Dow Tops 14,000 on Hope, Not Facts

Two weeks ago, the stock market was wandering around with a distinct heaviness. The only direction to go, it seemed, was down. Then, the Fed waved its magic interest rate wand, and suddenly, the bull run was on. Earlier this week, the Dow closed above 14,000 for the first time ever, and the NASDAQ hit an all-time high. Yet, nothing has changed but investors’ expectations and the calendar.

The subprime mess that dragged so many stocks lower hasn’t gone away. Citi is going to report a $3.3 billion drop in net income, UBS is out CHF4 billion, and reports on 3rd quarter profitability when earnings season kicks in will be sorry. Oil is still in the $80 a barrel range. There is still a war in Iraq-Nam, and another in Afghanistan. America’s trade deficit is growing ever bigger. The dollar is down and going lower.

However, there is a joy on Wall Street that is detached from all of this. The Fed’s cut has put in place the one thing every investment banker loves, the one-way bet. Under these circumstances, the Fed cannot raise rates. It would violate the laws of economics to do so. That means that the US interest rates have to come down, if not right now, then at the next Fed meeting, or the next, or the next. But the move will be for lower rates. If one can hold on for a quarter or two, the inevitable will happen.

Lower interest rates, of course, spur economic activity, and that’s always good for the stock market. Inflation is the one thing that could interfere in this rosy scenario, but Fed Chairman Ben Bernanke has more or less admitted that the credit crunch is a bigger concern. So, prices for equity will be higher in the spring than they are now. That means it’s time to buy, or so says the conventional Wall Street wisdom.

Another important factor kicked in on Monday. It was October, and that means the third quarter had ended and the fourth had begun. Traders and speculators are positioning themselves now to make up for a poor summer by trying to squeeze some profits out of the market before the year ends. Bonuses are riding on the result. With a one-way bet in place, only a fool would stay in cash. The market, as this journal often says, is driven not by supply and demand but by greed and fear. In the last fortnight, greed overcame fear to drive the Dow up. This, too, shall pass.

© Copyright 2007 by The Kensington Review, Jeff Myhre, PhD, Editor. No part of this publication may be reproduced without written consent. Produced using Fedora Linux.

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