ABK vs. US Economy: An Exercise in Denial (that a Recession nears)

Oops, I said the 'R' word: Recession.

The US stock market seems to be reflecting a state of denial.

Every time the US Census or another body that produces economic indicators releases some figures on how things are going in the US, the market takes a dive.

Then, just days later, the market makes a rebound based on information that seems... well, not very significant.

This latest roller coaster was due to information released by the Chicago Purchasing Managers' Index released on Feb 29 which indicated that the economy is contracting. As one would expect, the markets dropped by roughly 3% and continued a slight downtrend for the next couple trading sessions.

Then yesterday on Tuesday, March 4, the market makes a late day rally to end up nearly even for the day. Explanations? A possible Ambac Financial Group (NYSE:ABK) bailout. Wow. Uh, why is this cause for celebration and the repurchasing of stock en masse? Let's see, Ambac made some serious errors in judgement about insuring really bad bonds and is now paying the price. Yet the result of a bailout is a positive sign that a recession is not on its way? In other words, why would one invest long in a market that has most indicators pointing to a nice bloody recession? Because some poorly managed company may receive a "get out of jail free" card? Well.... that makes perfect (non)sense...

UPDATE: Ho HO! Just hours after this post, Ambac has filed with the SEC that it is issuing new stock to raise capital to uphold its AAA rating with Moody's Investor Services. The market has seen this as too little too late and ABK has dropped by over 10% already after the NYSE restarted trading on this ticker (which it halted before the announcement).

Daniel McMahon of Oppenheimer was quoted on Bloomberg that: "The market never should have rallied on this news in the first place", referring to the jump in price when several publications announced that a deal with banks may be nearing. Well put Mr. McMahon. Now if only the rabid, reckless investing public (and professionals) could simply use reason when pulling the trigger.