Did Scott Brown's Election Cut 335 Points Off the Dow?

CNBC's Jim Cramer devoted some of his show on Tuesday evening to crowing about the huge market rally that would follow the election of Massachusetts Republican Scott Brown. Is it possible that Cramer, who was speaking before the final results were in, was lamely trying to tweak the election results by encouraging his Massachusetts viewers to boost their stock portfolios by voting for Brown?

If so, Cramer's efforts failed miserably. Since it opened Wednesday after the election results were known, the Dow has lost 335 points. This is just another example of the nonsense that regularly passes as market analysis in our media culture.That same vein of politically-edged commentary on market movements, mis-framed as analysis, permeates the explanation for that Dow drop. For example, the Associated Press reports that the drop in the Dow was due to the market's negative reaction to President Obama's plans for financial regulation.

I am wondering how AP knows this. For example, did AP reporters interview the investors who placed the biggest volume sell orders in the stocks that fell the most in the stock indices? If so, did each of those investors say that they sold those stocks because of financial regulation? Reading the AP story suggests that such interviews did not take place.

And it raises the possibility that the market drop might be due to China tightening its lending standards. There is no evidence in the AP report that either explanation holds water, though.

Moreover, as I have argued before, there is not much of a chance that whatever financial regulation actually passes will change Wall Street's business strategies. The New York Times suggests that only between 3% and 10% of Wall Street bank revenues now come from the sort of proprietary trading that would be banned by Obama's proposed legislation. Thus the lost Wall Street profits from the financial regulation -- if it had teeth and it passed Congress -- would be trivial.

Serious market analysis would involve a fact-based exploration of why the biggest volume buyers and sellers of securities were making their decisions. To do that, reporters would need to get their hands on trading records and persuade those traders to disclose the true reasons for their decisions to buy or sell.

That sounds like a practical impossibility to me. But the fact that political commentary masquerades as market analysis is bad news for those who think that the stock market is efficient. That's because efficiency would demand real-time disclosure of why major market participants make their trades.

Without such efficiency, we might as well conclude that Scott Brown's election cut 335 points off the Dow. That conclusion is just as much nonsense as AP's report that the Dow fell because of Obama's financial reform announcement. I could just as plausibly make the argument that the loss of the Democrat's filibuster-proof Senate majority is what caused the Dow to fall -- after all the Dow had risen 26% between Obama's election and Tuesday when the Democrats lost that senatorial majority.

But due to the political leanings of the people who report on the market, the AP's "explanation" is much less controversial than the Scott Brown one.

I think it would be better if people did not confuse these "explanations" with actual market analysis.
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