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Tilting at Windmills

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July 17, 2008
By: Kevin Drum

FINANCIAL REPORTING FOLLIES....The New York Times reports today that the stock market is up. Here's the story they invented to explain it: (a) there's a widespread belief that the global economy is tanking, thus (b) reducing the demand for oil and (c) driving down oil prices. Wall Street, (d) seeing plummeting oil prices, (e) is elated and (f) drives stock prices up.

There are two basic possibilities here: (a) this explanation has been created out of whole cloth or (b) Wall Street investors are idiots. Or both. For now, I'm going with (a).

Kevin Drum 7:59 PM Permalink | Trackbacks | Comments (48)

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I saw a delightful theory in that same publication the other day about how the slide in oil prices over the last three days means that the bubble has burst and cheap oil will soon again be flowing.

Of course, I have more than a goldfish's memory, so I can remember three weeks ago when oil prices took a double-digit dip ... and promptly bounced right back up to set a new record. But hey, who's counting?

Posted by: Kevin on July 17, 2008 at 8:03 PM | PERMALINK

It is foolish to try and find reasons for two days of market action. There are lots of cross currents in the short term, particularly in an options expiration week. Markets have been so oversold that we got a countertrend rally for a couple of days. That is all there is to it; part of ebb and flow of market action.

But if you are a newspaper with space to fill, you come up with some crap to rationalize daily movement.

Posted by: rational on July 17, 2008 at 8:15 PM | PERMALINK

There's always a reason. The reason doesn't need to make sense, but there has to be a headline reason for anything the stock market did.

Today, the big gains came from banks because it appears they might not collapse before Labor Day. After panicking last week, it's time for a round of irrational exuberance. The two-day slide in oil seems to be helping, too.

Remember that Wall Street believes in woo. The most famous is called technical analysis which looks at tea leaves, er, patterns of trading from the recent past, to predict future trading. All rational people realize that the patterns are useless predictors, but there are enough believers that their irrational attitude does occasionally affect the market.

Posted by: freelunch on July 17, 2008 at 8:17 PM | PERMALINK

It's neither stupid nor made from whole cloth. profits in all but the financial sector have been depressed (or are negative) because of rising energy costs. You lower energy costs, and every non-financial sector of the economy looks decent. and the financial sector got a combo of a dead cat bounce and better than expected wells fargo news. (the rebound in this sector will be trimmed within the next week)

Posted by: Kolohe on July 17, 2008 at 8:18 PM | PERMALINK

Well it could get better. If the economy would get bad enough so that consumer spending takes a real dive, the Asian markets and all the commodity markets will crash. Then the dollar will be restored and I can get on with the easy life here in Brazil. And after Obama gives Al Gore all the money being spent in Iraq you all will be living in America 2.0 ...

Posted by: lostnbr on July 17, 2008 at 8:19 PM | PERMALINK

Definitely both. Most traders have very little understanding of the economy. Lots of trading is done on program. Most trading is done to generate fees.

Posted by: Jeff II on July 17, 2008 at 8:22 PM | PERMALINK

Could it be that speculators seeing a drop in the demand for oil have shifted into investing in the market.

Posted by: TruthPolitik on July 17, 2008 at 8:27 PM | PERMALINK

Mostly a) and a little b), with the proviso that rational is right:

It is foolish to try and find reasons for two days of market action. There are lots of cross currents in the short term, particularly in an options expiration week.

Any time that so called analysts give a hard-and-fast economic-based reason for a day or two of market movement, stupid is happening. This time is no different. This specific brand of nonsense is a huge part of what makes financial news coverage aimed at a general audience so completely and totally useless for anything other than laughs..

Posted by: R Johnston on July 17, 2008 at 8:30 PM | PERMALINK

Hey Kevin. Off topic for this post, but ... I'm a local in Austin who's not at the convention (I'm living on grad student wages), but I'd like to meet you if you're up for lunch with a reader (or two, or however many, whatever you like). I hope you enjoy your visit!

