Market Speculation

The Dow Jones picked up a little over 330 points this week as part of a significant recovery this month from a low of 6,547 to 7,776. The March 9 intraday low of 6,440 for the Dow was the lowest point since since the bottom price of April 1997 (ironically, enough that last time that Fargo had a flood this bad).

Check out Yahoo! Finance at any given time during the trading day and you’re bound to find a headline reading “Market climbs due to this report or that speech” or “Stocks fall on bad report or negative speech”. Of course its all conjecture. We can’t really know how Wall Street will react to most reports or speeches, but we will blame market movement in retrospect on an earnings report or Treasury projection or political speech.

Many are claiming the market’s steady growth in the past week was due to positive response to Secretary Geithner’s Public-Private Investment Program. And its certainly true that some of the growth was from investors confident that at the very least they would be able to fleece the government in the PPIP fund, if not participate in actual economic recovery. But there are deeper issues that are not always apparent.

Consider, for instance, this analysis from earlier in March when stocks were in a free fall:

“One reason the selling is bad right now is because hedge funds have to pay those investors who choose to exit this quarter by April 1. Hedge funds typically require 45 to 60-day notice before the end of a quarter for redemption… As the crisis prolongs, more and more hedge fund investors are reaching the end of their lock-up periods, the time period during which they cannot withdraw their money or can do so only by paying large penalties. This creates an escalating number of redemptions as time goes on. Hedge funds are usually leveraged, so they have to sell a significant amount of inventory by the end of each quarter to meet even modest redemptions.”

Thus the sell off in the past few weeks and present recovery this week. Is this is the only cause? Of course not. Is it also an educated guess? Yes.

So what is the point? Only that the market works in ways that are sometimes hard to boil down in a 30 second evening news clip, newspaper headline, or Twitter barb. Fear is a significant issue, and overreacting with costly programs like PPIP and TARP 2 is a very bad response.