October 19, 2011 5 Comments
In economic news of the day:
The credit markets had been going wider, and then some headline appeared on Bloomberg saying that France and Germany were going to agree to a 2-trillion-Euro something-or-other vis-a-vis the EFSF. (I didn’t figure out what the story meant but I’m guessing their plan is just, instead of recapitalizing their banks directly, which would inflate currency and harm their credit ratings, what they were planning to do instead was to launder the exact same liability through the EFSF – or in other words, become swap counterparties to the EFSF, which is a giant CDO – and hope no one noticed the new giant CDO on their balance sheets.) Anyway, it doesn’t really matter what the details are. What matters is that traders saw ’2 trillion’ on their screens and the markets rallied considerably within 10 minutes. Nor did it matter about an hour or two later when cold water was thrown on the whole ’2 trillion’ story which, in the end, doesn’t seem to have really meant anything at all. Markets finished up.
The other thing that happened came at the end of the day, when Apple reported earnings and missed. ‘Missed’, in this context, means that the earnings-per-share number they announced was smaller than some other number (the estimate/forecast/prediction) that traders had seen on their screens. Where did this other number come from? What is it based on? Is it valid? Nobody knows and nobody cares. The estimate was X but the announced EPS was Y<X. So traders said sell and AAPL stock declined.
This is closely related to the weekly and monthly rituals when economic data (e.g., non-farm payrolls) are announced. Say the non-farm payrolls estimate was 260k and it turns out to be 230k. People will groan and the market will go down. Say the estimate was 210k and it turns out to be 230k. People will cheer and the market will go up. Where does this estimate come from? No one knows. It's the estimate. Actual less than estimate = bad.
You know maybe the OWS people have it correct after all, markets just don't work.