Dumb and Dumber

And dumbest.

Dumb: Sen. McCain's economic plan, which is two-pronged.

Prong one: Let people who are 59 or older withdraw from their retirement accounts at a tax rate of 10%, instead of their current tax rate.

Okay, the dis-savings attribute of this is less severe than his rival's plan, and I get the age component: help out those people who are near retirement age, and let them bail in the face of a bear market.

But for one thing, they can "bail" without withdrawing: just rebalance the portfolio. Buy inverse index funds, or bond funds, or bank CDs, or just put it in a money market fund, for crying out loud.

And for another, why tax them at all? Just reduce the withdrawal age to 59, at least temporarily. Lots of people retire in their 50s now anyway. And if you're trying help someone get money out before the market tanks further, why add a 10% hickey on the hit they've already taken?

Prong two: cut the capital gains tax. Hey, I'm all for that, and I understand the increased-investment-stimulates-the-economy logic. But, ah, Senator - not too many portfolios are sporting capital gains these days. Great idea, bad timing, little immediate benefit. I thought your plan was to fix the economy, now?

Dumber: Sen. Obama's plan, also two-pronged.

Prong one: already covered it, yesterday. Worse than McCain's idea.

Prong two: provide a $3,000 tax credit for every job a business creates.

Let's see, average hourly earnings in this country are about $18 (for now). Multiply that by the typical full-time schedule of about 2,000 hours a year, and you're paying $36k. Plus bennies and overhead at about 15% on top of that, plus hiring costs. So all-in, first year, this new position costs you upwards of $45k.

And you want to entice me to add this expense to my business by offering a tax credit worth about 7% of the cost.

Senator, if I need more employees, I'll hire them. If the revenue I can generate with another warm body justifies the expense, you can be assured I'll create a job.

But your generous offer is one of those trades that's hard to make up on volume.

Dumbest? The stock market.

No, I'm not just bitter because I'm short, and had a red-letter day yesterday, and looked set for another one tomorrow, only to give up half of yesterday's gains.

Here was the data slate that hit the market today:

Inflation: the headline reading was down, and the core reading was flat. Neutral signal, basically.
Jobless claims: initial claims were down more than expected, on workers temporarily sidelined by Gustav going back to work. But continuing claims were up unexpectedly, to a new cyclical high. And that's worse because that means once a worker loses his job, he has trouble finding a replacement job. So he's chronically unemployed. Bad news.
Net foreign purchases of US securities: who really cares, for the most part? Not a market-mover.
Industrial Production: the biggest drop since 1974. Ouch. A real recession signal in the year-over-year number. Bad news.
Capacity utilization: down two and a half points, twice as big a drop as forecast, and the first reading below the traditional recession threshold of 78% since the last recession. Bad news.
Philly Fed index: huge drop. It fell three times as much as forecast. Another bad sign for manufacturing.

That was the morning's slate. Also, Citi and Merrill reported yet another quarter of losses, on even more bad bond write-downs.

The market wanted to rally. It tried early on, focusing solely on the inflation number, ignoring that even though the core reading was flat, it's still a half-point above the Fed's comfort zone, and the fact that core producer prices were up for the month, higher core consumer prices are coming, so this is temporary relief at best.

Besides, who gives two hoots about inflation right now? Not Ben Bernanke, I can promise you.

So in the first hour of trading, the Dow was up more than 100 points.

Then reality set in.

The stark reality that, even if the inflation number was spun as a positive, the overwhelming bad news that the manufacturing sector - supported all year by exports, and the last bastion of hope for the US economy - is falling completely out of bed (you heard it here first, by the way), caused a free-fall. by mid-morning, the Dow was down almost 400 points, to 8,200.

Then, it rallied back. We even got another piece of bad news, ugly-bad, at 1:00 EDT, when the National Association of Home Builders reported their builder sentiment index had fallen to a new record low.

Yes, housing's still in the toilet. And getting worse all the time. And what's even worse is the strong correlation (which I've mentioned before) between the NAHB index and the S&P 500 lagged 18 months. So if this new low represents the bottom, that means the bottom for stocks is about another 18 months out.

All these guys looking at every big down day keep talking about whether we're nearing a bottom. This isn't going to happen quick. It's going to look more like the Bataan Death March, with Paulson and Bernanke poking us with their bayonets at every step.

Still, the Dow came storming back to neutral on the day. And it bounced around there from late morning until within about an hour of the close, staying within a range of about 100 points either side of yesterday's close.

And that was telling. Why, you ask?

Because yesterday's close was uncomfortably close to Friday's, which was the low for this bear market to date. And this market wants desperately to avoid setting another low this quickly. Desperately. And a drop of about 125 points would have gotten it there.

So, it took off in the last hour of trading, posting a euphoric, 400-point gain in the face of a slew of bad economic data.

And in the face of all reason and logic.

But I'm not worried. Monday's gain - aided by the closing of the bond market and the banks - was similarly euphoric. And in two days, it pretty much evaporated.

This one won't take any longer, I'll bet. Oh, we may get a Friday rally, since the market loves to end the week positive.

But we may also get a new low. Reality may set in with today's data. Add in the fact that the next shoe to drop - hedge funds - was a hot topic of discussion today, as was the fact that November's ARM resets are going to produce huge jumps in payments due to the spike in LIBOR over the past month, and you have a perfect recipe for panic.

But only if you're logical. The stock market is not.

Tomorrow will also bring the monthly housing starts and building permits numbers. They're already at 17-year lows. You think they'll be up? And the first look at consumer confidence for October. Where do you think that'll come in: higher, or lower?

Today's late rally was attributed to four different causes that I saw. First, the inflation data wasn't as bad as expected - a "hey, at least it didn't go up" reaction. I already debunked that one.

Second, Citi's loss wasn't as bad as expected. Okay. But it was still a loss. And Merrill's was worse than expected.

Third, Yahoo rallied when a Microsoft exec made an off-the-cuff comment that a deal could still happen. Well, Yahoo's CEO didn't say he welcomed it. So it's not likely.

Finally, as stocks sold off, oil dipped below $70 a barrel. Okay, that one could be legit.

But it's around $72 right now.

So, take three false-hope signals, add in a fourth signal that has since reversed direction, and stack it up against five really bad signs. Add in further bank write-downs. Toss in the imminent collapse of half the world's hedge funds, triggering massive sales of securities, driving prices down further. Sprinkle on the specter of a fresh tsunami of foreclosures after ARM payments go up 10-13% in November.

Then throw in what happens in Asian and European markets overnight. I don't think they'll be as irrationally exuberant as ours, to steal a phrase from Mr. Bubble.

Top it all off with the special sauce of a couple more pieces of bad economic news tomorrow.

And the smart money is on a big sell-off.

Oh, it'll be a volatile day, too. Get this: since the beginning of September, 27 of the 33 trading days have seen triple-digit moves in the Dow. The average change (on an absolute value basis)?

295 points. Take out those six double-digit days, and it's well over 300.

So if you're worried about your 401(k), or your job, take heart. It could be worse.

You could be a stock trader.

(Sorry if you are.)