September started with a win for the bulls. We wish them well and would like to take the wins back starting on Wednesday. The month is very young and the market is still overbought.
We find the analysis to be a bit flawed on a day like Tuesday. As the market jumped this morning, the talk was all about how the Fed would need to lower rates. Then later, when Ford announced low sales figures, the continued chant of the media was that the Fed had more ammunition to lower rates as the market continued higher. Later GM announced positive sales for the period and the media was silenced as the market kept going up.
There are a couple of concepts here on this day. The media has been expecting a down September (and we are surprisingly in that camp, too) so they were modestly upbeat as the market opened the month with a strong positive day. The media will now tell us that the smart money is buying even as the public is selling—well, that may be true but will that result in higher or lower prices. Sure, the first day of the month was up.
The other issue that we have a difficult time with is this notion that the Fed needs to cut rates and that is good for the stock market…all the time. We think that the mere idea that the Fed would lower rates would be cause for concern about the future of the economy but since the Fed can fix anything with a rate cut, the economy is easy.
The problem with all of reasoning is that the market is up. Why do participants think the Fed will lower rates even as the market goes up??? These two things would seem to be mutually exclusive, or, at the very least, the rate cut doesn’t follow the market going up. Supposedly, the market could go up after a rate cut due to more liquidity being spread around but even that is a dangerous assumption in this market.
We have trouble thinking about the near term logic of the market. Yes, the B’s were out last Friday giving us their versions of the panacea for the future. And, today the market believed something positive about the promises. The market is now overbought and we need to focus on the next move which should be down hard. Still, the Dow remains below the 13,675 level.
As we write this evening the Asian markets are not trading like the Dow busted out for 100 points today. Japan opened strong but is now in the red. We’ll see how Europe trades in the morning.
The news this evening on the WSJ site is the Citigroup SIV (Structured Investment Vehicle). We haven’t mentioned these before and don’t have time to explain them this evening. Please pick up a paper edition of the WSJ and read the Heard on the Street column. It explains how C is denying any problems with Centauri, its largest SIV. This SIV is off C’s balance sheet so it operates pretty independently.
The other news is the short term interest rates, in the form of Libor (London interbank offered rate). This rate has moved higher due to the “credit-market turmoil”, according to another article on page C1 of the WSJ. We don’t have time this evening to go into the details but the WSJ gives a clear understanding…comments for discussion.