Let me know. brian at peacenik dot net

Posted by: editer on July 17, 2008 at 8:34 PM | PERMALINK

*

Posted by: mhr on July 17, 2008 at 8:35 PM | PERMALINK

The New York Times invented a story? How can that be??! Incredible!

I'll say!

Posted by: Judith Miller on July 17, 2008 at 8:49 PM | PERMALINK

Most traders have very little understanding of the economy.

I humbly submit that most investors have very little understanding of the economy.

The way to think about this is "investing" is strategic and "trading" is tactical. You put on your investor hat and come up with a strategy to make money and convert that strategy into a series of tactical trades to achieve your overall strategic goals.

Posted by: rational on July 17, 2008 at 8:49 PM | PERMALINK

"created out of whole cloth" - I would have said "they pulled it out of their asses"; I guess that's why I'm not a professional blogger.

It's actually both a and b. The whole thing about investors and consumers being "rational" is a useful construct for academics, in the real world we refer to them as "morons".

Posted by: Dave Brown on July 17, 2008 at 8:50 PM | PERMALINK

Yeah, what is this "whole cloth" thing? I mean, I understand it, "whole"="uncut" so "from whole cloth" means made fresh, not from anything else. But isn't this something we should stop saying, when some perfectly good vulgarity like "pulled it out of their asses" is available?

Posted by: SqueakyRat on July 17, 2008 at 9:01 PM | PERMALINK

They ought to make these speculators take possession of the oil.

Posted by: Jet on July 17, 2008 at 9:08 PM | PERMALINK

It's the oil prices coming down that's got the market up IMO. They know that cheaper oil will translate into more growth and more profits. Consumers will keep more money in their pocket to buy more stuff (other than oil). It is really that simple, but very short-term term thinking. However, there is this big problem with oil demand returning with any renewed growth down the road-that growth will get damped right back down again much quicker the next time due to a rebound in prices because the supply can't respond as fast as the world economy can grow. Perhaps at some point everybody will be forced to settle into a low rate of growth until alternatives are developed.

Posted by: Doc at the Radar Station on July 17, 2008 at 9:09 PM | PERMALINK

The various financial news networks fill their air time every day with this kind of baloney. There is a very well known, well paid and well endowed female air headed television personality who has made a fortune spinning this kind of explanation for just about every market flutter. I am not even mentioning that Guy on NPR.

Posted by: Ron Byers on July 17, 2008 at 9:13 PM | PERMALINK

Definitely "B" -- Wall Street investors are idiots.

Posted by: beb on July 17, 2008 at 9:23 PM | PERMALINK

Actually, the answer is B-ish. The NYT description is pretty stock, but as best I can tell, everyone seems to think that the high oil prices are a big cause of the global recession. So, recession, demand down, price down. Then, seeing the "oil bubble" at an end, people jump back in to the stock market. So, the economy is not so bad, and everyone needs oil, so the price jumps and stocks tank. Look for $5 increase in oil and a 150 point drop. It would be worse (300) with normal Friday profit taking, but its the summer, so there won't be time to drop that much before everyone leaves for the Hamptons.

Posted by: do on July 17, 2008 at 9:42 PM | PERMALINK

I tend to think of the stock market as a bunch of pigeons in Skinner boxes, each subject to random reinforcement. Except that the boxes are Plexiglas such that the pigeons can observe each other's behavior. And the experimenter died long ago.

Posted by: idlemind on July 17, 2008 at 9:49 PM | PERMALINK

You understand linear programming right? Spiking oil prices were breaking several industries eg airlines, trucking, autos. If that massive distortion is contained markets can again try to make sense of the future. Which is what they get paid to do.

