Economic Review

1/25/2010

Pricking of bubbles comes in the least expected ways.

Well it had to happen sooner or later. The over exuberant gains posted in the US Stock market (lets call it a mini-bubble), despite pathetic macroeconomic fundamentals, experienced some air being released and the needle came from a non-monetary authority. Obama’s recent comments regarding proposed plans on limiting certain activities that banks would be able to pursue sent jitters through the US Equity markets, which plunged about 4% over a two day period.

Now here’s an interesting thought….should comments regarding restricting some activities of the larger US banks really cause the major US Equity Indexes to plunge 4%, with prices settling near the lows of the session? Well, some could argue that bank profitability would decrease and there would be a limited fallout in other financial intermediaries…but a 4% sell-off over the mention of “could be plans?”

The real answer for the extreme move by Stocks more likely revolves around the fact that the markets were simply, significantly over valued due to such factors as momentum speculation, which was helped facilitated by a continued near zero-interest rate policy. Does this scenario sound familiar? Just read last weeks analysis and put the pieces of the puzzle together. The question to ask now is….will stocks shrug off the recent negativity and resume the bubble run or is the hole in the balloon un-patchable? I think you know the Doc’s feel on this one.

Stephan Kudyba (MBA, PhD) THE MARKET DOCTOR

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