Dow Jumps Nearly 900 Points
By - October 29, 2008

The Dow jumped 889.35 points, or 10.9%, to 9,065.12. It was the blue-chip index's sixth-biggest one-day percentage gain ever. The advance was the latest in the series of wild market swings that have made the market's current swoon even more unnerving for investors. The Dow, which is down 16% this month even after Tuesday's rise, has recorded triple-digit gains or losses in all but two of the month's 20 trading days so far. And Tuesday's gain by the Dow was the biggest only since Oct. 13, when the Dow jumped 936 points, or 11.1%.. – LA Times

Dominant Social Theme: Animal spirits return.

Free-Market Analysis: Everything is OK now? The Dow roared up an almost impossible 10 percent yesterday, purportedly on news of an expected rate cut by the Fed. All this is fairly cynical in our opinion. Between basic money generation and rate cuts (credit generation), the amount of artificial money surging through the creaky arteries of world finance is setting up the patient to blow yet another gasket.

It won't happen now because the patient is on an artificial respirator, but happen it will. If the business cycle is kick-started by all the money being thrown around, then eventually there will be another crisis down the road and it will be even worse. There is no asset-link (gold or silver) to money right now and that means central banks can print as much as they want. And boy are they doing so. It can certainly have an effect. From the newspaper article it is fairly clear, actually. It all has to do with rates.

The rally came as the Federal Reserve began a two-day meeting in Washington. Investors are betting that the central bank will cut its benchmark lending rate today to 1% from 1.5%, its lowest level since 2004. Rate cuts are intended to stimulate lending, a top priority for central bankers around the world as they try to thaw out frozen credit markets and avert a deep and long-lasting recession. In addition to gushing liquidity from the Federal Reserve, the Treasury Department started this week to disburse the first of potentially $700 billion to banks and certain other companies that are short of capital. Administration officials have been exhorting banks to start using the capital to make loans.

We're not sure that this means all that much to the individual saver and investor, of course. Maybe to institutional types. And certainly we have never met such an average investor, but we presume he exists. You know the one we mean, the one who gets up in the morning, combs his hair and then decides it's a good day to buy IBM because the central bank is making the cost of credit cheaper. Never. Not once.

And even the article itself seems to indicate some hesitancy about the wild buying, as if it had gone far beyond what could be explained.

There was no apparent reason for the latest surge — which came on a day when the economic news was mostly gloomy — adding to a feeling among some market watchers that the rally might have been little more than a head fake. "I'm very hesitant to read anything significant into it," said Richard Weiss, chief investment officer for City National Bank in Beverly Hills. "I'm not convinced that this is the end of the downturn, unfortunately."

After Thoughts

So we will await today's follow up with interest. End of year buying and selling often has to do more with big funds dressing up their balance sheets than any realistic, long-term trend. Anyway, markets move and even in a great bear market like the one that is in place today, investors will see swings, mostly initiated at the institutional level, or perhaps from even larger players. It doesn't mean the fundamentals have changed. Banks still aren't lending much and the media has discovered a new bubble, the emerging markets bubble (see yesterday's Daily Bell) that will doubtless be much in the news going forward. With entire countries going bankrupt, it's nice to see there are optimists who will buy into both American and foreign markets. We're just not sure it's a long-term trend. Or real at all.

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