Market Rallies on Geithner's Appointment: Why?

Last Friday was shaping up to be another gloomy day in the U.S. markets. The Dow, which attempted to rally during the afternoon, was again down at 2:40pm. Then, at around 3pm, NBC announced that Timothy Geithner would be Obama's pick for Treasury Secretary, and just like that, investors forgot about Citigroup's (C) stock dropping below $4 a share, about the impending collapse of America's auto industry, and about every other issue that has been plaguing the market this year.

By the time the closing bell rang, the Dow had closed up almost 500 points, seemingly based on that one piece of news.

Did Geithner's selection change anything fundamentally? Is he some sort of financial superman that will solve the credit crisis in one week's time? Were investors fearful that Obama would nominate Fidel Castro and relieved when he didn't choose a hard-line communist? No, it can't be any of those things. I am guessing that the rally was in large part due to the idea that people thought that a new Treasury Secretary would bring change. But as anyone with any common sense knows, change is a two way street.

During the last year, there has been a trend in the markets to overreact to the comments and actions of a few individuals that, because of their wealth, are assumed to know more than the rest of us. Warren Buffett is of course one of the best examples of this kind of person. Any significant investment of Buffett's is immediately reported in the media and, more likely than not, the market reacts. Both General Electric (GE) and the markets rallied when Buffett announced he would be investing in GE. Goldman Sachs (GS) rallied when Buffett announced his investment in that company. Of course, we don't know the exact nature of Buffett's investment in those companies, but we do know that both of their stocks are significantly lower since the dates of Buffett's investments and the subsequent short-lived rallies.

Buffett may be known as the Oracle of Omaha, but he is certainly not alone in reaching oracle-like stature. Billionaire investor Kirk Kerkorian has a devout following of his own. It is therefore not surprising that many saw it as a bullish sign for the sector when he announced his investment in Ford (F) earlier this year. I don't have to tell you where that sector stands at this point in time and that Kerkorian lost millions on his investment.

Perhaps one of the most sensational and tragic investments by an oracle-like figure was Joe Lewis's investment into Bear Sterns when its stock was trading at around $100 a share. It is rumored that Joe lost around a billion dollars when Bear Stern's stock dropped over 90% in less than a week.

I think the lesson to be learned from this and other similar instances is that many market participants assume that others somehow know more than they do and that it is always reassuring to know that somebody rich is in the same boat as you. However, if someone thinks that the markets can sustain a significant rally based on the actions of one individual, even if he is the wealthiest person in the world, or based on the appointment of one government bureaucrat, then that someone needs to reassess their view on the nature of investing.

Comments

[je:]

The rally was short covering.

2008 Nov 24 08:32 AM

[willynill:]

If the rally was due to short covering, why was the short covering occurring? Answer: Because the information about the Secretary of Treasury was sending a signal that Obama would not be as leftist as feared, and that was good news which may be spilling over into Monday's market, along with other "good news".

2008 Nov 24 09:24 AM

[mdmrjsds:]

Good question. While watching the thrashing of this crisis, a certain view has crystallized for me. What is called the 'smart' money is in fact not very smart. It should rather be called the 'system' money or the 'groupthink' money.

As you say, the appointment hasn't really changed anything. And the $700 billion stimulus package being bruited about only confirms that the Obama (our Hugo Chaves el norte) braintrust doesn't have a clue either (what do you expect, they're Keynsians too). The underlying problems haven't disappeared and aren't being addressed. And they really exist, they aren't just a lack of confidence, a figment of the imagination.

So there will be a relief rally as people hope that things are going to go back to the way they were. Unfortunately, that can't last long term, because reality is asking for payout. And it only accepts cash on the barrelhead. And there isn't any. About 3 trillion dollars of value has evaporated in the US economy. Who's going to pay? The answer seems to be our descendants and international central banks.

2008 Nov 24 12:04 PM

[henarl:]

In this horrendously dismal market, stocks seem very cheap by recent history so, even though extremely pessimistic, investors were ready to buy. People now over-react to almost any news, whether good, bad or, as in this case, basically nuetral.
After two big down days the market was aching for an excuse to get some back.

2008 Nov 24 12:57 PM

[msmtax:]

I am appalled that the failure to pay self-employment tax by Tim Geithner on his 2001-2004 tax returns would be explained away as an "honest mistake", and that the Obama administration would continue to support Mr. Geithner as the nominee for Treasury Secretary. Employees of international organizations are briefed on their tax responsibilities, including the requirement that US citizens pay self-employment tax. Employees of international organizations receive special tax treatment as the result of international treaties, and the employees are well-informed that they are being taxed under a different tax regime as a result of working for an international organization.
Mr. Geithner did not pay the self-employment taxes for 2001 through 2004, but of even greater concern is the fact that he did not correct 2001 and 2002 when his 2003 and 2004 returns were audited in 2006. At that point, he could certainly no longer feign ignorance. In fact, he did not correct his "honest mistake" until after his nomination to serve as Treasury Secretary, thus negating any possible argument that he was "not aware" that he owed self-employment taxes for 2001 and 2002 since he had already been audited on that exact point.
For an administration that prides itself on transparency and high moral and ethical standards, I am truly disappointed that Obama spokesman Robert Gibbs has come out with an official statement of the Obama administration indicating that this "honest mistake" does not rise to the level of disqualification. To the contrary, I think that the fact that he most assuredly was aware that he owed self-employment taxes during the course of his employment with the IMF, and absolutely knew from 2006 after his audit yet failed to correct the prior year returns, is more accurately referred to as cheating on his taxes rather than making an honest mistake. His failure to correct 2001 and 2002 after the audit of 2003 and 2004 reflects an attitude of arrogance and being above the law which is not acceptable.
Regardless of his experience and ability to serve as Treasury Secretary, I firmly believe that this failure to pay self-employment taxes, even after the audit when there was no doubt of his awareness of his legal obligation to do so, should eliminate him from consideration. To allow him to continue as the nominee under these circumstances is a slap in the face to all Americans who honestly report their income and pay the tax due.

Jan 14 11:20 PM