Posted by: wren on July 17, 2008 at 9:54 PM | PERMALINK

there's a livestream of Howard Dean at Netroots Nation (re-named from yearlyKos) right now at Ustream.tv

Wesley Clark is opening right now:

here's the direct link to watch and live chat as well:

HOWARD DEAN LIVE SPEECH here
DIRECT LINK: http://www.ustream.tv/channel/exhibit-hall-4

Spread the word :-)

Posted by: voxpopgirl (vpg) on July 17, 2008 at 9:56 PM | PERMALINK

there's a livestream of Howard Dean at Netroots Nation (re-named from yearlyKos) right now at Ustream.tv

Wesley Clark is opening right now:

here's the direct link to watch and live chat as well:

WATCH HOWARD DEAN LIVE SPEECH at Netroots Nation via Ustream HERE

Spread the word :-)

Posted by: voxpopgirl on July 17, 2008 at 10:01 PM | PERMALINK

(a) there's a widespread belief that the global economy is tanking, thus (b) reducing the demand for oil and (c) driving down oil prices. Wall Street, (d) seeing plummeting oil prices, (e) is elated and (f) drives stock prices up

and (g) convinces people the global economy is doing fine, thus (h) maintaining the demand for oil (i), and maintaining high oil prices. Wall street, (j) seeing high stable oil prices, (k) is depressed and (l) drives prices down, (m) creating a belief that the economy is tanking.

Posted by: asdf on July 17, 2008 at 10:19 PM | PERMALINK

Daily market narratives are basically about luring retail investors into markets they don't really understand by convincing them that daily movements aren't a random walk. You can get a continuous stream of such nonsense on CNBC.

Posted by: PeakVT on July 17, 2008 at 10:33 PM | PERMALINK

You don't get paid for writing a story that says "Shit happens."

I noticed a long time ago that business reporters tried to explain every random fluctuation in the market by lining it up to whatever the big news of the day is.

That's when I stopped listening to them.

Sometimes shit just happens.

Posted by: Paul Camp on July 17, 2008 at 10:34 PM | PERMALINK

If oil demand is going down enough to get a "correction" in the price of oil and some other problematic commodities, then that implies that the commodity price driven global economic slide should be self limiting. That doesn't mean that prices of equities, and stock markets may not have overshot, and may not overshoot going the other direction. But normally these oscillations will damp out, i.e. perhaps the markets and economies are seeking a new equilibrium.

Now, slower long term processes, such as depletion of resources, and continued growth of developing economies, and population increase will likely mean that equilibrium economy should get progressively nastier. Counter to that, technological advances -like say plugin cars, and mass transit etc. will hopefully increase the size of global economic output per unit of scarce resource. Which process wins out long term will determine if we get richer or poorer as time goes by.

Posted by: bigTom on July 17, 2008 at 10:39 PM | PERMALINK

Jeebus, it's one thing when Bushie lies, but Wallstreet too? Please ignore that fiction behind the curtain Dorothy! It's just your brain on whinning steroids.

So what Bank is in trouble now? IS it all of them?

Why is Fed Chairman Ben Bernanke moving this credit here and shifting that lending over there? Sort of looks like those Enron creative investment games all over again. And we know that Big oil isn't worried about Bush's legacy, at least not more than their high profit utopia of it's ALL SO COOL NOW.

Looks like the monster that ate Bush (and us too). It's a classic sci-Fi exodus - first you see a solvent nation and now you don’t because Cloverfield is at the bank with the munchies - well before you got there.

Where is Eliot when we need him?

If this goes South, lets not let NRO or Weekly Standard columnist go un-ruined because Bush didn't hijack the Republican Party, not even close - so I don't want to hear it, got it.


Posted by: Me_again on July 17, 2008 at 10:46 PM | PERMALINK

Comment above:
Any time that so called analysts give a hard-and-fast economic-based reason for a day or two of market movement, stupid is happening. This time is no different. This specific brand of nonsense is a huge part of what makes financial news coverage aimed at a general audience so completely and totally useless for anything other than laughs..

I'm trying to transpose this to a poker metaphor, since poker and investing have in common that they're attempts to gain a long term edge in a field that's quite a random walk in the short term.

"Analysts today confirmed that drawing the queen of clubs as the river card was a culmination of Negreanu's efforts over the course of the tournament as well as a reflection of broad-based fears by the deck of plastic playing cards about the broader market outlook...."

When you have a bunch of writers who are paid to say something, anything, to make short-term noise look important, I'm sure you can get some weird explanations.

