Friday, April 15, 2005

Today the market will fall....

In just a little under and hour the US markets will open and chaos will reign. All the foreign markets are down especially the Japanese and European ones. The European markets has a big impact on the capital flows of the US. US T-bills are falling as people move cash into quality. What is driving the market the underlying market dynamics is cost of oil and the questionable strength of the US financial system. Yesterday rumors hit the market about the problem child know as GM. Somebody floated the idea that it may declare bankruptcy. AIG the 3ed largest holder of GM bonds is in bigger trouble then we initially expected. Interest rates are going higher and that is always a drag on the market. Add to this mix the report that IBM’s sales are falling mean a market that is looking for an excuse to break to the downside.

Last night I looked at Mandelbrot’s writings on cotton prices and volatility. He makes a really good point that a big movement down or up increases the likelihood of another large percentage movement in the same direction. He even has the mathematics to prove it. There are all sorts of ways to manipulate the market are lesson the possibility of a major crash…like fiddle with government statistics and do a little creative accounting. AIG, Enron, BP, the FED and lots of other institutions are not anywhere close to transparent so a crash when it occurs is going to be unpleasant in the extreme. I think we are close…its just a feeling. If you cannot trust the information you receive from a company or government in order to analyze a company your risk increases and the efficiency of capital deployment decreases. Capital costs increase and you have yet another drag on the economy.


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