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 issues 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 weeks 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 statues. 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 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.