That Dow bump? Blame irrational exuberance

At least according to one University of Alabama at Birmingham professor.

The release:

Irrational exuberance behind recent stock gains, says UAB finance expert

BIRMINGHAM, Ala. – A second straight week of stronger-than-expected third quarter earnings from a broad cross section of U.S. industries has held the nation’s Dow Jones Industrial Average above the psychological benchmark of 10,000 points for the week of Oct. 19, but the climb isn’t likely to last, says a finance expert at the University of Alabama at Birmingham (UAB).

Assistant Professor of Finance Andreas Rauterkus, Ph.D., says the current levels of the major U.S. stock indices are unquestionably inflated. Rauterkus says the gains are a rubber band-like snap reaction from investors to the market lows of March.

“There is no doubt that the current market levels are the result of the irrational exuberance of investors who were stuck on the sidelines for many months while the country’s economy collapsed,” Rauterkus says. “Many investors now are back into the market and buying up shares on the kind of news that under more stable conditions would not justify a run up of stock buys.”

Rauterkus says he expects the market to reset itself as early as the end of the current earnings season as investors look to take profits from the Dow’s climb back to 10,000.

“I think it is wrong to interpret current earnings reports as great news because all that these companies have done in the third quarter is exceed extremely low expectations,” he says. “It’s like a student earning a grade of D instead of D-minus on a test, neither one is particularly good.

“So, I believe the market is likely to pull back,” Rauterkus says. “Certainly not to anywhere near the lows of earlier this year, but the adjustment could be a noticeable.”

Rauterkus also expresses concern over the continued weak performance of the U.S. dollar and growing international worry about its role as the international reserve and commodities currency.

“The dollar has lost its one-time title as the world’s most reliable currency, which is driving up the prices of commodities like oil at a time when consumers cannot take much higher prices on anything,” he says. “It is clear based on the performance of the dollar over recent months that the U.S. is slipping from its status as the world’s lone dominant economy, and many up-and-coming nations like Brazil and China will have a growing voice and role in international finance.”

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Back to 2002

So to speak. I don’t want to be all doom and gloom here on the last day of the year, but this is some sobering news — 2008 saw the loss of six years of market gains. They’ll eventually come back, but the shocking part of this loss is the speed it happened and how it happened across the board.

Petroleum is way down despite the efforts of OPEC. Hedge funds? Investment banking?  Commodities? The only happy folks are those who shorted everything under the sun for the last half of the year.

From the link:

When the New York Stock Exchange closes later this afternoon, virtually anyone with money in stocks will have felt the punishing drop in the market.

The markets were headed for a higher close Wednesday, but overall, it was a very bad year to own stocks, any stocks — indeed, one of the worst ever. The Dow Jones industrial average will end the year down more than 34 percent, the worst year for the index since 1931, and the broader Standard & Poor’s 500-stock index more than 38 percent. Blue-chips like General Motors, Citigroup and Alcoa lost more than 70 percent of their value.

All told, about $7 trillion of shareholders’ wealth — the gains of the last six years — will be wiped out in a year marked by violent market swings.

But what is striking is not just the magnitude of the declines, staggering as they are, but also their breadth. All but 2 of the 30 Dow industrials, Wal-Martand McDonalds, fell by more than 11 percent. Almost no industry was spared as the crisis that emerged in the subprime mortgage market metastasized and the economy sank into what could be a long, gray recession.

Wall Street is in the tank

Ouch.

From the link:

Investors are preparing to close out the last three trading days of 2008 with Wall Street’s worst performance since Herbert Hoover was president.

The ongoing recession and global economic shock pummeled stocks this year, with the Dow Jones industrial average slumping 36.2 percent. That’s the biggest drop since 1931 when the Great Depression sent stocks reeling 40.6 percent.

The Standard & Poor’s 500 index is set to record the biggest drop since its creation in 1957. The index of America’s biggest companies is down 40.9 percent for the year.

With these statistics ready to play out this week, it is little wonder why investors are all too happy to close the books on 2008. Analysts are already looking toward January as a crucial period for the market as it tries to recover some of the $7.3 trillion wiped from the Dow Jones Wilshire 5000 index, the broadest measure of U.S. stocks.

