Investors evidently found a firm new toehold in the wall of worry yesterday, this time in the form of a prediction by the Oil Price Information Service that gas is likely to hit $4.00 a gallon before long. How crazed did buyers become over this prospect? Well, check out the chart below, which I’ve left unlabeled. Which stocks do you guess would be the very last to rally under the circumstances? If you said the airlines, go to the head of the class.

The chart shows the AMEX airline Index, and one can only surmise that those in the know on Wall Street are confident the carriers will be able to pass on the surcharge so that it won’t affect the industry’s bottom line. But pass it on to whom? Surely not to travelers, since the business has become too competitive to allow it – but to shareholders, who have been absorbing the hit for the last seven years. And yes, the Dow Trucking Index, shown below, reflects the same sort of exuberance -- the irrational kind, to borrow a phrase from Mr. Greenspan.

Jesse Livermore on Disaster

As usual, Jesse Livermore’s take is instructive, as certain passages from Reminiscences of a Stock Operator attest. Here are some relevant excerpts culled from the classic work by an astute correspondent:

“My heart and prayers go out to our fellow citizens that have been affected by this catastrophic storm,” he writes. “For insight into how the market can potentially behave in response to natural disasters like these, may I suggest reading Reminiscences of a Stock Operator, Chapter VI, that talks about the delayed response of the markets to the 1906 San Francisco earthquake.

“I quote a small portion from Chapter VI:

pp.76-77:

The next day we got the news of the San Fransicsco earthquake.  It was an awful disaster.  But the market opened down only a couple of points.  The bull forces were at work, and the public is never independently responsive to news..."

pp.78-79:

"On the following day, when fuller reports came in, the market began to slide off, but even then not as violently as it should...The street paid no attention to the earthquake the first day or two.  They'll tell you it was because the first despatches were not so alarming, but I think it was because it took so long to change the point of view of the public toward the securities markets.  Even the professional traders for the most part were slow and shortsighted..."

Some investors might be impelled toward caution by these words, perhaps disdaining to buy into Wall Street's latest romp. For our part, we continued to acquire some puts in Citi yesterday while leaving room to do so in the QQQs and Diamonds when they have reached the point of exhaustion. Meanwhile, we offer our prayers, donations and sympathy to the residents of New Orleans, along with our apology for the unseemly and ultimately inscrutable behavior of the markets in the wake of catastrophe.