We Don't Need No Stinking Market Capitulation

by: Matthew Rafat July 25, 2008    

Matthew Rafat

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The economy looks bad, but when experts demand a 5% or more down day before buying stocks, we may have to wait a long time for a real recovery. Market experts, including Barry Ritholtz, want capitulation, or one day of panic; however, the markets have placed rules to prevent large down days. The new rules against naked short selling are another brick in the wall against a Depression-era one-day dip.

In addition, Grasso instituted trading curbs ("circuit breakers") to prevent exactly what the experts want. Meanwhile, Congress continues to consider regulations against ICE and other trading exchanges to prevent instability. If the experts and mutual fund managers want something the exchanges and government are actively preventing, even good economic data may get cast aside as we create a self-fulfilling sideways market.

The facts are that oil has come down from its high, and the American dollar is slowly recuperating. The dollar has already decreased so much the Mexican and Canadian currencies are the ones that look overvalued. The European Central Bank [ECB] has to maintain or increase interest rates to keep its superior edge on the dollar, and at some point, EU citizens will be screaming bloody murder when growth slows or stops. We forget that Europe has many powerful and influential companies that want to sell their own products abroad and are becoming angry at the U.S. dollar's weakness.

As for oil, barring an Israeli attack on Iran or vice-versa, oil will decrease in price. Commodities experts have been denying a supply issue for months. In the absence of a supply issue, oil prices will decrease as Americans use less oil--unless the law of supply and demand suddenly vanishes.

I am no Pollyanna, but with money markets offering 2%, and CDs not much better, if investors don't take some action, inflation (running around 5%) will destroy their purchasing power.

Having said that, why is the market discounting technology companies, many of which have plenty of cash and were not involved directly in subprime, finance, or housing? If I'm Intel (INTC), Google (GOOG), ST Microelectronics (STM), Microsoft (MSFT), Brocade Communications (BRCD), Taiwan Semiconductor (TSM), or MEMC (WFR), I'm beginning to wonder if the American stock market is an inefficient way of valuing my company. After Sarbanes-Oxley, why would a rational company want to have an IPO in this irrational market?

Disclosure: I own shares or plan on buying shares in the above companies.

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This article has 12 comments:

  •  
    Jul 25 12:15 PM
    Its not that I want to see a 5% down day -- its just that such a day will have significance reflecting a better psychology. As of now, there is still too much complacency for the bear market to end.

    We own selective equities, closed most shorts early in the month, but still have a decent cash position. This rally can run for a few weeks or months, but we doubt it reflects the 08/09 recessionary lows . . .

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  •  
    Jul 25 12:47 PM
    I agree with Barry Ritholtz, and would argue that there should still be some correlation between overall GDP growth and the business performance of tech companies. Also, being long tech companies has been one of the most crowded (and wrong) trades on Wall Street.

    Disclosure: I plan to buy the same tech stocks that Matthew Rafat is considering for my clients but I will either wait for lower prices or begin to do dollar cost averaging.
    Reply | Link to Comment
  •  
    Jul 26 08:34 AM
    Matthew, I agree. When I see the "experts" insist that we "need" hugh down days, the skeptic in me questions their motives. I wonder if the real reason they preach that is so they can jump in and profit from the rebound.
    Reply | Link to Comment
  •  
    Jul 26 01:12 PM
    Matthew, I believe you are right on the money with respect to European monetary policy. I believe that their misguided policy of holding rates high into the current global slowdown will eventually put them in a world of hurt. The U.S. will be ahead of the game when the turn in housing occurs in the next year.
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  •  
    Jul 26 03:13 PM
    This sounds like a plus for the little guy that can only read the newspaper and Business Week and tries to make stock choices that are hopefully in the upper half of the SP500. The less volatility, less market swing due to fund rotation, less perceived hedge fund forces, the better.
    Reply | Link to Comment
  •  
    Jul 26 05:43 PM
    300 mph,
    unfortunately US will never be ahead as it became a socialist country
    And where have you got European monetary policy is misguided?
    As euro stregthens input costs are significantly cheaper for them than for US. It gives them unlimited advantages and US will probably loose and will never recover

    Do you mean EU should also make their currency worthless as US government does?
    Even deep dollar devaluation doesn't help to improve trade balance. US is really doomed. Just wait for a run on dollar

    And even some say US is so important as they consume so muc but what's the sense to provide goods to insolvent US consumer and get worthless dollars?
    It slow but steady realization but more and more countried depeg their currencies from US dollar

    I repeat there won't be any recover in US before inflationist policy stops and deficits balanced
    Reply | Link to Comment
  •  
    Jul 26 10:04 PM
    5% is not enough IMO. I would need to see a high volume 20+ % one day crash to believe that we have put in a near term bottom. I believe this will only happen after the markets trickle down to 9500 in around mid 2009. The sudden breakdown will be driven by a rapid increase in jingle mail as those underwater will decide that it is not a short term thing and they will want to take of the mortgage debt relief act of 2007 which allows them to jingle mail without owing the IRS taxes on the amount forgiven. If they wait until 1 Jan 2010, it will be too late and they will be stuck in their house underwater forever.

    9500 - 20% takes us to the mid Dow 7k region which is where the last big multiyear support was found. Then it will be time to go long long long as we build the right shoulder. Oops. Did I let that slip that the Dow is forming a H+S? After the right shoulder is formed at Dow 10500 or so on the way back up, it will turn down again and that will be where that traitorous bastard Greenspan's "age of turbulence" takes on a whole new meaning. That's when the world will reject the USD wholesale causing our stock market to tank well below 1000.

    I see you are laughing. If only you would read Robert Prechter's book and then study what Ron Paul has been preaching for 30 years and then read Peter Schiff's book you would not be laughing. You would be planning.
    Reply | Link to Comment
  •  
    Jul 26 11:02 PM
    I agree with Ponzi there.
    Reply | Link to Comment
  •  
    Jul 27 08:48 AM
    The whole purpose of the market price is that it is a reflection of reality (that is of supply/demand)....The more controls you place on the market price the further into "fantasyland"... you go.

    How is one to make a rational decision if the market price has been so distorted by controls and regulations?

    As for a capitulation days...it doesn't seem to matter to me if they occur or not...In the long run, prices eventually make it to their destination...controls or no controls.
    Reply | Link to Comment
  •  
    Jul 27 11:28 AM
    Here is a statement to show what a sucker the market and those who overly rely on it is: the last done price in the market (which could be a transaction between one buyer holding 100 shares and a seller selling 100 shares) is used to determine the value of the company which has many times the number of shares. Does that one last price truly reflect the price of the company?

    What's the purpose of the capitulation - whether its 5% or less or 5% or more (some suggesting at least 20%) when what is traded on that day is perhaps no more than may 5-10% of the market total share issue? How does the capitulation serve to be a buy signal?

    The market pricing has been living with this huge fallacy that a company is worth only as much as the last price set on one day multiplied by the number of shares issued. Likewise, technicals and momentum indicators (which may play a good role in determining certain volume and direction) are also relying on this last price indicator but really tell you nothing very much if 100% of its shareholders actually think so too.

    Here therefore lies the opportunity - if that last price is not the true price, then perhaps its better not to rely on it.

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  •  
    Sep 18 09:09 AM
    capitulation day is posponed once again! it is coming, but not before the election. like house prices...their is much further to go down before bottom
    Reply | Link to Comment
  •  
    Sep 18 09:17 AM
    oops! there not their d*mmit!
    Reply | Link to Comment
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