Market ADD

by Steven M. Cohen  •  Jan 7, 2008 at 4:14 am

http://www.buyselljump.com/2008/01/market-add

It would appear that the market is nearly finished cycling through the CDO crisis. This doesn't mean that there won't be additional massive writedowns accompanied by massive layoffs. But as far as the stock market is concerned -- been there, done that -- when it comes to mortgage-backed securities, so on to the next issue or crisis, in this case the looming or already-present recession, depending on one's point of view.

I attribute the market's ever-briefer attention span to informational overload, which compresses issues into shorter and shorter time spans, providing it less time to process more information. This process has accelerated as the volume of available information has increased exponentially and the time it takes to deliver it has decreased, nowadays down to about instantly.

The most graphic example of informational overload accompanied, or perhaps precipitated, the market's crash in 1987, when information cascaded in and seemed to pile on top of itself before it could be processed, creating a Krakatoa-like market that needed to blow its top just to relieve the pressure. Back then the issue du jour was the "twin deficits," trade and budget, which had dogged the markets for months prior to October's collapse.

However, like today's CDO crisis, the deficits as an issue seemed to atomize once the market blew up. In fact, it soon became clear that the economy was continuing to do just fine, and that the crash had mostly affected stockholders and stockbrokers, leaving Main Street scratching its head in wonderment.

Perhaps a more legitimate cause of the crash in 1987 was that the market had become overheated for several years, its resulting combustibility a function of an avalanche of LBOs and hostile takeovers fueled by the nascent junk bond industry, as well as by excesses and abuses like insider trading scandals a la Ivan Boesky. So maybe the "twin deficits" got an undeserved bad rap.

In any event, it looks like the market is getting on with its life and disposing of one obsession while moving on to another. This issue inflection point is illustrated by the benign reaction last week to State Street's announcement of a large writeoff in connection with a reserve set aside for pending subprime mortage litigation (its stock rose more than 8%), along with the obligatory ousting of a top executive; as contrasted with the market's bruising slide on Friday attributed to weak job numbers that suggest recession.

That the market can move nearly seamlessly from the black-hole hysteria of CDOs to the numbing spectre of recession is actually encouraging, testimony to its flexibility and ability to shake off bad news. We can attribute this miracle to investors' brief and ever-shrinking informational retention time, rendering seemingly cataclysmic events merely transitory in a matter of moments.

Next on the horizon: the black-hole hysteria of an increasingly contentious and distracting election. Investors will fixate on the terrifying possibility of a Democrat who will raise taxes and exacerbate economic distress, while searching desperately for the emergence of a fiscally-conservative Republican with a low-tax, pro-growth program--in other words, a candidate that hasn't shown up yet.

In any event, count on windy politicians to provide the market with its latest version of information overload.

receive the latest by email: subscribe to steven m. cohen's free mailing list