Posted by: Equal Opportunity Cynic on July 17, 2008 at 10:54 PM | PERMALINK

lol

So many posts, so much hot gas.

The real reason for the rally (which many have been expecting) is as follows.

1. Technical conditions (TA is self fulfilling prophecy) is oversold. This means profit taking on shorts which adds to the movement upside.

P.S. - the guy railing against TA has no idea what he is talking about or what TA actually IS. Dumbass.

2. Sector rotation - Oil into beaten down financials - money is moving from 1 sector to another.

3. The fuse that was lit by the gov which started this rally which none of you mentioned - the SEC "order" against naked shorting vs selected financial stocks. Look at the list, have a think about the real message being sent.

4. Nothing blew up so far, when real fear is settling into the market.

Posted by: lolcat on July 17, 2008 at 11:13 PM | PERMALINK

Bush signals an easing of tensions with iran by proposing the opening of an "interests section" - and oil prices fall.

Coincidence?

Posted by: RepubAnon on July 17, 2008 at 11:17 PM | PERMALINK

Bush signals an easing of tensions with iran by proposing the opening of an "interests section" - and oil prices fall.

Coincidence?

Posted by: RepubAnon on July 17, 2008 at 11:17 PM | PERMALINK

(b)

Posted by: a on July 18, 2008 at 1:00 AM | PERMALINK

Why are there rallies when the overall economy still looks like crap? Because our economy is too large for it all to go in the crapper at once. When things are going bad, there's always somewhere less-bad to invest. When things are going great, there are less-good investments as well.

And it relies on investors, who are not typical people. They see tragedy and turmoil and think "How can I profit?" rather than "Oh, crap!" They aren't immoral fucks, just amoral folks. Higher energy costs attracted speculators until the price hit a ceiling. They'll be back at it if inflation strikes, if Israel strikes, or if other things look less promising as a way to make a buck.

And anyway, most of the increase in the price of oil is because the dollar is losing value. That's not investors causing the problem, but our enormous debt. But it's better to blame Democrats for not drilling and Iran for not caving than it is to blame spending policies that have not been in the same universe as the tax rates, since taxes make Jesus get itchy palms or something.

Posted by: jon on July 18, 2008 at 5:38 AM | PERMALINK

The stock market story that no one is writing should be titled Sideways. The Dow is not only essentially where it was two years ago, it is essentially where it was EIGHT YEARS AGO, when President Doorknob took power! The Dow finished at 10,792 on Jan. 19th, 2001 - the day before Bush was inaugurated. The other day it closed at 11,201, barely 400 pts. higher! The NASDAQ is worse than it was eight years ago - it closed at 2,841 on 1/19/01 and closed at 2,312 yesterday.

Why isn't anyone pointing out that Bush has presided over the longest period of horrible equity market performance in American history???

Posted by: The Conservative Deflator on July 18, 2008 at 6:47 AM | PERMALINK

>> Why isn't anyone pointing out that Bush has presided over the longest period of horrible equity market performance in American history???

BECAUSE THE PROBLEMS NOW ACCUMULATED UNDER BOTH CLINTON AND BUSH

Bloody hell get that partisan bs out of your head, you think Clinton is innocent? Who repealed Glass Stegall !

Posted by: lolcat on July 18, 2008 at 7:31 AM | PERMALINK

The explanation for the the market rally is really quite simple. All the short sellers have gone to East Hampton with their families. C'mon, everybody deserves a little time off. But don't worry, they'll be back in a couple of weeks.

Posted by: PureGuesswork on July 18, 2008 at 7:48 AM | PERMALINK

FWIW columnist Steven Pearlstein agrees with lolcat:

"...the emergency order by the Securities and Exchange Commission outlawing 'naked' short-selling of key financial stocks sparked a huge rally in those stocks, as shorts scrambled to buy the shares they never owned but had promised to sell."

http://www.washingtonpost.com/wp-dyn/content/article/2008/07/17/AR2008071702608.html

Posted by: hubcap on July 18, 2008 at 8:33 AM | PERMALINK

Bloody hell get that partisan bs out of your head, you think Clinton is innocent? Who repealed Glass Stegall !

