Business Week reports that bad economic news drove down stock prices today. Really? Ok, Lehman may write off another $4 B, FNM and FRE are in trouble, but where is the new news in any of that, that news has been in the markets for months! Last week the markets peaked over the S P 1300 level, was it good news that caused that move up? Or is this just a roller coaster explanation for what happens day to day? The truth is that stock prices peaked last year in October, they have been headed down ever since.
I would suggest that the mod of the public has more to do with this than anything else, see my recent posts on The Dark Knight and Twilight. When the mood of the public shifts to the Dark Side of the Force, all news is negative, and that is what causes a bear market. We will be discussing such things in Financial Statement Analysis this semester as well as Intermed II and Managerial Accounting. Such thinking reflects the new social science of socionomics, how popular culture shapes markets. Frankly I think most projected cash flows are the result of popular thinking in a very focused scale. Consider that FEDEX projected a high value for acquiring Kinko's, and then promptly wrote off hundreds of millions of dollars of investment. At the time FEDEX wanted to believe it was true, so it was. When reality crossed the popular idea, they had to write it down. We just saw the same thing on a wide spread scale with sub prime mortgages and ten years ago, dot.com stocks. in each instance investors talked themselves into believing there was value when there was none, no wonder the King's New Clothes remains a popular fable.
Fun stuff these markets, stay tuned for more socionomic observations.
Professor Elam 
Leave a comment