New Layers of Complexity

Email and phone calls from frustrated investors are snowballing. I don’t think I’ve seen this kind of volume since the dot-com bust, and the nature of current concerns is different.

Back then, people were just wondering when tech would get back on its feet, when the market would work through its overbought condition, the right time to buy and such. What they looked at almost entirely were market data points in the usual financial analysis. Whose profits were rising, whose were falling, various marketing plans and so on formed the bulk of the analysis, as they usually do.

These days, though, people can’t use their usual arsenal of tools to figure out what’s going on because so many non-market forces are at work: bailouts, emergency loans, rate cuts or lack thereof, taxpayer money flowing into the market by the hundreds of billions.

As I suggested yesterday, we did indeed get the mirror image of last week in this week’s first two days. Last week, the market roared higher on Monday on news that the government had nationalized Fannie/Freddie, then crashed on Tuesday. This week, the market crashed on Monday on news that the government had not saved Lehman Brothers and that AIG was only the last “e” away from collapse, then rallied on Tuesday.

The government put its foot down finally, said the politicians, and would not be allowing moral hazard to run wild anymore. It had to bail out Fan/Fred with tax dollars, but it just wouldn’t go there with Lehman Brothers or AIG.

That was all of one day ago. Overnight the government did use $85 billion from taxpayers to buy 80% of AIG. Re-enter moral hazard. Also, just to keep a modicum of honesty on the table, it actually bailed out Lehman Brothers, too.

How’s that?

Well, JPMorgan lent Lehman $87 billion on Monday, but this morning the New York Fed reimbursed JPMorgan that full amount. See if you can follow this complicated trail to see who actually bailed out Lehman.

I’d say the death of moral hazard was greatly exaggerated.

If companies would simply fail when they go bankrupt, we’d have a chance at running some reasonable analysis. These days, they don’t. The market’s direction depends on policy making behind the scenes, nobody knows what the next policy will be and that includes those making the calls, which is why it’s darned hard to get a handle on things.

For instance, while the Fed may have passed on the chance for another emergency rate cut yesterday, it’s still not out of the question. With the Ted spread widening to its biggest read since the October 1987 market crash, it could be that the Fed is saving its strength for a later Hail Mary pass.

The Ted spread, by the way, is the difference between the 3-month Treasury Bill’s interest rate and the 3-month London Interbank Offered Rate, or LIBOR. Straight from the Investopedia:

The Ted spread can be used as an indicator of credit risk. This is because U.S. T-bills are considered risk free while the rate associated with the Eurodollar futures is thought to reflect the credit ratings of corporate borrowers. As the Ted spread increases, default risk is considered to be increasing, and investors will have a preference for safe investments. As the spread decreases, the default risk is considered to be decreasing.

Also, the SEC may be drafting the documents for a fresh ban on naked short selling, which is partly credited for the July-August rally. The ban ended in the middle of August — and so did the rally. Coincidence, of course.

This Just In: Make that “Also, the SEC drafted the documents for a fresh ban on short selling just before 10:00 a.m. in New York.” It happened as I was writing.

Now, none of this is meant to excuse faulty analysis. This is the market, these are the things that move it, and tough luck. However, understanding why it’s hard to get a handle on it all is the first step toward being a little forgiving with yourself.

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