“It is hard to gauge a recovery because there’s so many things out there that are interactive with each other,” said Scott Fullman, director of derivatives investment strategy for WJB Capital Group in New York. “Nothing is in a vacuum. Anybody who is managing money has to be on the cautious side for at least the first six months of 2009.”

If you’re getting unemployment …

… good news, the checks have been extended.

From the link:

Jarred by new jobless alarms, Congress raced to approve legislation Thursday to keep unemployment checks flowing through the December holidays and into the new year for a million or more laid-off Americans whose benefits are running out.

The economic picture was only getting worse, if Wall Street was any indication. The Dow Jones industrials dropped more than 400 points for a second straight day, reaching the lowest level in more than five years, and the Standard & Poor’s 500 index fell below lows established six years ago.

The Senate’s vote followed Thursday’s government report that laid-off workers’ new claims for jobless aid had reached a 16-year high and the number of Americans searching for work had surged past 10 million.

The White House, which had opposed broader legislation containing the benefits extension, urged passage of the new version and said President George W. Bush would quickly sign it.

Amex hoping for the dole, GM sinking and oil back in fifties

Here’s a little buffet of economic news —

The latest hopeful for corporate socialism? American Express after reorganizing as a bank holding company.

From the link:

American Express Co. is seeking $3.5 billion in funds under the government’s plan to directly invest in financial firms, according to a Wednesday report in The Wall Street Journal citing unnamed sources.

Earlier this week, American Express received approval from the Federal Reserve to become a bank holding company, which is a similar structure to traditional commercial banks. The credit card company now has access to financing from the Fed and the ability to grow a large deposit base.

The increased funding opportunities through government programs, including the potential $3.5 billion investment, could be a huge boost to American Express as one of its primary sources of funding has nearly disappeared amid the ongoing credit crisis.

Crude has dropped below $56 a barrel.

From the link:

The Energy Department said it expects U.S. consumption of petroleum to drop more severely than any time since 1980 next year, with gasoline use dropping by another 3 percent. Its Energy Information Administration on Wednesday said 2009 petroleum consumption is projected to sink by a further 250,000 barrels per day, or 1.3 percent, more twice that projected in its previous outlook.

Also on Wednesday, the International Energy Agency said more than a trillion dollars in annual investments to find new fossil fuels will be needed for the next two decades to avoid an energy crisis that could choke the global economy.

Light, sweet crude for December delivery fell nearly 6 percent, or $3.50 to settle $56.16 a barrel on the New York Mercantile Exchange, the lowest closing price since January 2007. Oil prices have plunged more than 60 percent in four months from record highs near $150 in July.

And last, but certainly not least, among debate on whether to bail out the Big Three US automakers, General Motors stock closed at its lowest point since 1946 — yes, that’s not a typo nineteen FORTY six.

From that link:

Shares of General Motors plunged another 13% on Tuesday to a 65-year low, closing below the $3 mark for the first time since 1946.

The stock closed Tuesday down 44 cents to $2.92, its lowest close since April 1943.

The Dow Jones industrial average component has lost nearly 40% of its value since Thursday. Shares began their slide on Friday when GM warned that it could run out of cash and posted a $4.2 billion loss.

On Tuesday, the battered automaker unveiled plans to idle nearly 2,000 hourly workers who build engines, transmission systems and body panels, during the first quarter of 2009, according to company spokesman Tony Sapienza. That reduction follows the news, disclosed Friday, that GM will idle another 3,600 hourly workers.

Making matters more complicated, GM will have to keep most of these hourly workers on the payroll during the current labor contract, which runs through September 2011.

Trading stocks right now …

… requires quite a bit of testicular fortitude. And a casino roll doesn’t hurt either.

Wall Street had another astounding advance Tuesday, with the Dow Jones industrials soaring nearly 900 points in their second-largest point gain ever as late-day bargain hunters stormed into the market. The Dow and the Standard & Poor’s 500 index were each up nearly 11 percent.

There didn’t appear to be any one catalyst for the surge that saw the Dow nearly double its gain in the last hour of trading. Many analysts said investors were grabbing up stocks in the belief that the market had fallen too far in recent sessions; the Dow had dropped 500 points in two days. Some said buying early in the day came from anticipation of an interest rate cut Wednesday by the Federal Reserve, and the market just followed its recent pattern of building on its gains or losses in the last minutes of the session.

