There is a certain school of thought — and I use that word loosely — that seemingly tries to tie each twitch of the market, every noisy jag up or down — to some broader issue. Partisan politics, economics, technology, and of course, presidential elections becomes fodder for this school of thought rationalization. Flip on FinTV at random, and you will often see someone explaining the most recent market moves via whatever their favorite pet issue of the moment is. By pure coincidence, the market is doing well because their issue is improving, or not coincidentally, doing poorly due to some entity’s failure to recognize the significance of their peeve, and taking action NOW!, thereby tanking the Dow.

The area is rife with rationalization, bad analyses and cognitive errors. I studiously try my best to avoid it as a form of commentary, and it certainly has no place in any investment thesis. It is more often just a revealing Rorschach Inkbot Tests.

That said, I mentioned something yesterday which perhaps I could expand upon further: The strong September rally as perhaps a response to developments in Syria, or at the Fed, or elsewhere. At the risk of my own confirmation bias, I want to explore some explanations as to what might be going on.

Consider this an exercise in rationalization:

Syria: The war weary American public has no appetite for another Middle Eastern adventure. Kerry’s gaffe — an off the cuff comment about disarming Syria’s chemical weapons — may have accidentally averted war. Is this rally a peace dividend? Is the market rallying on the possibility that the American consumer will not see sentiment crushed, that the Treasury will not have to spend another few 100 billion dollars half way around the world, that we won’t have another 50,000 wounded warriors returning home to a less productive lifetime of medical care and cost?

• Federal Reserve Chair: I refused to vote for Obama this election because of his relationship with Larry Summers (and to a lesser degree, Tim Geithner). His economic naiveté is the only explanation I could think of for Summers as Fed Cheif. But key Democratic Senators are not enthused, with pockets of opposition developed. My favorite explanation/rationalization/confirmation bias/wishful thinking is that the market is starting to discount the increasing liklihood that it will not be Summers. It may not be Yellen, but so long as its not Summers, both the equity NAD the bond markets are pleased.

• Profits: Is it possible that the profit picture is not nearly as gloomy as the doomsters have portrayed it? After 10 consecutive quarters of forecasting the imminent collapse of peak profits, have they seen their credibility dinged up a bit?

As I so often say, I don’t know why the market does what it does. Most of the day to day action is far too noisy and driven by way too many inputs to be seriously explained by any one thing.

And while we know markets act as discounting mechanisms, often imperfectly, subject to the extremes of human emotions and cognitive errors, there are inputs that move the needle.

But despite these issues, markets often gets the broad strokes right. So we have a market up everyday in September (ending today? next week?) and up huge this week — and still disliked.

I wonder what the September rally actually means . . .

 

UPDATE:  9/12/13 2:00pm

Some interesting news regarding Summers:

 

John Cornyn, Leading GOP Senator, Would Oppose Larry Summers Nomination

Summers Faces Key ‘No’ Votes if Picked for Fed
Three Senate Democrats Oppose Bid, Setting Stage for Razor-Thin Vote
 

 

Previously:
Markets Are Rorschach Inkbot Tests (March 2nd, 2009)

Category: Cognitive Foibles, Current Affairs, Markets, War/Defense

Please use the comments to demonstrate your own ignorance, unfamiliarity with empirical data and lack of respect for scientific knowledge. Be sure to create straw men and argue against things I have neither said nor implied. If you could repeat previously discredited memes or steer the conversation into irrelevant, off topic discussions, it would be appreciated. Lastly, kindly forgo all civility in your discourse . . . you are, after all, anonymous.

21 Responses to “Is the Market Rallying on Syria or Summers?”

  1. theexpertisin says:

    One has to reluctantly give creds to our adversary, Vlad Putin, for playing our man in the White House like a Stradivarius on the Syrian issue.

    • ZedLoch says:

      I read his op-ed this morning, and I wonder: who is playing whom?

      • DeDude says:

        Exactly, I hope this is a coordinated “good superpower – bad superpower” play to get where they both want to go. If not then it is US forcing Putin to take a stand he would never have taken without the threat of military intervention. The fact that he is so bitterly attacking the concept of our intervention would suggest that later is more likely what happened. The outcome of all these dangerous weapons being secured and kept out of the hands of the more dangerous parts of the Syrian opposition is clearly a win-win for both superpowers. And that is an outcome we could never have bombed ourselves into, nor would Assad ever have given us that outcome without the alternative being that we bombed him out of power.

