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The Knee-jerks Have It...Barely - Money Matters for 12/13/05
Alan Greenspan will be remembered for a lot of things, but two words - irrational exuberance - will follow his name through history.
Greenspan used those words in a speech on central banking before the American Enterprise Institute on December 5, 1996. After he spoke them, markets in Japan and Hong Kong fell sharply and other markets followed the downward trend the next day. Even though his words were couched in a seemingly harmless and rhetorical question, they proved powerfully moving and from thence and forever will be linked to wild speculation in the stock markets, as it was in the 1999-2000 dotcom boom and subsequent bust. (for more information on the term, irrational exuberance, see here.)
Why do I bring this up? Because after Greenspan and his Fed buddies hiked interest rates another 1/4 point today, to 4 1/4%, the exuberance displayed on Wall Street was initially exuberant, then moderated and may be, upon further review, eventually, irrational.
It wasn't the interest rate increase that caused the sudden spike in stocks - that was expected. But in the accompanying statement, the Fed changed some language, indicating that the run of rate increases - this was #13 in a row - was nearing an end.
In their statement, the Fed governors removed the word "accommodative" and added the following language:
"The committee judges that some further measured policy firming is likely to be needed to keep the risks to the attainment of both sustainable economic growth and price stability roughly in balance."
Essentially, the Fed is signaling that their rate increases are nearly at an end, but it doesn't take a rocket scientist - or a Wall Street economist - to figure that out. Your average New York taxi driver would probably be able to tell you that the Fed won't increase rates much more as that might lead to stagnation or even recession.
So, the knee-jerkers on the Street got busy as soon as the statement hit the wires, bumping the Dow by as much as 90 points before settling back to close a "measured" 55.95 points to the good.
Maybe even more interesting is that after the initial bounce, traders were downbeat into the close and the Nasdaq closed only four points on the upside.
All of this speculation and excitement over something widely expected smacks of the irrational side of Wall Street and demonstrates that initial reactions are often in the wrong direction. Perhaps after digesting the Fed news, investors took a more sober look at the the November retail sales figures which were released earlier in the day and reasoned that they probably should have had more of an impact and maybe will tomorrow and on subsequent trading days.
Those November retail figures were not very encouraging to the Wall-Marts, Sears and Targets of the world, showing an increase of 0.3% for the month just past. Worse, excluding auto sales, which were up a healthy 2.8%, the number was -0.3%, a real, verifiable downer for US merchants and the first real indication of how the holiday shopping season is actually shaping up.
If this indication is any kind of guide, retailers should be happy with 3-4% increases in same store sales over 2004. Anything less than that will be considered a failure, and Wall Street will reflect that sentiment.
So, in my 3-foot-fall view of the US economy in December, the first foot was the spike in oil and natural gas prices which continues unabated (crude closed above $61 again today and natural gas futures ended at an all-time high of $15.29). The second foot fell softly and actually didn't even hit the ground as the Fed delivered a little bit of Christmas cheer to an otherwise skittish market with their contrived slip of the tongue.
The third foot-fall will come when there's some definitive numbers on the holiday shopping season and that may not come until late in the month or even early in January. The market is going to have to make up its own mind for the next couple of weeks and that's not going to be very easy.
Take, for example, the conflicting advance-decline and new highs-lows figures below. New lows on the NYSE nearly equaled the new highs, while the A-D on the Nasdaq was negative. There's some churning going on, and tomorrow ought to be a decisive day after just about a week's worth of hand-wringing and tight-range trading.
Dow Jones: +55.95; 10,823.72 close
NYSE Advancers: 1816
Nasdaq Advancers: 1448
NYSE New Highs: 179
Nasdaq New Highs: 115
Gold: -7.40; 524.10 close
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