Wall Street Roars Back Again

by John M. Curtis
(310) 204-8700

Copyright Sept. 4, 2010
All Rights Reserved.                                             

             Defying all the experts, Wall Street started September on the right foot, with all major averages posting massive gains.  With the Dow Jones Industrial Average rocketing up 255 points or 2.5 %, stunning otherwise pessimistic bears, whose predictions of a double-dip recession continue to dog the market.  Recent weak real estate and consumer spending ostensibly sent the market into a tailspin in late August.  There’s nothing accounting for any change in the economic outlook in September other that Wall Street’s biggest mutual, hedge and private equity funds deciding to buy back into the market.  When the funds sell off, like they did in late August, there’s always a point where they buy back in.  Today was the day.  While everyone wants an excuse, Wall Street’s market makers like Goldman Sachs don’t pay attention to economic news:  They focus purely on profit-and-loss.

            Justifications for market movements typically originate from publicists working inside the industry, using various news evemts to justify buying and selling opportunities.  Today’s excuse came from the Institute for Supply Management showing manufacturing activity rising.  Rises in manufacturing signal possible improvement in the employment situation while companies add jobs to accommodate growing demand.  What isn’t said is that rising stock markets fuel the cash reserves needed by publicly traded companies for hiring, not expected changes in manufacturing trends.  When stock markets rise, cash accounts swell, enabling companies to begin expanding payrolls.  More hiring helps the consumer economy by putting more cash into the ranks of the previously unemployed, giving workers resources to fuel the economy.  Consumer spending accounts for about two-thirds of Gross Domestic Product.

            When the Q-3 GDP report in August showed the nation slowing down from Q-2’s 2.6% to 1.4%, Wall Street began short-selling, accelerating the latest market decline.  President Barack Obama’s recent economic reform bill did nothing to reign in short sellers like hedge and private equity funds, currently not regulated by the Security and Exchange Commission.  When hedge and private equity funds go short, they accelerate profit selling among mutual funds, causing the market to nosedive.  Obama and his Treasury Secretary Tim Geither, a former Goldman Sachs employee, have more work to do to stop the current runaway short-selling that keeps markets rising.  Without rising markets, publicly traded companies can’t count on enough cash to expand payrolls, finally reducing the unemployment rate.  Growing the stock market is the key to lowering today’s high unemployment rate.

            Manufacturing can only rise when enough consumer demand requires factories to ramp up production and personnel.  “If manufacturers ramp up . . . it’s going to require hiring,” said Daniel Penrod, senior analyst at the California Credit Union League.  “Getting closer to that threshold (of hiring) is vital to the economy,” underscoring the necessity of job creation to economic recovery.  No amount of government stimulus or bailout can substitute for private sector job creation, heavily dependent on rising stock markets.  While Penrod attributes the market rally to manufacturing growth, Wall Street know when to buy and when to sell.  Market-makers like Goldman Sachs coordinate the buying and selling opportunities for the nation’s biggest funds.  It’s simply not possible for everyone to be on the same buying or selling page without guidance from some organizing source.

            Looking at the big picture, today’s weak economy can begin to grow only if Wall Street, the nation’s wealth generating machine, continues to cooperate.  Sustained rallies or bull markets require control over short-sellers who look to lock-in profits at the expense of the overall market.  Europe’s Stuttgart-based Central Bank has begun to reign in short-sellers especially in financial stocks, where banks require the cash to make loans to consumers and businesses.  When the U.S. banking system ran out of cash in 2008, Wall Street blamed the problem on defaulting mortgages.  While mortgage defaults and foreclosures no doubt played a part, the banks refused to accept responsibility for risky derivative trading, placing depositors’ cash at risk.  Newly enacted reforms do very little to prevent another banking crisis by restricting bank from engaging in high risk stock market investing.

            To help cement the current buying trend on Wall Street, the Federal Reserve Board and Treasury must sit down with the nation’s biggest mutual, private equity and hedge funds to get voluntary restraint on short-selling.  Economic growth depends on rising stock markets, requiring the nation’s biggest funds to earn profits on long-term growth, not short-selling.  Manufacturing can only improve when there’s pent-up demand from consumers.  Consumers can only fuel the economy by having stable employment.  Stable employment, in turn, steps up consumer demand, keeping manufacturers in the production mode.  Manufacturing reports hint at future employment trends and economic growth but must be supported by a rising stock market.  Keeping the shorts at bay and growing the stock market is the best way to assure publicly traded companies have enough cash to keep adding jobs.

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.

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