by John M. Curtis
(310) 204-8700

Copyright Aug 17, 2009
All Rights Reserved.

      Wall Street’s downward roller coaster resumed operation Monday, with the Dow Jones Industrial Average plummeting 186 points to 9,135, losing about 2.0%.  Only Wall Street concocts the most child-like excuses blaming the sell-off on anemic consumer spending.  Consumer spending was no different, if not worse, in March when the Dow began its ascent from oblivion, climbing from a low of 6,500 to its recent high Aug. 6 of 9,582.  Since then, the market has deteriorated more than 450 points but not for the feeble reasons given by Wall Street PR experts.  After gaining 45%, sell signals have been beamed from Manhattan’s market maker Goldman Sachs, giving the nation’s biggest funds and investment houses a chance to take profits.  Between now and Labor Day, the market could shed another 500-1,000 points, paving the way for another Fall rally, possibly taking the Dow to 11,000 by year’s end.

                Earnings’ season produced substantial gains, spelling, at least to some economists, a possible end to the recession.  Former Federal Reserve Board Chairman Alan Greenspan was already on record telling ABC New Aug. 3 that the recession was over, expecting a 2.5% growth rate in the third quarter.  Despite that good macroeconomic news, Wall Streets works on profit and loss, not whether future indicators predict increased growth.  “The economics obviously don’t support where we’ve been,” said Joe Saluzzi, co-head of equity trading at Themis LLC, predicting the sell-off would continue.  Wall Street doesn’t operate on the same theory as other economics, looking to buy on dips and sell on peaks.  Today’s sell-off says less about future consumer spending and more about how fund manages take profits when the time is right.

            Some analysts, especially New York University economist and proverbial bear Nouriel Rubini, predicted a steep market sell-off to match real prospects for economic growth.  But since the market’s spectacular rise from its March lows, Roubini has predicted the sell-off would take the Dow down to around 5,000.  His forecasts were based on scientifically proven economic models, showing, if nothing else, the dislocation between economics and Wall Street.  Free market principles, or the organic nature of the stock market, don’t taken into account powerful programmed trading where the nation’s biggest funds and brokerage house heed seriously buy or sell signals.  Blaming the latest sell-off on consumer sentiment doesn’t take into account ongoing consumer weakness while the market rocketed up to recent highs.  After a 45% run-up, traders simply decided to take profits.

            Profit-taking plays havoc with long-term investors, especially popular 401 (k) investments, where investors watch retirement portfolios drop in market downturns by as much a 50%.  Meanwhile, traders take profits at the expense of long-term investors, driving the market down when it’s time to take profits.  Concerns about consumer spending are real, since 70% of Gross Domestic Product is linked to retail purchases.  President Barack Obama’s $789 billion economic stimulus programs hasn’t seemed to boost consumer spending, still reeling from the stock market and real estate meltdowns.  All economic indicators point toward growing unemployment, more default and foreclosure activity, lower real estate prices and weak consumer spending.  With tightened lending standards, it’s harder for consumers to qualify for the loans needed to boost consumer spending.

            Commodity prices, including the value of a dollar, seem to move with the stock market.  When the market drops, commodity prices also take a hit, with traders predicting lowered demand and slowed future spending.  Commodity prices, especially  gold, silver and oil, had been rising with economists like Greenspan predicting the end of the current recession.  Despite today’s bad news about consumer spending, the market could pick up when traders decide share prices are priced to buy.  Commercial banks and real estate lenders will have to make more cash available to fuel the next consumer spending binge.  So far, consumers have tightened their belts, creating one of strongest savings rates in recent history but adding little to GDP.  Keeping the stock market on the up-swing is essential to consumer spending, as publicly traded companies generate enough cash to add jobs.

            Wall Street’s excuse du jour for the current sell-off should end when share prices get sufficiently discounted.  Regardless of consumer spending, the stock market should continue its upward trend when major funds and investment houses decide it's time to buy.  Long-term investors always get the short end of the stick, staying at the mercy of programmed trading that seizes buying and selling opportunities.  If Q-3 finds the economy back in the black, it’s going to be difficult to stop traders from taking longer positions, especially optimistic projections about the market’s direction by year’s end.  While consumer spending will likely remain flat, more bailout funds should help accelerate the pace of economic recovery.  Whether it’s cash from real estate or commercial credit, consumers will have to have the resources needed to help fuel the next consumer spending boom.

 John M. Curtis writes politically neutral commentary analyzing spin in national and global news.  He's editor of OnlineColumnist.com and author of Dodging The Bullet and Operation Charisma.