Stock Market Jitters? Yawn.
OK, so I feel compelled to comment on the recent few days in the market, although in truth I think it merits a big yawn. I try to ignore "the market" as much as possible and focus on individual companies and specific investments. Obsessing too much over the market environment can lead you astray and cause you to take your eye off the ball. That said, you cannot ignore the macro picture totally. More than at any time in my short lifetime, the market is Warren Buffett's proverbial voting machine rather than a weighing machine. Oceans of capital have moved from more staid mutual funds to the hyper-kinetic trading universe of hedge funds who measure their success on a month to month basis. Many of these guys cannot ride out a storm, so they exit positions at the drop of a hat. The resulting volatility is scary but, in my opinion, it doesn't much constitute a reliable message about the health of the market, the state of the economy, or the investment landscape.
Some of the things that gave people the heebie-jeebies this week were a pretty lame basis for a market meltdown. Greenspan talking possible recession? Please. Anybody with a brain knows that AG was talking expansively, saying a recession is possible in the sense that it is not impossible. Check out Caroline Baum's take for more on this. Durable goods? Again, lame. It's a highly volatile measure and one month's data conveys almost nothing of meaning. On another day (that wasn't bookended with China and Greenspan) that same durable goods report could have been seen as good news as it might be another piece of evidence for the Fed's bias to tilt toward easing. China? Who cares. China is a speculative market. Speculative markets take hits, often big hits. It says nothing about the vast and varied asset class that is US equities or global blue chip equities.
What are the big things that market participants should be worried about. Kudlow hinted at it today in the WSJ - the policy cycle. I am not so much a believer in the business cycle as I am in the policy cycle. Bad policy squelches economic dynamism and is what can really kill a rally like what we've been enjoying for 3+ years now. The three biggest bad policy risks that are lurking out there today are 1) higher taxes on capital, namely the repeal (failure to extend, really) of the dividend and capital gains tax cuts, and secondarily, the failure to make the death tax repeal permanent; 2) protectionism, principally the prospect of tariffs enacted against foreign goods, particularly Chinese goods, over some phony notion of "fair trade" 3) continued government interference and regulation in enterprise - from misguided energy policy formented by global warming hysteria to failure to reverse Sarbanes-Oxley to imitating any number of silly and destructive European economic policies (like this one, for example). Finally there are a number of policy proposals that are circling around the halls of the Great Sausage Factory that are being enthusiastically embraced by big business, but don't let the business endorsement fool you into thinking these policies will be good for the economy in general. They will be good for those big businesses and bad for entrepreneurs that are the source of dynamism and resiliency in our economy. Universal healthcare and carbon emission caps come to mind. Big businesses are embracing these notions because the burdens will fall most heavily on their smaller, more nimble competitors. Politicians gerrymander and do everyhting to strengthen imcumbency, big businesses lobby and advocate that which would hamstring competitive upstarts. So, be very nervous over developments like this.
All that said I am relatively optimistic about the market because 1) I think a presidential veto is the backstop to any significantly higher taxes, we have at least until 2009 to worry about that; 2) Big money hedge funds and private equity guys bought off the Democrats prior to last November. Hedgies need the market to continue doing well, and, more importantly, so does the private equity industry. All these LBOs and going dark transactions and what not have to be refoisted back onto the public again at some point. A healthy stock market that is fertile ground for IPOs and M&A activity has to exist or all that private equity capital can't exit. So not only do I think that the Great Sausage Factory will do no harm, it might even help the investment climate. For starters, I think the private equity guys will demand of their bought and paid-for politicos that they reform Sarbanes-Oxley. They might even demand that companies be relieved of the burdens of providing healthcare.
And lastly, we have SuperHank.
UPDATE: Here is a differing viewpoint.
Some of the things that gave people the heebie-jeebies this week were a pretty lame basis for a market meltdown. Greenspan talking possible recession? Please. Anybody with a brain knows that AG was talking expansively, saying a recession is possible in the sense that it is not impossible. Check out Caroline Baum's take for more on this. Durable goods? Again, lame. It's a highly volatile measure and one month's data conveys almost nothing of meaning. On another day (that wasn't bookended with China and Greenspan) that same durable goods report could have been seen as good news as it might be another piece of evidence for the Fed's bias to tilt toward easing. China? Who cares. China is a speculative market. Speculative markets take hits, often big hits. It says nothing about the vast and varied asset class that is US equities or global blue chip equities.
What are the big things that market participants should be worried about. Kudlow hinted at it today in the WSJ - the policy cycle. I am not so much a believer in the business cycle as I am in the policy cycle. Bad policy squelches economic dynamism and is what can really kill a rally like what we've been enjoying for 3+ years now. The three biggest bad policy risks that are lurking out there today are 1) higher taxes on capital, namely the repeal (failure to extend, really) of the dividend and capital gains tax cuts, and secondarily, the failure to make the death tax repeal permanent; 2) protectionism, principally the prospect of tariffs enacted against foreign goods, particularly Chinese goods, over some phony notion of "fair trade" 3) continued government interference and regulation in enterprise - from misguided energy policy formented by global warming hysteria to failure to reverse Sarbanes-Oxley to imitating any number of silly and destructive European economic policies (like this one, for example). Finally there are a number of policy proposals that are circling around the halls of the Great Sausage Factory that are being enthusiastically embraced by big business, but don't let the business endorsement fool you into thinking these policies will be good for the economy in general. They will be good for those big businesses and bad for entrepreneurs that are the source of dynamism and resiliency in our economy. Universal healthcare and carbon emission caps come to mind. Big businesses are embracing these notions because the burdens will fall most heavily on their smaller, more nimble competitors. Politicians gerrymander and do everyhting to strengthen imcumbency, big businesses lobby and advocate that which would hamstring competitive upstarts. So, be very nervous over developments like this.
All that said I am relatively optimistic about the market because 1) I think a presidential veto is the backstop to any significantly higher taxes, we have at least until 2009 to worry about that; 2) Big money hedge funds and private equity guys bought off the Democrats prior to last November. Hedgies need the market to continue doing well, and, more importantly, so does the private equity industry. All these LBOs and going dark transactions and what not have to be refoisted back onto the public again at some point. A healthy stock market that is fertile ground for IPOs and M&A activity has to exist or all that private equity capital can't exit. So not only do I think that the Great Sausage Factory will do no harm, it might even help the investment climate. For starters, I think the private equity guys will demand of their bought and paid-for politicos that they reform Sarbanes-Oxley. They might even demand that companies be relieved of the burdens of providing healthcare.
And lastly, we have SuperHank.
UPDATE: Here is a differing viewpoint.
posted by Donny Baseball at 10:25 PM
3 Comments:
Nice post! What we need right now is for Roach, or Krugman, to come out and predict a bear market, crash, or recession.
I can't believe many professional investors actually bought the bogus Yen carry trade reversal theory. These people shouldn't be managing money.
TS-
Check out Luskin today at www.poorandstupid.com for the Krugman Contrary Indicator Watch.
In September I would have speculated that MS would not be treating a first-tier Orange Country business investment like Blackstone this way. But as the Fall has progressed and the potential liability increased it is clear that banks are willing to risk even their largest clients to wriggle away from some of these deals.
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