Marketwatch: “U.S. stocks toppled again Wednesday, continuing a manic trend that has had the Dow industrials swinging 400 points each day this week.”
Why did this happen? Here’s one answer.
The economy is like a sick patient. Yesterday, the markets worried whether Dr. Ben would renew their prescription. When he said he would, at least re the medicine of zero interest rates, they were elated. He even said he’d renew the prescription for two more years! Hooray…big rally!
Then today, the markets got out of bed and said: “Wait a minute…Dr. Ben just said I was going to be really sick for another two whole years…oh no!…big selloff!”
Dr. Ben also said that even though he had stronger medicine (another round of quantitative easing) in his black bag, in his opinion, or probably more accurately in the opinion of the medical practice he runs, we didn’t need it.
Enter Snidely Whiplash…
I don’t know what the hell is going on either, so all we can do is speculate on the market volatility. My story would go:
1)Bernanke doesn’t announce QE3 on Tuesday afternoon, Dow tumbles 205 points.
2)A huge, algorithmic based margin call starts an emotional flurry of purchasing. Remember, Dow didn’t just gain 400 points, but it was also a 600 point swing in that last hour or so.
3)People wake up the next day to realize there was nothing fundamentally different about the economy between Bernanke’s statement and market close and decide selling off is the way to go because double-dip is now a probability.
It’s amazing how emotionally charged trading is right now. Bernanke truly is the most important person on the planet right now, and his words and Fed action (inaction) consolidate the gains and losses of an entire year into a few hours.
We will have to wait and see, but just on fundamentals, considering projected growth with no stimulus, isn’t the market overpriced? Am I missing something?
My take on the stock market: I’m of the mind that the Dow should be around 8,000 rather than in the 10,000s.
Why? Price/earning ratios. I’ve read that the long-term historical average has been around 15. (Feel free to correct me on this point.)
Last I checked, current P/Es of major stocks are still weighing in at well above 15.
In particular, I see a great deal of weakness in the social media sphere. Take, for example, LinkedIn. Its share price has dropped quite a bit since its IPO.
My understanding is that LinkedIn makes most of its money from corporate headhunters, who pay to have access to the site. After all, they might as well fish where the fish are.
Then there’s advertising. I’d surmise that’s in second place behind revenues from the headhunters.
As for third place, I’m guessing that would be membership fees. I’m of the mind that only a small percentage of LinkedIn’s members actually pay to use the site. And, if LinkedIn started charging fees to everyone, a lot of the user base would vanish.
Note: Don’t take the above as investment advice. It’s just Martha, spouting off on a blog.