    • i_rookie says:

      I wouldn’t be so sure of who played whom

      • DeDude says:

        Yes it is amazing how often peoples ideological blinders prevent them from seeing (or admitting) the truth right in front of their nose. Obama/Kerry has played this one absolutely brilliantly.

      • Chad says:

        If Obama’s administration did this on purpose it is quite impressive. If not, I don’t care. At least we have a chance to avoid this Syrian mess.

  2. Global Eyes says:

    Syria and Summers are two good reasons for the market to decline. So long as Federal expenditures continue to rise, expect Mr Market to do likewise.

  3. mle detroit says:

    I think it’s simply that the grown-ups are back from vacation.

  4. ironman says:

    If it helps, there is some very positive news coming out right now regarding the state of the U.S. economy, which a large percentage of people in the market are being somewhat slow to digest.

    Another plus is that the uncertaintly related to the future of QE is dissipating (sorry, have to point here and here again….) Look at the chart in the first of these links – changes in the year-over-year growth rate of stock prices have a very quantum-like characteristic – they periodically move from one energy state to another. In this case however, energy states are the fundamental expectations for changes in the growth rate of the sustainable portion of future earnings (aka “future dividends”), which is the primary driver of stock prices.

    The whole QE quandary this summer has split investors between the future for stock prices associated with the fundamental expectations at two specific points of time: 2013-Q3 (the current quarter, in which the Fed would act sooner to taper its QE programs) and 2014-Q1 (a more distant future quarter, one that would have a positive impact on stock prices, and the quarter upon which investors were fully focused with the belief that the Fed would wait until then to begin tapering its QE efforts prior to Bernanke’s infamous press conference on 19 June 2013).

    Now, let’s put all these things together. The improving economic situation in the U.S. economy says the Fed will pull its tapering trigger sooner rather than later. With that being the case, there’s little advantage for investors to continue focusing any part of their forward-looking attention on 2013-Q3 in making their buy/sell/hold decisions, and with less than a few weeks left to go in the quarter, the time in which the expectations associated with it could be expected to affect stock prices is running out.

    Since they’re already partially focused on 2014-Q1, it makes sense that the full focus of investors will return to the expectations associated with this future quarter in making their investment decisions, which fortunately, are positive. So we have the major uncertainty related to QE going away, as a more positive economic situation is developing, with the advantage of also having positive expectations for a significant point of time in the future.

    Investors might hate it, seeing as all the alternative futures are considerably more negative, which means that any disruptive event that forces investors to shift their focus to other quarters whose future we can see at this time would coincide with a crash, but what has developed in the market is really the best possible outcome that could have happened given the current circumstances.

    Note that we really haven’t mentioned Syria in all this – we don’t think it’s been much of a factor, as we don’t see the market reacting to events related to it in real-time as they’ve unfolded during daily trading sessions, which it would if it were. As best as we can tell, it’s just part of the typical level of noise that’s always present in the market.

  5. Gonzop says:

    ” His economic naiveté is the only explanation I could think of for Summers ”

    euphemism – my buddy at Fed New York went to the white house to brief Summers on shadow banking in 2009. He (MIT trained and the whole shabang) was appalled at such a poor level of understand from Summers

    it is beyond belief that Obama could not think of a better candidate i.e. anybody at this point is better suited, and less dangerous.

  6. Iamthe50percent says:

    One day last year I heard an MSM “journalist” cite authoritatively why the market went down that day. The next day he cited the EXACT SAME REASON for the market going UP on THAT day.

    I pay no attention to this instant pundits. If they knew what made the market go up and down, why aren’t they billionaires?

  7. Non Sequor says:

    Re: peak profits

    Should peak profits even be a concern for investors with sufficiently broad holdings? Apple had a highly profitable niche which Samsung has been moving in on. That’s negative for Apple’s earnings but positive for Samsung’s revenue and earnings. Shouldn’t in general decline in profit margins among incumbents create green shoots for new entrants into markets (or expansions into adjacent markets by existing players).

    Just make sure you aren’t sitting on a portfolio of nothing but incumbents.

    • Smokefoot says:

      Competition lowers the profit margins of both competitors. Barriers to entry can help maintain profit margins by keeping competitors out.

      How to explain the current record high profit margins? Are barriers to entry especially high right now? The financial sector lost a lot of competition 5 years ago, which helps them maintain high profits, but what about other sectors?

