June 12th, 2008

Instantaneous Voting Machine; 1973 Market Crash Redux

It’s all so confusing. There are so many cross currents that it’s nearly impossible, even for a bank of university or government computers churning macroeconomic numbers, to sort through and come to a conclusion they can be embraced with confidence.

I watch all three of the evening talk shows on CNBC (Fast Money, Cramer and Kudlow), I confess, not so much for answers as for the discussion and debate. I want to hear all sides and then try arriving at my own decisions. Here are some of the threads I heard tonight:

  • There will be a rate hike in support of the dollar which will….
  • Put a floor and support under the $US (though not necessarily pushing it up relative to other currencies since they will be raising rates too) which will ….
  • Take some steam out of the commodity and food bubble, at least in terms of their $US denominated prices which will ….
  • Help unwind some of the inflationary pressures through lower gas costs and stabilize the cost of other imported consumer goods at the expense of …..
  • More expense cost of our export goods, however, for our foreign customers and …..
  • Possibly undercutting one of the remaining strong spots in the US economy, companies that export machinery and equipment, technology and health care products overseas and thereby ……
  • Undermining the remaining areas of strong employment since two other industries of significant employment, finance and construction, continue to experience employment distress.

O.K., you get the picture. And this isn’t the end of the thread, it goes on and on. You listen to these talking heads and each one zeros in on the one topic they feel comfortable about and “predicts” that it’s the solution, the cure all for these economic ills. I got dizzy trying to keep it all straight.

That’s why I tune it out. The market is one big voting machine, the place where millions of individuals do their own analysis, make their own assessments and cast their votes by buying or selling shares. Their decisions might be based on:

  • general economic (“lower gas prices will be equivalent of another consumer rebate check”) or
  • individual industries (“airlines are the perfect hedge against falling oil prices and oil stocks since they’re so depressed now and should benefit directly when oil comes down”) or
  • individual stocks (“buy Lehman since management shakeup is good sign; sell Lehman because shakeup is only the tip of iceberg).

It really doesn’t matter. Prices and market indexes distill it all down to nothing more than the net result, the equilibrium where supply meets demand. And when we see that the votes pull prices down, it means that the balance of opinion about those different forces and more indicate that we’re not out of the woods with an expectation of more to trouble to come.

I then monitor the direction that equilibrium of votes is trending through moving averages, through my MTI, and right now its telling me to “be in cash”. I don’t know what the specific reason might be, I can’t sort it all out and I don’t really care. All I know is that it’s time to be very cautious.

By the way, I scooped just about anyone else about the similarities between today’s market and the crash of 1973 when I wrote “1973 and 2001 Market Crashes and Today’s S&P 500 Index” on March 1, 2008 (click to read)!

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