The BMW Method
"So much for Efficient Market Theory"

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By BuildMWell
November 2, 2007

Posts selected for this feature rarely stand alone. They are usually a part of an ongoing thread, and are out of context when presented here. The material should be read in that light. How are these posts selected? Click here to find out and nominate a post yourself!

Yesterday the Federal Reserve did something quite nice for us investors. They reduced their key rate from 5.75% to 5.5% which was exactly what 92% of investors expected. The market was up about 137 points on the news. Then, this morning, three things happened to upset the old applecart:

1. A brokerage firm announced that Citigroup "might" have to reduce their dividend to raise capital due to the sub-prime fiasco that no one seems to be able to place a rational value on.

2. Another "expert" theorized that the Fed "might not" cut the key rate again in December because they made a reference about inflation and said they would do what was necessary to stop it if it reared it's ugly head.

3. A report from the Commerce Department indicated the consumer spent less in September, worried about the housing market and further credit market turmoil. One trade group reported that manufacturing in the U.S. grew in October at the weakest pace since March.

Of course, it was also reported by the Government that the economy grew at 3.9% in the third quarter which was a very impressive rate of growth and tended to negate the bulls#*t theorized in item #3 above.

The made-up concern about the lack of a future rate cut was just that; a reading of the Fed tea leaves by an expert who has merely speculating. This, of course makes item #2 suspect.

And, Citigroup has never once even hinted anything about a dividend cut. That was just more idle speculation on the part of one "expert".

So, we watch almost 400 points fly out of the DOW 30 due to a pile of rumors and idle speculations. Is that rational? So much for Efficient Market Theory.

The Fed rate cut was the only real event. Everything else was just hypothesis and scare mongering. You have got to love the silliness of the average investor...he will buy anything. Make up even a non-plausible story and you can move the market. So, what does that prove to us about rational markets? Do they even exist? In the long-run, absolutely. On a day-to-day basis, we can make a lot of money just ignoring the ridiculous hype and buying winners at historically low prices. I hope some of you folks got some bargains today.