      ~~~

      BR: I haven’t the foggiest what you are talking about . . .

  8. jmay says:

    “A certain school of thought”? Don’t you mean the entire financial media?

  9. Angryman1 says:

    IMO, a new credit/debt bubble is at the “end phase” of the building part and entering the wholesale into the market.

    It first shows itself in asset markets. This one went into stocks and money markets starting this May as seen by the steepening yield curve. I suspect the Government data machines going to have some surprisingly good reports coming this fall……………

  10. Non Sequor says:

    “Another plus is that the uncertaintly related to the future of QE is dissipating (sorry, have to point here and here again….) Look at the chart in the first of these links – changes in the year-over-year growth rate of stock prices have a very quantum-like characteristic – they periodically move from one energy state to another. In this case however, energy states are the fundamental expectations for changes in the growth rate of the sustainable portion of future earnings (aka “future dividends”), which is the primary driver of stock prices.”

    Ironman, please don’t confuse the happenstance of market ephemera with something that is a mathematical element of the structure of our reality. Be mindful of the difference between shapes in clouds and the structure of electron clouds!

  11. 4whatitsworth says:

    Is there really any doubt that if the Syria situation moves toward war that the stock market will move down?

    Sure there are other factors as well however I believe that the smart money would be on Putin doing what he thinks is the right thing regardless of Obama’s position. Let’s all hope we can agree on what the right thing is.

    BTW I just saw this..

    http://www.businessinsider.com/why-the-russian-syria-deal-cant-be-accepted-2013-9

  12. Miguel Palacios says:

    http://www.bloomberg.com/news/2013-09-11/stan-druckenmiller-says-fed-exit-would-be-big-deal-for-markets.html

    If there is anyone worth listening too about future direction of markets its Stanley Druckenmiller..

  13. neddyj says:

    The reason the market keeps going up is because the money increasingly has nowhere else to go (sad but true). It’s coming out of bonds. It’s not necessarily a ‘rotation’ into stocks – but when people who had long term bonds or bond funds and start to see principal eroding they sell. Money markets are still zero…and investor money is rarely patient. So it keeps flowing into equities because that trade has been working. And it will continue to – until it doesn’t. And I would imagine the end of the gravy train will be ugly. So every time the market has a ‘reason’ to go down, it does temporarily until the money from the sidelines / money market chases it back up – and those who think a bull market has to climb a ‘wall of worry’ believe that’s exactly what they’re seeing. Barry always harps on the fact that this is such a hated rally that it is bound to continue until it is loved. I agree that it’s a hated rally, but I think that it will stop when one of these bad news events is enough to tip the scales. What concerns me when that happens is that over the last 5-10 years lots of money has gone into ETFs and has been a chief reason why this rally has occurred on such low volume. If buyers turn to sellers and sell in volume – who will be there with the catcher’s mitt to stop the slide? Could higher interest rates cause the end? Lousy earnings? Higher taxes? This thing ain’t bulletproof. Those that think it is are being naive. I’m no doomsayer or chicken little – major contributors to this rally have been that the market had a very low starting point and the world didn’t end, earnings came back as Barry has pointed out numerous times (but at least some of those earnings were reappearing bank earnings due to a change to the accounting rules), and free money. Well we’re not starting at a low right now, those bank earnings that reappeared cannot magically multiply, and the free money train is coming to an end. The stock market is now waiting for what Hilsenrath calls a ‘dovish taper’ – the bond market doesn’t seem to care. There’s been one hell of a rush to the exits there. A taper is a trend towards the end of free money. The stock market may party a little longer because the tapering may take a few years….but will everyone hold onto their stocks until the music stops? Or will they begin to sell because they know the music is going to stop a few months/years down the road.

    Did QE work? For stock prices it did. For housing prices it did. But it’s nothing more than a drug, and when that drug is taken away – both stock prices and housing prices will likely drop. What happened to mortgage apps this summer simply because the Fed spoke about tapering? I wonder what that will do to housing prices over the next 6 months….I wonder what falling housing prices will do to stock prices…I wonder what falling stock prices will do to the economy…

  14. peterkrause says:

    I am taking meds to counteract my irritation at the edit-free world we all live in, but I can’t help noticing typos and other grammar mines, and some are keepers. Equity NAD. In my longstanding quest to be always 95% invested most of the time (still wanting) I work hard at growing a pair, of equity NADS. Thank you Barry.