October 16, 2008

Market Uncertainty: Fear of Socialism

DJIA post bailout 'recovery' as of yesterday's close
The market remains trending down and is extremely volatile. In my view, large institutional investors are trading on fear and uncertainty. Here is what one such investor, John Wilson, the co-director of equity strategy at Memphis, Tennessee-based Morgan Keegan, (which manages $120 billion) says about trading on the fear, as quoted at Bloomberg.com:
It's absolutely trading on fear right now and uncertainty, because nobody knows yet how bad the economy is going to get. It's disquieting to me, and I've been doing this for 35 years.
What is behind this fear of recession? A poll taken by CEO Magazine and posted October 8th, offers an insight into the minds of America's business CEOs. Their overwhelming sense that an Obama presidency would be bad for US business is part of the fear driving the institutional investors to execute panic trades. This type of trading are further destabilizing what might have been a normal recovery from the well-deserved collapse parts of the commercial credit industry. The poll suggests that their fears are of a Barack Obama presidency and his anti-wealth policies would add to the already troublesome government meddling in the free market.

Almost 70% of CEO's fear an Obama presidency
I think these CEOs probably know more about the nuts and bolts of how the economy works than most politically motivated theorists. These cats actually want to see the market make money for investors! Some comments from CEOs that responded to the CEO Magazine poll:
CEO comments reflect McCain as the better of two less than ideal choices. One CEO said, "I’m not terribly excited about McCain being president, but I’m sure that Obama, if elected, will have a negative impact on business and the economy." Another stated, "Obama has shown his inexperience in many of his ideas. Some of his planned programs would bankrupt the country within three years if implemented."

For example, Obama says that he wants to increase the capital gains tax. Many small business owners have from time to time reaped a substantial capital gain from the sale of a business or a vacation home. If they receive a couple of hundred thousand dollars or more from the capital gain, they appear to be "rich" in that year, according to Obama’s definition, even though they may have an average yearly income of less than $100,000 and net assets of less than a half-million dollars. They will not only be taxed at a higher rate, but if the asset has been held for many years and has grown in value no faster than inflation, they will be taxed on imaginary income, and may well suffer a real loss. Many politicians, it is felt, confuse wealth with taxable income. A wealth tax mainly taxes productive capital, thus reducing job and productivity growth, and it also encourages people to move their wealth to other countries and/or engage in other non-growth oriented expenditures.
The bailout is, as I said before, an unmitigated disaster. The Congress still can't see the light, and can only propose more socialist government meddling with the markets and another 'share the wealth' stimulus package for the economy. Bad will indeed come to worse should our enlightened electorate put Barack Obama in the White House.
Hat Tip: I heard about the CEO Magazine poll while listening to Rush Limbaugh on the car radio.
Update: At closing today, the market had recovered a bit more than half of yesterdays losses. The downward trend continues with the kind of volatility that only a day trader could love. Two ticks down and one tick up does not a recovery make.

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