Redefining Normal in the Financial Market

Posted November 14, 2008

The US stock market rose to new heights despite continued signs of economic declines. The G20 is getting ready to meet in Washington, D.C. and Japan has a well-defined agenda.


The Dow Jones Industrial Average continues to baffle financial market analysts.  Yesterday, 13/November/2008, the DJIA astonished everyone by closing at 8,835.25 which was an increase of over 550 points.  The FTSE once again held fairly steady at 4,168.21 as did the NIKKEI at 8,238.64. 

So why did the DJIA go so high?  It certainly was not because of good economic news.  In fact, bad news keeps unfolding each day.  Weekly jobless claims are climbing.  The big three US auto makers are projecting gloom and doom if allowed to go bankrupt.  Projected company earnings keep failing to meet expectations.  For example, the giant retailer Wal-Mart said its 4th quarter projected earnings per share will range from $1.03 to $1.07 which is below what Wal Street had hoped to hear. 

What is confusing analysts is the fact that the equity markets rallied and yet the US dollar weakened against the euro and other currencies.  In terms of US dollars, the US dollar weakened against the euro ($1.2676); the Canadian dollar ($.8142); the Australian dollar ($.6486); and the New Zealand dollar ($.5605).  The dollar gained against the British pound ($1.4671); the Swiss franc; and the Japanese yen ($.0103).  Financial analysts are seeing new economic results that would have not been predicted if the markets were acting "normally". 

Of course, there is going to have to be a new definition for normal.  If you have "panic selling" when investors get scared, can we call it "panic buying" yesterday?   Is there such a thing under the new order of things? 

In general terms, the dollar is considered to be in fairly good shape whereas the other currencies are weak.  The British pound is under tremendous pressure against the euro which is worrisome for Great Britain.  It is these kinds of issues which will be discussed at the upcoming G20 meeting in addition to many others. 

Japan is coming to the financial summit armed with specific proposals.  Japan has agreed to assist emerging markets in order to prevent financial collapse in many of these countries.  Japan is now facing a recession also as manufacturing orders dipped to some of their lowest levels in a decade.  The summit was to be a discussion on global financial regulations and future actions needed to prevent continued economic declines, but the agenda is changing. 

For one thing, the world leaders are not anxious to make an agreement with a US president who is soon leaving office.  This would not be true if the incoming President-elect had the same philosophical economic views, but Obama is a social liberal having very different approaches in mind for economic solutions.  

Japan wants to propose the International Monetary Fund double its capital to $640 billion.  Japan also is recommending that $100 billion in loans be made to the IMF and that Europe and the USA speed up the elimination of the non-performing assets on the books.  

There will also be discussion concerning moving to a global dollar based currency. 

So there are a lot of day-to-day movements happening in the equity markets, and unfortunately many of them are turning out to be completely unpredictable.  You can almost see the puzzlement on the faces of those who have studied the markets for years.  Who ever thought, for example, they would witness the day when the retired "king" of the US Federal Reserve would publicly admit he failed to see this crisis developing.  

If the experts are baffled, what is the lonely investor trying to hang on to retirement funds supposed to do?