Legends of the Fall

phcpbl

Tim Knight

The market's rise over the past 4 months has been spectacular, and I think it might have more to go. But let's give this a bit of historical context.

Below is the Dow Jones 30 shown during a different bear market rally. In this instance, the market went down 51% and then went up 52% (I will step in here and gently remind folks that a 52% gain after a 51% fall doesn't bring you back to a profit, since you are staring with a damaged base).



This is very similar to what we've seen recently, although in spite of the market's strength, it could still climb some more and be within the bounds of this historical parallel. We've gone up "only" about 41% so far, so it's entirely possible we could claw our way back to the psychologically-meaningful 10,000 on the Dow (and, boy, wouldn't that make headlines!) I've tinted in green the climb we've had so far, and I've tinted in magenta the "extra" portion we might climb given the historical analog.



We don't know the future, but we do know the past. Below is the subsequent market action following the example on top. I have, once again, tinted in green the countertrend rally. As you can see, the 52% rise didn't matter that much once all was said and done.



This isn't to say it'll happen again. Based on what the past two weeks have done to my sense of certainty, I figure we could be out Dow 20,000 by next Friday and not surprise anyone.

But the point is to understand that big percentage gains over short amounts of time don't necessarily hold up. Thus ends the sermon, and thus ends these two wretched weeks. I'm going to now go and get as far away from a chart as my feet will carry me.

**********

Lessons Learned

This is going to sound like another one of my pissy little rants, but it's not. I truly believe what the world has learned from the past six months is as follows:

    * Investment banks can give away whatever bonuses and compensation suits them;
    * The same banks can take whatever risks like that without really taking any risk, since the taxpayer will be given the bill;
    * At the same time, they will be entitled to keep all the profits (many of them tax-free and offshore);
    * There is no reason for anyone to get spooked about punitive taxes, as AIG was. The handful of executives that blinked and gave their bonuses back were suckers. The others wisely waited for the American attention to move back to Britney Spears and kept their bonuses;
    * The United States Government views it as their business to prop up equity markets, since so much of the voting public has a stake in them;
    * The SEC and other regulatory agencies will do everything in their power to help the long side and damage the short side of the markets;
    * As long as the average American has a working color television, they're not going to cause any real trouble, at least not for more than a day or two.

This is the reason I gave up on being a Libertarian years ago - - - the idea that most people are sensible and self-reliant is foolish. Likewise, I was foolish to think the playing field was even.

It's going to take a long time - - many years - - before the U.S. house of cards collapses. China and the U.S. are in a new cold war (this one, financial), and the same rule of Mutually Assured Destruction applies.

Until things blow up, I think the above lessons are going to create a very meaningful floor to any downdrafts. Yes, I still think at some point some softness will take place, but my cynicism - which was already pretty deep - has quintupled since I've finally gotten the above facts through my very thick skull.

The public is easily fooled. Washington knows this. Wall Street knows this. Thinking otherwise and trying to fade a rigged system is a good way to lose money. To make money, one has to understand the snowing is going to continue until it is simply impossible to keep the charade going.

So shame on me for thinking people had learned anything. They haven't, and they won't. My bad. I wish I had known better and acted accordingly. I feel really naive for behaving otherwise.

slcgh

NewMember

What a sour grape!  To admit wrong IS hard, isn't it?

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