Thursday, November 20, 2008

Farewell Free Markets

When every market move is hanging on what Government says or does it's a sure sign that the free markets are gone. I have been writing and talking about the danger of our increasing dependence on what the government indicators are for quite a long time. Markets used to move without waiting and hanging on every word from them, but not anymore.

Besides the current examples of Congressional hearings about GM, financial bailouts, and Paulson, we've been breathlessly waiting for numbers on unemployment, housing starts, housing sales, interest rate hikes/reductions, oil reserves, oil outputs, OPEC price decisions, GDP information, etc. etc. etc. ad nauseum; something for every day of the week only to be constantly analyzed, and repeated by the news media based on the numbers and pegging each indicator to each tic, and regardless of accuracy or not, being held as gospel. Did we bring it on ourselves?

I remember a time when company earnings, valuations, book value and p/e ratio was more important. It seems to me that the very availability of having instant information made us into a bunch on knee jerk traders and investors. The media was more than willing to accommodate as need be, giving us information headline by headline , tic by tic, and analysis after analysis. All instant opinions and all could and can be acted upon immediately with just a keystroke; still it was acted upon as we saw it's effect on the company and we were not so concerned with government regulations effecting them.

Unfortunately that has changed to the point where the information we get word by word from the government trumps all other reason and regardless of how well a company is managed, how good their outlook, their book value, p/e ratio or earnings, traders are dumping them. We deem company information now as irrelevant because we fear what the government will say or do in the next minute, hour, day, etc., so we are trading out of fear.

Government action fear based trading should worry us all, it's not only because we act fearfully but, also because we are letting the government regulate how companies will operate and letting go of true capitalism. When we call upon government to do something about excess CEO bonuses and income, when we have politicians instead of stockholders call for company accountability and when we call upon government to equalize things via regulations we have a socialist market and we don't have a capitalist free market. In other words we have a China not USA.

A perfect example of how a fear based government regulated market works is being lived as we speak. Another more specific example is how the Chinese government via the media effected BIDU; trust me, there's no way that CCTV would have reported the news without the government's OK, because BIDU is far too public not to be monitored by them. The reason could be as innocuous as someone in BIDU offending a high government official or perhaps it was because they owed GOOG something but both those are just (somewhat educated) guesses. In other words when government intercedes, reason for company viability is thrown askew by the sheer effect of the unknown. True or actual reasons are unknown, and as you know market hates uncertainty.

Under a capitalist free market, reasons could be reasoned by looking at books and other more direct information about a company; under a socialist market reasons can be a joke, a favor, a bribe, a threat, a ______ (fill in the blank). FNM and FRE are examples of government regulated stocks, now we have AIG, all the banking stocks being bailed. We also have the threat of the entire market being re-regulated, monitored and run by them and as a result, chaos will continue to prevail.

As rules will change your reaction and adaptability will count, but don't count on reason because the markets and our government as we've known them are no longer there; we've given them far too much reign over us.