On Allegations of Wall Street’s Displeasure with Obama and Other Signs of the Apocalypse

· The stock market is down 52.4% annualized since the Inauguration, signaling Wall St.’s indictment for the recent stimulus and bank bail-out plans.

· We have broken through the market lows reached last November.

· CNBC’s Rick Santelli led traders in a much publicized revolt against current economic policy at the Chicago Board of Trade http://www.cnbc.com/id/15840232?video=1039849853

These sobering facts are all true. But truth, as anyone who has knowledge of quantitative analysis will tell you, is a tricky sort of thing. Let’s look at another way of presenting these facts.

· The stock market is down 4% since the Inauguration.

· We have retested the market lows reached last November, as many technical traders predicted.

· The always animated Rick Santelli leads a frustrated skeleton staff in revolt at the CBOT.

Statistics

I like statistics. I like to pull apart the numbers and see whether the conclusions drawn from their analysis is valid. I like to think of myself as a CSI who works with numbers instead of bodies.

Many will argue this point, but to me, numbers are less creepy. Let’s take a look at the numbers behind these headlines, and then you can write your own.

The Stock Market

When people talk about the stock market, they’re usually referring to an index that measures its movement. There are a lot of indices, and some are more reliable than others.

Almost everybody has heard of the Dow Jones Industrial Average. It is comprised of the price movement of thirty behemoth-sized US companies. Thirty is not a lot, and does not reflect the health of mid-sized or small companies, so this may not be the best reflection of how the market (with about 5000 listed companies) is doing.

There is also the Standard and Poor’s (or S&P) 500. This is five hundred large and mid-sized companies that represents about 75% of the US market, and is the most widely used proxy for the US market.

Let’s use the S&P 500, and see what it tells us.

The Market is Down 4 – 52%

· On January 20 of this year, the S&P 500 closed at 805.22.

· On February 20 of this year, the S&P 500 closed at 770.05.

805.22 minus 770.05 equal 35.17.

35.17 is 4.4% of 805.22.

So the S&P 500 is down 4% – right?

Well, not so fast. When we express a percentage move in the stock market, your savings account, your home loan rate, etc., we do so on an annualized basis to prevent math geeks like me from pulling a fast one. If I gave you a loan for $25,000 at 4%, that sounds like a pretty good deal doesn’t it?

Not you have to pay it back in a month. Then, I’m a loan shark.

So, we take every move in rates, and adjust it over a year – called annualizing. Here’s the math.

805.22 minus 770.05 equal 35.17.

35.17 is 4.4% of 805.22.

January 20 – February 20 is 1/12 of one year.

It must be multiplied by 12 to represent one year.

4.4% times 12 is 52.4%

A four percent drop in one month is no walk in the park for investors, but it is hardly unprecedented and is unlikely to result in many jumping from the windowsills.

The 52.4% number assumes that the market will drop 4% every month all year.

Breaking the Lows

The S&P 500 has now closed lower than it did at its then lowest point last November. With the level of volatility (up-and-downiness) in the last year, that may or may not surprise you. Why is it so widely reported?

Broadly, there are two types of investors: fundamental and technical.

· Fundamental investors look at balance sheets, cash flow statements and other financial data for a company and calculate the future value of the company on that basis, and try to buy the company for less than that price.

· Technical investors look at the past price movement of the company to predict its future price movement. They rely on charts to calculate their “buy” and “sell” prices, and generally buy and sell more often than fundamental investors.

Technical analysts find great significance as to whether the price of the stock market can “hold” its previous “lows.” If it “breaks the low,” they increase the probability that it will trade even lower in the short-to-medium term.

I am personally a fundamental analyst. I’d rather look at hard economic data than price movement in the past to make my investment decisions, but acknowledge that there are a significant number of technical analysts, and if they are all selling at the same time, it is bound to have some effect on the market.

CBOT Revolt

Have you ever flipped by the financial channels and seen people in horribly patterned, bright colored jackets standing in a crowd, all screaming at the same time? That is the Chicago Board of Trade. This is where commodity trades are executed. Commodities are things like orange juice, wheat and pork bellies. Treasury bonds (medium terms loans to the US government) are traded here, too.

If you are a farmer and want to lock the price of your crop or livestock before going to market, this is where you go.

In any event, commodity prices are falling, and the number of traders on the floor of the CBOT is very low right now. CNBC reporter Rick Santelli, a bright, animated reporter, gives his analysis, primarily on the direction of interest rates, live from the CBOT.

A group of traders yelling at the CBOT is only news because the market is slow and they are yelling at, not near the cameras.

What’s Going On?

Okay, we see that perhaps the current situation is being reported just a bit more pessimistically than need be. A reasonable person looking at these data could conclude that the 52% market drop, broken lows and CBOT revolt had, as all things do, another side.

Has the market indicted Obama? Well, certainly, the market has gone down.

Many have said that this downturn is a response to the components of the stimulus and bank rescue programs. That may be true, but there is always a myriad of reasons that markets move.

· Uncertainty

The stock market, as we said before, is viewed by fundamental analysts as a measurement of price. When an income stream is calculated from which a current value is determined, this process involves looking forward.

When data are insufficient to project this income stream, there is a dearth of buyers, and market prices drop.

The details of the bank bailout plan have not been promulgated, and buyers are on the sidelines waiting for the details.

· Conservatism

Having participated in banking for most of my life, I have observed a significant level of conservatism, particularly in investment banking. This is reasonable, considering that generally, more conservative party platforms have promoted

1. Lower tax rates

2. Market competition

3. Free and fair trade

Consequently, there is likely to be a negative bias toward a policy that states that tax rates are likely to be raised for the wealthiest, with possible nationalization of the banking system and “buy American” provisions in the stimulus package.

· Economic Reality

This economic downturn, resulting from lax lending standards coupled with those loans having been securitized and sold throughout the US and the world, is a complex problem years in the making. The solutions will be neither immediate nor simple, and the results of efforts to stabilize the banking system and stimulate the economy are not predictable in the immediate future.

However, as positive sentiment grows to unsustainable proportions in the upswing of an economic cycle, so does negative sentiment stretch to unreasonably gloomy proportions in the trough of an economic cycle.

The economic problems in the US are serious and of very significant proportion. The current fixation however is on the negative interpretation of data. Many economists, however, see that very negativity as a sign that we are in the earliest states of recovery. http://www.cnbc.com/id/29284507

Further, we have recent and relevant data to support the fact that a large, targeted stimulus package is the correct economic response to a situation similar to ours. As some of you may remember, Japan suffered a similar problem in the 1990’s, where bad loans were held on their books without recognizing their current value, and the country suffered a decade long period of stagnation.

The current Treasury Secretary has a significant background in both domestic and international economics, and appears to understand that doing nothing is more likely to replicate the Japanese result. Consequently, when reviewing the package, it is predictable that some will prefer modifications to the program, but most reputable economists agree that stimulus is likely to stem the spiral of economic downturn.

It is possible that the actions taken by the Treasury and Federal Reserve Bank will work. That side of the story has reports that are few and far between.