what we are going to see for a while now. A lot of volatility, with the market really doing nothing but moving sideways.
If you have any questions, e-mail me at nsnodgrass@evanstonadvisors.com
