Liberal Talk Radio

Sheesh. The trading day isn’t even over and the headlines are screaming “Dow Hits 12,000.” My favorite headline is from the Grey Lady, which has the (apparently non-ironic) decency to mention that it’s fundamental economic WEAKNESS causing the surge in the DJIA:

A drop in consumer prices and a report showing further signs of weakness in the housing market sent stocks surging this morning.

I’m pretty nonplussed by this whole Dow-on-a-rocket thing. Why? Three reasons. First, the Dow is pretty weak as an indicator of broad economic activity. It’s based on the prices of its 30 constituent companies. And the companies that make up the index are selected more for their “who’s who” qualities among large-cap companies than for any other reason. Second, as the above quote from the NYT points out, stocks often rise for a time on bad economic news. Job cuts, for example, while bad for the economy as a whole, are often good for a company’s bottom line — in the short term. So stocks will go up as investors applaud the short term improvements to cash-flow and cost-structure, then fall slowly as the reduce output of the downsized company starts to show in sales and revenue figures. [FWIW, this is also why I think the Efficient Markets Theory of stock valuation is baseless drivel.]

Finally, “what goes up must come down” as they say. Check out the graph of the SP 500 over the last 10 years.

Which brings me to the last thing I’ll say today about this: there’s no fundamental reason for the American economy to be performing as well as it is. The balance of payments is all sorts of out of whack, creating downward pressure on the dollar, which would screw discount retailers who import most of their products from low-cost countries. The average American consumer is leveraged to the hilt, and this borrowing has been financed by China and other NICs. If the dollar falls, this effectively means the cost of credit goes up. House prices are not just stagnant, they’re actually falling. We’re still vulnerable to oil price shocks (and the Middle East isn’t getting any more stable with Commander Cody and Satan’s Dick-dog on the watch). Blah blah. I could go on. Point being there’s a lot of uncertainty in the U.S. economy right now.

So, for the record, as I ignore the self-congratulatory headlines of the financial press this AM, I tell you that I’ve moved about 20% of my retirement accounts to money markets and bond funds until this thing stabilizes. October, after all, is historically a bad month for the stock market.