Wednesday, August 10, 2011

Fools And Their Money

(Understanding that this is being typed at 10:30AM, so who knows how accurate it will be, but it's my best guess at the moment)
Anybody who bought in the market this week is a fool. Or worse.
Here's the thing: events of the past six days tell me that there's panic even in the smart money houses. Let's follow the S&P downgrade story for a moment.
Last Thursday, S&P submits to the Treasury Department a draft memo of its downgrade announcement (ignore the $2 trillion error. It really is irrelevant.)
Treasury, headed by a bunch of former Wall Street execs, leaks word to their contacts on the Street. Those people, the "smart" money, sell off as best as they can and stash cash and gold. Market drops 500 points. Nobody, least of all yours truly, understood why that happened. We couldn't know. The markets are supposed to operate with perfect knowledge of all events. No one is supposed to get inside information.
Here's the set-up: if you don't understand why a market moves the way it does, don't base any decisions on what happens next.
But Friday was like any other day on Wall Street, where people looked forward to the weekend and l imagine figured Thursday was a one-off drop, possibly triggered by some "flash crash," some computer program that triggered another program that triggered another's happened before...and there were bargains to be had. Buy! Buy! Buy! Like little guppies following the hand trailing flakes into the bowl...
The market rose a little. People went home happy. Then S&P spoke up.
Way to ruin a weekend, guys. The curious thing about this is, Moody's (the other major player in credit ratings) has been circumspect about lowering or even commenting on the mess.
So Monday happened. If you ever want to understand panic and how people behave, study Monday's stock indices. Again, if you didn't understand why the market moved up Friday (and you really couldn't unless you knew why the market collapsed Thursday), don't buy into it. The smart money was shorting their asses off, I bet.
Monday's collapse was understandable and apparent. It should have continued yesterday, but didn't a) because the big boys shored up the market (especially the bonds on Monday and Tuesday) and b) panic makes smart people do stupid things. We got a breather from the Fed, as I said this morning.
I didn't think it would last until Friday. I overestimated how calm the markets might be at this news.