I felt it important to send this out before Obama addresses the nation this afternoon. I will try to be brief but the information requires a bit of chronology. We’ll skip the correlating history story even though it is about the ship the “Mary Celeste” and how she mysteriously disappeared into the pantheon of myth and folklore much like the gossipmongers of yesterday peered into the abyss of misinformation to create fear.
Rumors of secret meetings of the victorious Democrats began to swirl as the Dow took a dive. These meetings betold a story of plans for dramatic changes – freezing 401(k)’s, plans to tax your 401(k), etc. Then the real travesty occurred. This rumor morphed into government controlled, mandated retirement accounts. Conspiracists saw the additional mandate of being restricted to buying US Treasuries as a means to funding ballooning debt. The meltdown in the market looked like my grandmother’s cheese sandwich.
I’m getting to how the story was resurrected. Let’s tackle the why first. We are in the midst of getting a new President who is presumed to have new policies. The economy is in severe distress. Since the media has no more election to sell they are forced to wildly speculate that some of the proposals will be sweeping New Deal style policies. Since we have no details, nor specific proposals, this makes for fertile rumor mongering ground. And the Dow delivered on the rumors.
The spark to all of this – as far as I can tell (with the help of some savvy friends) – the basis was probably the testimony in a House sub-committee hearing several weeks ago. Some of the proposals suggested ending tax breaks for 401(k)’s and other sweeping new government plans. There was very little press coverage at the time (remember the election wasn’t over) and as far as research bears, no vote was taken.
How did this turn into harried rumors? Reuters revisited the hearing and CNBC picked it right up. Rather than waste the time I have with you, here’s the link: http://www.cnbc.com//id/27558644. Essentially, the resurfacing of a stale story sank the Dow. Unfortunately, what does get lost is real news like state and local governments talking about cutbacks and tax hikes in the face of imploding revenues. Herein lies a truly potential counter to confound turning the economy.
The 900 level in the S/P is important. The bull’s next defense is 880. Should that barrier be tested the likelihood of a retest rises sharply. 1000 points in two days makes it tough to identify the resistance. Perhaps 8820 in the Dow and 820 in the S/P
Market reaction to Obama will be watched closely. If you’ve planned your work, then work your plan. Opportunities abound.
http://fa.ml.com/Rachel_McLaughlin
Sources: Art Cashin-UBS, CNBC, Financial Times, Economist. This material is not intended to be relied upon as a forecast, research or investment advice, and is not a recommendation, offer or solicitation to buy or sell any securities or to adopt any investment strategy. The opinions expressed are as of November 7, 2008, and may change as subsequent conditions vary. The information and opinions contained in this material are derived from proprietary and non-proprietary sources deemed by Merrill Lynch to be reliable, are not necessarily all-inclusive and are not guaranteed as to accuracy. Past performance is no guarantee of future results. There is no guarantee that any forecasts made will come to pass. Reliance upon information in this material is at the sole discretion of the reader. Investment involves risks. International investing involves additional risks, including risks related to foreign currency, limited liquidity, less government regulation and the possibility of substantial volatility due to adverse political, economic or other developments. The two main risks related to fixed income investing are interest rate risk and credit risk. Typically, when interest rates rise, there is a corresponding decline in the market value of bonds. Credit risk refers to the possibility that the issuer of the bond will not be able to make principal and interest payments. Index performance is shown for illustrative purposes only. There may be less information available on the financial condition of issuers of municipal securities than for public corporations. The market for municipal bonds may be less liquid than for taxable bonds. A portion of the income may be taxable. Some investors may be subject to the Alternative Minimum Tax (AMT). You cannot invest directly in an index. Discuss your investment needs with your financial professional before investing
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