Ignorance and Mania

Ignorance is not knowing. Mania is believing the herd. The stock market turned on the drop of a bear. That is, commentators and pundits simply had to voice the realization that stocks were knocking on the door of a bear market at the end of September. By definition, the bear market is a drop in an index of 20% from its most recent high. As if Ben Bernanke’s Batman alarm went off, the indices burst higher from the cave of the bear market on the second trading day of October with a classic PPT rally of 400 Dow points in the final 40 minutes of the trading day. It hasn’t looked back. Two weeks later, the Dow is nearly even for the year. And to think - all we had to do was mention the word, ‘bear’!

What changed? Yes the PPT clearly decided that a bear market would not be tolerated. But the driving force of the bear market was, and is, too much debt. Has the debt problem been solved? Yes, like always, the banks that extended loans that cannot be repaid will be ‘re-capitalized’ by the central banks. Where do they get the money? Thin air? No, from the tax payers either through monetary inflation or sovereign debt expansion. Presto! Problem solved. Greece is healthy again and the Gulf of Mexico is free from petroleum pollution. Corporations are suddenly gold nuggets again as the debt problems vanish. Actually the debt problems vanish because the central banks are acting so that the derivative world stays healthy. Derivatives are on every balance sheet and contribute to perceived capital and earnings. That’s the real reason debt cannot be defaulted. That’s the real reason Greece will not be allowed to exit the EU. All the while, investors remain ignorant of the precariousness of the world economic environment. Fortunately, the ignorant can survive because the central banks reward ignorance. As long as investors don’t know anything and don’t read articles like this, they can merrily invest their money and be confident that the central bank stands ready to intervene at the drop of a bear. No worries. Just stay ignorant. That’s the key.

That ignorance of course leads to mania. Surely the herd is right. Well, of course they are. As evidence, we can look at the mania in the semiconductor world. Specifically, PPT rallies lift all boats and semis are on the crest of the PPT tsunami of buying. Virtually every company in the business has reported weakness of late. Let’s look at Fairchild Semi. They make chips for the communications industry. Reported in business publications on October 14, 2011, the company said Q3 profit fell 19% versus last year and sales were lower by 3%. True, the earnings beat analyst expectations by two cents. Read on. Sales were below estimates. The company also (like most of its rivals) guided sales estimates lower than analysts’ guesses saying that the economy had slowed. The company plans to ship fewer chips going forward. So? What does falling sales and falling earnings and a weakening economy and falling prospects have to do with anything? In a PPT driven market mania, the answer is nothing. Absolutely nothing. Nada. Zip. This is PPT mania. It’s all good. Get you some. Just close your eyes and buy. You don’t have to know anything. Fairchild was up 10% on the news. No, that’s not a misprint. The stock was up 10% on the wonderful news. Where will the mania end? Don’t ask me. Ask Ben. Below is one of the better performing stocks of the ebullient day of October 13. I include this chart because it is representative of the investment environment. All the roulette players think they have acquired some kind of skill by always betting on black only they don’t realize that the Fed has painted all the numbers black. Tomorrow we will spin the wheel again. I’ll bet the little ball lands on a black number.

Notice in the chart below that the stock price has been in decline to reflect reality. Notice also the explosion in volume on the ebullient news of an eroding environment and dimming prospects. Does anybody care about reality anymore? I doubt it. I’m not trying to pick on Fairchild. I just thought the chart was worth pointing out a little perspective to a completely irrational stock rally. 

FCS last five months

Chart courtesy StockCharts.com

Disclaimer: The views discussed in this article are solely the opinion of the writer and have been presented for educational purposes. They are not meant to serve as individual investment advice and should not be taken as such. This is not a solicitation to buy or sell anything. Readers should consult their registered financial representative to determine the suitability of any investment strategies undertaken or implemented. BMF Investments, Inc. assumes no liability nor credit for any actions taken based on this article. Advisory services offered through BMF Investments, Inc.