New Column up at Real Money (09/09/05)


My latest Real Money column, "Ignore the Pundits — Katrina Will Hurt" is posted. It is loosely based on Thursday’s discussion, Katrina Lowers Year End Expectations.

It looks at both the long term impact of Katrina, and also explains why the market has been moving higher despite the bad news.

Here is the ubiq-cerpt™:

"Yet at the same time, the market’s internals and technicals have been quite healthy. This explains in part why the markets have proven so resilient lately. In the weeks leading up to Katrina, both the Dow and Nasdaq were making higher lows. The Nasdaq held critical support recently and bounced off of it. Redwood Technimentals Chief Strategist Kevin Lane notes, "It is hard to envision a harsh sell-off while the NYSE Composite Index is making new highs. All this recent activity suggests to us that we may be able to challenge the upper end of the range again." This despite the long-term economic damage Katrina has wrought.

How do we reconcile these two apparently opposed factors? Consider them over differing timelines: There is an increasing danger of economic deterioration over the longer term (12-24 months). In the shorter term (one to three months), the markets have enough strength to power higher."

In  other words, different market influences will have their impact felt across very differing time frames.

Here’s my list, from longest to shortest:

Monetary Policy (Interest Rates, Taxes, Money Supply)
Technicals/Market Internals

Note that there are various aspects of each of these that can impact each other at times. For example, I have noted on several different occasions that markets can apply a different P/E mulitple to stocks at different times. The 1982-2000 rally started at a S&P500 P/E of 7, and ended at nearly 30. Clearly, pschology/sentiment plays a key role in this. Otherwise, why would a Dollar of earnings be worth only $7 in ’82, but worth 4X that amount later?


Ignore the Pundits — Katrina Will Hurt
Barry Ritholtz, 9/9/2005 10:41 AM EDT

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  1. nate commented on Sep 11

    “Clearly, pschology/sentiment plays a key role in this. Otherwise, why would a Dollar of earnings be worth only $7 in ’82, but worth 4X that amount later? ”

    Maybe it is changes in interest rates and not psychology/sentiment.

  2. cpg commented on Sep 11

    In regards to your article on Katrina, several points in it lack clarity for me.

    1. The linkage between the panic of 1907 and the S.F. earthquake. Here is an article on the panic of 1907

    2. OPEC embargo. I don’t think the embargo had as much of an impact as the government reaction to it.

    While your assertions may well indeed be correct, your supporting data didn’t seem to back it up.

    thanks cpg

  3. Barry Ritholtz commented on Sep 12

    Re: the 1906 Quake:

    Because British companies underwrote the majority of the city’s fire insurance policies — an estimated Sterling 23 million ($108 million) at the time — millions of pounds worth of insurance claims were soon presented in London.

    The magnitude of the resulting capital outflows in late summer and early autumn 1906 forced the Bank of England to undertake defensive measures to maintain a fixed sterling/dollar exchange rate. The central bank (we didn’t have one yet) responded by raising its discount rate 250 basis points between September and November 1906. …

    Actions by the Bank of England attracted gold imports and sharply reduced the flow of gold to the United States. By May, 1907, the United States had fallen into
    one of the shortest, but most severe recessions in American history. Thus primed for a financial crisis, already- weakened world markets crashed in October 1907.

    Ultimately, the Panic of 1907 led to one of the most important institutional changes in American history: the creation of the Federal Reserve System designed to
    provide for an elastic currency and to act as a lender-of-last-resort.” …

    The page you referenced touches upon what led to this, but didn’t put the causation together:

    “Tight credit markets in Europe, particularly in England where the Bank of England had been raising its bank rate since December 1906, have been implicated in setting an especially precarious financial stage in 1907. Therefore, the normal seasonal inflows of foreign gold were not happening in 1907 as European interest rates rose. Because there was no central bank or reliable lender of last resort during the National Banking Era, there was no reliable way to expand the money supply in the United States.”

    The earthquake forced the UK to raise rates dramatically, to stop the hemoraging of cash and gold out of the UK (and to the US) That’s what ultimately led to lenders becoming unable to provide capital to stock traders and trusts.

    As to the 1973 Gov’t action, what specifically are you referring to ? And do note that whatever was done is ultimately traced back to the Embargo . . .

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