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Posted by on Sep 18, 2008 in At TMV | 6 comments

Dow Recovers 400 Points – Panic to Manic

The roller coaster ride on Wall Street went up today. The Dow actually began the day up 150 points on news of a swap agreement between the Fed and European central banks. This pumped $180 billion in liquid currency into circulation thus alleviating an emerging credit crunch.

Later in the day the euphoria died down and the Dow actually went into negative territory around noon.

But in the afternoon a rumor emerged on Wall Street that Treasury Secretary Henry Paulson will create a quarantining body to dispose of the bad assets from AIG. A crackdown on short-selling also pushed the market upwards.

Again, this action by Wall Street makes no rational sense. Of course the Fed was going to work to quarantine the bad assets from AIG. The purpose of the takeover was to separate out the bad assets and sell off the still-profitable insurance assets. There was never any drama about whether or not this would happen even if nobody knew the form it would take. And the short-selling crackdown was widely discussed the day before as well.

So why did the Dow jump 400 points in the last two hours of trading?

It’s the same reason why the Dow dropped 400 points in the last hours of trading yesterday.

Investors are absolutely jittery right now, overreacting to every bit of news that comes around. Any sign of good news is cause for mania. Bad news means panic.

Wall Street is best when it is steady and predictable. Wild fluctuations are obviously better than a total and complete meltdown, but they signify a sense of disbelief and mystery among financial firms.

It’s like when you are lost in the woods and you see what looks like a road and a way out and you feel immense euphoria. Yes, you knew you’d get out at some point. But just seeing the road makes you feel great. Ah, but the road was just an old dirt road and not the way you came in on. Now you slink back into utter despair. Wait! I saw a car! I think I did! And the emotional cycle goes up and down.

That seems to be Wall Street these days. Credit markets are in total disarray and investors are desperate for any sign of stability.

Buckle up folks!

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Copyright 2008 The Moderate Voice
  • DLS

    Overreaction.

    I’d side, if anything, with the pessimists on lefty talk radio (transparently pursuing their political agendas, which conservative talk radio nevvvvvvv-errrrrrrrrr does, of course), such as the guys on the Thom Hartmann Program (you know I’ve been listening to it) that say this is maybe halfway from overwith, going downward, that is.

  • mikkel

    Elrod: was it just AIG? I thought it was banks in general.

    If so this leg is basically done and things should calm down a while…especially if there is a bailout of Wamu. Then it’ll be a few months before JP Morgan, Citi and Bank of America are on the brink (trust me, they will be) best case scenario or the US Government worst case scenario (it’s a possibility, especially if they start buying all this bad debt).

  • elrod

    I don’t know if it’s just AIG. I don’t think there’s a full-on bailout of all bad banks. WaMu shares went up today and they’re still looking for someone to acquire them.

    • mikkel

      I’m seeing reports everywhere of all banks.

      Also they might ban short selling. If so we haven’t begun to see what real volatility means. Expect 5% up/down days to be the norm.

      And in laws of unintended consequences it’d ruin most hedge funds and derivatives markets and eventually lead to an extreme crash.

  • CitizenKang

    Elrod, for some reason your post on Wall street over-reaction brought this video from Monty Python to mind: http://www.youtube.com/watch?v=AwZaqZaRe78

    Kind of a non sequiter I suppose, then again I imagine we could all use a laugh.

  • elrod

    You are correct, mikkel. It IS all banks!

    I just wrote a post about the Mother of All Bailouts above.

    This is quite shocking to say the least. The government has basically nationalized the financial services industry.

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