Hougan a Winner!

Dow drops below 10,000, and in Europe it’s worse …

We all knew the bailout was not necessarily a miracle cure, but so quickly below 10,000? Matt Hougan had long ago bet Don Friedman (our conference guru) that the Dow would drop below 10,000 before it hit 15,000. And he was right. It took some time to wind its way back here, but he was right.

And if you think THAT is bad (and I’m pretty sure you do), Europe is in even worse shape. I am just back from a week in London, and the Europeans seem even more confused than the Americans. And the dollar, despite the U.S. market free fall, is strengthening (click here to get on the convoluted market reasoning as to why that is so).

As bad as things seem in the U.S., the scattershot, get-the-policy-in-Sunday-before-the-markets-open approach of European governments to the credit crisis, makes the U.S. federal government look like the crew of the Starship Enterprise in terms of efficiency. In Europe, it seems a bit more like Dr. Who, with bad special effects and all. Or maybe Hogan’s Heroes. The Europeans, remember, have no equivalent of the Federal Reserve with the ability to do anything with funding across the continent.

And the politicians in Europe are betraying obvious, uh, what’s the word I’m looking for? Panic. Yes, that’s it, panic, as the scramble to insure all bank accounts sometimes at levels wildly beyond their economic means (see Ireland) if there IS a run on the banks. But then, I suppose they can always print a ton of money to make sure they’re covered. Oh yeah, maybe not; they’re in the EURO, though the European Central Bank is largely feckless and doesn’t have the financial wherewithal to back up any sort of bold plan beyond tinkering with interest rates. All that adds up to a whole lot of bad.

I have a lot of things I wanted to put in here, as there has never been a better time in my life for interesting topics in the market to read on. You find out what people (and markets) are made of in times like this. And what brought it all on? An idea circulating in the global economist circles in recent weeks has been that it was all caused by Bill Clinton, that supposed economic genius who with his friend Al Greenspan brought the U.S. though its pleasure-boat era as an economy. Now, the thinking in some circles goes, we can point our fingers at the Clinton administration for pressuring U.S. banks, and in particular Fannie Mae and Freddie Mac to loosen their credit standards. And with that pressure and easy profits merging together, the new policies flowed out as easily as a tax cut in the middle of a major war. The best enunciation of the theory I’ve seen is in the British magazine Spectator. The New York Times posted a similar thesis here.

If you have any doubt about MY thesis that Europe is in even worse shape than the U.S., check out the headlines in today’s FT (at least they were before the Dow busted a move on 9,000):

And here is the New York Time‘s take in a sweeping and very well-written Floyd Norris piece.

Finally, I did want to react to Matt’s blog on the fact that sectors are driving everything that is going on with style and size indexes. I’m actually not sure that anyone besides maybe Rob Arnott has tried to deny that. The issue is whether allocation to sectors makes more sense than allocation to size and style indexes. And I’m not seeing a really coherent response on that from Matt. He just seems to be saying that people are denying the effects of sectors, which I don’t think they are. And what do you propose, Matt, when sectors are driving an outsize part of performance in not just styles and sectors but in the total market? Should we tilt away from the hot sectors, equal-weight them, close our eyes really hard and repeat, “There’s no place like home!” There’s no place like home!”? Enquiring minds want to know what you propose to DO with all this wisdom.

OK, we’ll leave it at that for now. My head is spinning again with these markets. Not sure I want to buy DIA or XLF or ANY of them right now. Let’s let the panicking masses get it out of their systems first.

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