Nov

18

It is interesting to watch the monkey rope that ties the Nikkei and the S&P together with almost exactly the same prices day after day, having moved in lockstep down from 1500 to 848 in S&P and 15000 to 8360 in Nikkei with a co-terminous correlation of 95%. Though separated widely in temper and geography, economy, and culture, they move to the beat of the same drum. And amazingly, the psychology within the day is almost as good to know as the predilections of the scholarly market people who react presumably after reading our mail.              

The lessons in the book The Wild Trees by Richard Preston about falling from above the red line of certain death of 50 feet should be taken by all market people. Of 16 such declines of 50 or more in last 20 years, half of them came in 2008, and the first such decline  since 9/11 came on 2/27/07 at an ending price of the then terrible 1451. The first of the 8 declines in 2008 came off 9/15 at a closing price of 1196. The lessons in surviving such declines that Preston relates in The Wild Trees, including quiet, counting, and counterbalance, are valuable for market people as apparently is the death warrant that such falls indicate in the forest and the market.

The inevitable outcome of the bailout is clearly seen in England where people beg for the government to approve payment for standard therapies for disease that are routinely denied based on cost benefit analyses of the expected number of extra days to live from the treatment versus the costs and benefits to the average man. The move by the white shoe firm to forgo their bonuses at the top, is a nice corollary to this ultimate outcome. Of the 468 of the 500 companies that reported, third quarter earnings 272 are up and 164 are down with a market cap weighted change of up 5.4%. The 384 non financial companies reported an average market cap weighted change of +25%. 260 out of 466 were positive surprises relative to expectations. Tell me why the market should be down 60% or so based on this performance and say, a predicted earnings change in aggregate of -20% to 20% for the next year et al.

Nigel Davies writes: 

The argument put forth is that the worldwide loss of wealth caused by the bursting of the housing bubble has yet to feed through to peoples' pockets, thus profits are still running through like a decapitated chicken. There seems to be some logic to this reasoning, especially when one considers the leverage used in the purchase of housing and the presumption that corporate profits have been funded by this fast disappearing paper wealth.

On the other hand one imagines that many older folks who took equity release at the top may be cracking open the champagne right now. And the difficulty in putting figures on all of this no doubt explains the manic depressive behavior of the mistress.


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