A Republican congress with a veto-proof majority.

Posted by: on July 18, 2008 at 9:32 AM | PERMALINK

Over the last 20+ years, the US stock markets have become a complete sham, manipulated and massaged daily in order to provide results that are pre-determined in nature. The place is nothing but a banana republic any more, all free-market theories have been tossed aside in order to protect the value of absolutely WORTHLESS paper garbage and a long-ago failed fiat currency system. There is no such thing as "free market" any more - manipulation is the name of the game, rising paper valuations are a necessity to keep the fraudulent ponzi scheme alive. Is nothing but a mirage, a true scam. And unfortunately for the powers that be, it's about to come tumbling down under its own weight...

Posted by: angry citizen on July 18, 2008 at 10:53 AM | PERMALINK
There are two basic possibilities here: (a) this explanation has been created out of whole cloth or (b) Wall Street investors are idiots. Or both. For now, I'm going with (a).

There is a third possibility; the explanation is basically accurate but slightly simplified: prices (before the rise) already included an expectation of the economy tanking, but the effect on oil prices was greater than Wall Street expected, thus the (bigger than expected) drop in oil prices led stock prices to increase because they offer a negative feedback that Wall Street feels (with some justification) could mitigate the economic slowdown. It's not as silly as you make it seem.

Posted by: cmdicely on July 18, 2008 at 11:12 AM | PERMALINK

The Gramm-Leach-Bliley_Act effectively repealed Glass Stegal

The bills comprising the act were introduced in the Senate by Phil Gramm (R-TX) and in the House of Representatives by James Leach (R-IA). The bills were passed along party lines with Republican support in the Senate[1] and with bipartisan support in the House of Representatives[2]. It was signed into law by President Bill Clinton.

Senator Phil Gramm (he of the recent unfortunate commentary) led the Senate Banking Committee which sponsored the Act; he later joined UBS Warburg, at the time the investment banking arm of the largest Swiss bank.

http://en.wikipedia.org/wiki/Gramm-Leach-Bliley_Act

Posted by: on July 18, 2008 at 11:16 AM | PERMALINK

Sorry pushed to button too fast on the last post

Posted by: Terry on July 18, 2008 at 11:17 AM | PERMALINK

There is a third possibility; the explanation is basically accurate but slightly simplified: prices (before the rise) already included an expectation of the economy tanking, but the effect on oil prices was greater than Wall Street expected, thus the (bigger than expected) drop in oil prices led stock prices to increase because they offer a negative feedback that Wall Street feels (with some justification) could mitigate the economic slowdown. It's not as silly as you make it seem. Posted by: cmdicely

Chris, you guy these guys (most of them are guys) way too much credit. When you are moving millions of dollars around on a daily basis, as do the institutional traders, a five cent a share change is enough to make a lot of money for a fund. The underlying economic strength of the stock (or stocks for industry traders) really has no significance. Again, most of these guys don't know or really care about the underlying economic fundamentals or how something fits into the "bigger picture."

Posted by: Jeff II on July 18, 2008 at 11:59 AM | PERMALINK


P.S. - the guy railing against TA has no idea what he is talking about or what TA actually IS. Dumbass.

The guy railing against TA knows exactly what he's talking about. TA is only an occasional self-fulfilling prophecy - I've traded enough on TA to know that it works about as often as when it doesn't work.

Posted by: Andy on July 18, 2008 at 2:53 PM | PERMALINK

You're correct. The answer's created out of whole cloth with the hands of Wall Street Investor [who] are idiots.

Posted by: Zane Safrit on July 18, 2008 at 4:11 PM | PERMALINK

TA is used as a MONEY MANAGEMENT technique based on assessment of risk/reward and give u good entry/exit points.

it does not, and never claims to work, all of the time.

Posted by: lolcat on July 18, 2008 at 7:18 PM | PERMALINK

Pretty nice site, wants to see much more on it! :)

Posted by: John Williams on August 19, 2008 at 9:12 PM | PERMALINK




 

 

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