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8/9/2005
Random Thoughts on the State of the Market, by Victor Niederhoffer

We enter a period when canes are being used, but not only for markets. The Grandmaster is visiting us from England, and he tore a tendon in a game of punch ball. He's now hobbling about on a cane -- like the rest of us, for other reasons.

Amidst the terrible lagging performance of the U.S. market year to date and the last five years on absolute basis, it is interesting to consider previous periods like this. Why this orgy of bearishness? Ten-year bond yields are up to 4.4 % from a 30-year low of 3.9%, which certainly reduces the Fed Model forecast by 0.5% to a mere 19.5 % for the next year. This must be counterbalanced by the fact that, according to Bloomberg, 88% of S&P 500 companies have reported and only 71% have exceeded forecasts. The rate of profits increase is a mere 13% per quarter over the corresponding quarter.

Today is Fed day, of course, and on a recent tour of Wall Street our tour guide pointed out the former offices of Townsend Greenspan. He noted with zeal that a member of the Ayn Rand group said with veneration that the fake doctor is the only person in the world that knows how taking three lug nuts or a rivet from the hull of a domestic car would affect the U.S. economy. That's just the problem. Input/output analysis doesn't work. The mix of consumer tastes and producer inputs changes because of technology and growth. Regardless of the fact that the clerisy at the central banks are the last bastion of central planning in the world outside Cuba and North Korea, it is good to note the moves of the market on the days surrounding their actions: a very good 2/3 up, with slightly more than the usual volatility. Is it relief? Or merely the fundamental rule of markets -- that you can't make extra returns without extra risk.

Victor adds:

There are certain key events in the market that determine the ambience until the next one comes along. One such event occurs today, and this doesn't mean the fake doctor's swan song. The West Virginian reports earnings of his company today, after the close. For many years, he has been a poster boy for pomposity, gilding the lily and overestimates of strength, greatness and integrity in his own company and the market. The mere sight of him with his power photographs making him look 15 feet tall, with references to his virtual closings, academic background and transfer is enough to bring back a sense of loathing and recall for the bad days of 2000. Some recent announced earnings came after the close on:

  5/10/05
  02/08/05
  11/09/94
  08/10/04
  5/11/04
  02/03/04 

The earnings the last five times are always 5% over the estimate which today is forecasted to be up a nice round 1/6 over the corresponding August '04 quarter of 0.21 per share. The market overcame its normal tendency to revulsion and recrimination on the last West Virginian gilding and that was very healthy. If, and it is just an if, it could overcome once again, then why do the words tech and back resonate?

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