Friday, September 19, 2008

Chicken Little and Henny Penny Save Wall Street


It's what drove the Dow down 950 points over two days this week. Oddly enough, fear also was the motivating factor behind Wall Street's dramatic two-day turnaround in which the Dow gained back nearly 800 points.

On Monday and Wednesday, the fear was that major investment banks were about to cause a global financial meltdown. On Thursday and Friday, the days the market rebounded, that same fear fueled a rally as government agents intervened with various devices designed to cool traders down, eliminate short selling and wipe clean the balance sheets of some of the most over-leveraged companies in America.

Was the fear of global financial calamity real? Maybe, though it was probably not as bad as many thought or as those government interlopers made it appear.

Rushing around Washington, jawboning members of congress, Fed chairman Ben Bernanke and Treasury Secretary Henry Paulson put on their best impressions of Chicken Little and Henny Penny, declaring to all who would listen, the sky is falling, the sky is falling!

Well, as we all know from the fable, the sky isn't really falling and sly Foxy Loxy eats most (or all, depending on the version you wish to read) of Chicken Little's friends.

So, the moral is the same on Wall Street as it is in stories we softly tell four-year-olds: Have courage, or don't believe everything you hear. This little nugget of wisdom should not be lost on investors, all of whom are in their adult years, though many act like four-year-old children.

If anyone was eaten, it was the American taxpayer, if the Paulson plan is actually adopted by congress. If it turns out that the pending disaster was more fiction than fact and congress either acts slowly or not at all, then we have all had our lunch eaten by the government and its various agents of deceit.

It's also worth noting that today was a quadruple witching day, on which contracts for stock index futures, stock index options, stock options and single stock futures (SSF) all expire. Huge sums of money changed hands this week.

For now, the Foxy Loxies have the upper hand and are laughing, but another adage also applies, he who laughs last, laughs best. And that last laugh, my dear friends and readers, comes November 4, election day. Who will be laughing then?

It should also not be forgotten that we are still in the throes of a vicious bear market. This week saw no bottom being put in place. It's far too early in the cycle for that. Also, true bottoms are never overcome by such massive volume as was evident on Thursday and Friday. There is still a long way down before recovery begins. The wild activity of this week should be seen only in the overall context of disaster averted... for now.

Dow 11,388.44 +368.75; NASDAQ 2,273.90 +74.80; S&P 500 1,255.07 +48.56; NYSE Composite 8,186.47 +411.31

The mammoth moves over the past two days did move some key metrics. On Friday, advancing issues outpaced losers, 5345-1131, nearly 5-1. For the first time in a very long while, new highs exceeded new lows, 442-280. It will be interesting and useful to see just how long those numbers remain shifted toward stocks making new highs.

Oil finished up $6.67, at $104.55, but the metals were battered, as one would expect. Gold fell $32.30, to $864.70. Silver lost 23 cents, fending the day at $12.48. The general understanding is that commodities should continue to unwind, along with stocks. The deflationary spiral has begun, and the government can only intervene just so much, for just so long. Sooner or later, the real market dynamics return.

This week was fun and proof once again that the party never stops on Wall Street.

Volume was very high, but again, there was an abundance of self-dealing.

NYSE Volume 2,954,863,000
NASDAQ Volume 3,965,442,000

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