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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!