Monday, March 2, 2009

No One Volunteers to Catch a Falling Knife

So the market dropped 4.7% today on what seemed to be a relatively slow news day. Warren Buffet wrote that the economy was likely to be weak for 2009 and perhaps 2010 but he continued to be optimistic long term. The EU refused to bail out Eastern Europe or car companies but this should not have been a shock to anyone becuase the EU itself does not have the $200B that was being asked. The US government continued to prop up AIG despite the largest loss in American history but this is widely acknowledged as necessary. Keeping AIG alive is a convenient way for the government to insure $300 billion of bad assets ala their C and BAC plans through the CDS that AIG is short. There were economic data on consumer spending and the ISM manufacturing index but these numbers were inconclusive, you could cheer or fear them.

I think the markets went lower because generally investor sentiment is darkening. 2009 is going to be worse than people expected. The recovery may not come till late 2010 and then could still be anemic. I think that the government's lack of consistency has eroded their credibility to the point where I think that people are less inclined to rally the markets on new announcements of government programs than the have been in the past. There has been a lot of thought that when a rally came it would be violent because of all the cash on the sidelines. I believed this theory myself but I think that it might have been overstated. The cost of coming in early has been very very high. Look at Buffet, his call to buy American on October 16th was 25% ago in S&P terms. If Warren Buffet can be wrong by 25%, how confident can the average investor be about calling the bottom?

I think that what this means is that people won't attempt to front run the recovery. They'll wait to see it in the data. That could be a long time coming.

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