“There is nothing fundamental that came out today or yesterday that would take it up or down. We’re all groping for something meaningful to talk about,” said Bob Andres, chief investment strategist at Portfolio Management Consultants. “The market is exhausted from going down.”

Wall Street carnage continues

Cover your eyes and hold onto your wallet unless you’re really into casino action. I will admit there’s probably some real bargains out there, but who can guess which companies will remain solvent to see the eventual uptick.

From the link:

Wall Street joined world stock markets in a selloff Friday, with the Dow Jones industrials dropping more than 300 points and all the major indexes falling more than 3 percent. The growing belief that a punishing economic recession is at hand had investors abandoning stocks.

The pullback on Wall Street wasn’t quite as steep as some had feared though the pace of selling increased in afternoon trading. The massive declines began overseas after another round of grim corporate news stirred fears about the world’s economy. Investors also grew nervous after a decline in index futures before the market opened was so steep that selling halts were imposed.

The anxiety Friday — demonstrated by the limits on futures and gyrations in everything from gold to the dollar — underscored the fear and uncertainty that has gripped markets since the mid-September bankruptcy of investment bank Lehman Brothers Holdings Inc. and the subsequent lockup in the world’s credit markets.

Stocks still very volatile

The markets are just crazy volatileright now. Anyone doing any serious trading has either a lot to gamble with, or just gets a sick thrill out of outrageous risk.

From the link:

Fears of a global recession slammed Wall Street on Wednesday. The Dow finished the session down 514 points – its seventh-worst point loss ever.

The glum mood, sparked by weak corporate profits and falling oil prices, hit global stocks. Major markets in Asia dropped. Japan’s Nikkei finished the session 2.5% lower. European shares also fell in Thursday afternoon trading.

The Labor Department’s weekly report on jobless claims gave investors another reason to be nervous. Claims rose 15,000, to 478,000, for the week ended Oct. 18, which was worse than expected. A consensus of economists surveyed by Briefing.com had expected claims to rise to 465,000.

RealtyTrac, an online marketer of foreclosed properties, added to the market malaise Thursday with a report showing that more than 81,000 homes were foreclosed in September.

Looks like another tough day on Wall Street

Maybe not as bad as yesterday, but mid-afternoon numbers don’t look too promising.

These figures come from the WSJ website and are current as of 2:37 pm EDT.

Dow Jones Industrials down 5.76%

S&P 500 down 6.53%

Nasdaq down 5.37%

10-year note down 0.81%

I guessing everyone is noticing a trend in direction in these indicators.

Update 2:32 pm CDT — There’s a bit of a rally heading toward the bell today and both the Dow and Nasdaq are pushing positive numbers — less than 1% into the green, but positive.

One story that seems to be getting lost in all the financial freak-out is oil is dropping like a rock. Crude is now below $78 a barrel.

From the link:

Crude futures sank to a 13-month low on the mounting threat to global oil demand from the financial crisis.

Light, sweet crude for November delivery settled $8.89, or 10.3%, lower at $77.70 a barrel on the New York Mercantile Exchange, the lowest settlement since Sept. 10, 2007. Brent crude on the ICE futures exchange closed at $73.65 a barrel, down $9.01.

Oil prices fell along with commodities from copper to corn, as well as the Dow Jones Industrial Average, which dropped for the eighth-straight trading day. Turmoil in the financial sector has resulted in a frozen credit market, cutting companies in the wider economy off from borrowing and threatening economic growth worldwide.

Final update 3:17 pm CDT — The markets close for the weekend and only Nasdaq held on for a gain. A 0.27% gain.

The bailout — success from the jaws of defeat?

I’ve done some blogging on the bailout — here on today’s failure in the House and here’s a link to more.

It looks like the WSJ thinks the House vote was a blessing in disguise. I agree with them.

From the link:

Don’t Panic.

By throwing out a deeply flawed bailout plan, the House may have created an opportunity to craft a more effective response to the financial crisis.

With credit markets frozen and the Dow Jones Industrials Index plummeting 777.68 points Monday, the 228-205 defeat of the rescue package appears to come at the worst possible time. Plenty of experts think the “no” vote has the power to wipe what little confidence remains in the markets.

But it also could lead policy makers, particularly Treasury Secretary Henry Paulson, to draw up a plan that more directly addresses the factors causing the financial system to fall apart.