Archive for May, 2010

This week we received two charts that are so very instructive about the industry we are part of. Here is the first:

The source for this chart is Bloomberg. The story with it was the traditional sell side story, basically that the market is soaring but that it is not too late to join in. Appealing and compelling! Get on that train today!

The other chart we received was also from Bloomberg, covering the S&P 500 index going back to January of 2007 instead of February of 2009. 

So, the part from February of 2009 looked identical but the left side had a very large fall included. The point of that chart was to show that, from January of 2007 through  the late 2009 you still needed more rise in the market just to break even. Not compelling! Not appealing!!

Which chart is more important to an investor-the one showing that they need to hurry and join in the meteoric rise or the one that shows that they still have significant market losses and no compounding of your money? You be the judge.

Yes, we have been repeatedly cautious about market valuations this year. We have said that prices have gone too far and too fast and that risks are rising as a result. We have sold some positions and increased our cash positions (because we did not see much that seemed compelling to buy). However, the speed and depth of yesterday’s market collapse was not something we foresaw at all. It was shocking to everyone, including us.

We did not see the market rising as quickly and steeply as it did in 2009 and now we certainly did not expect this rapid a drop. What can we learn from this? First, the market volatility of 2008 is not totally behind us. We still remain in a turbulent market, range bound in the long term but able to climb steeply and then fall sharply. It is a market best suited for hard work and diligent processes rather than passive investing.

The other problem from yesterday was the fact that we seemed to have computers running amuck. Much of the speed of the descent stemmed from computer trading programs, flash trading, etc. The passive investor believes the “market is efficient” and correctly prices stocks at all times. Yesterday afternoon, in that case, all American businesses lost more than five per cent of their total value in less than ten minutes and then regained most of that value over the next hour and a half. I don’t think even the staunchest advocates of efficient markets would like to defend that proposition. So, we had computers and people losing their grasp on reality and nearly causing a calamity worse than the oil spill in the Gulf. It seems to us that we need to replace some of the speed of computers with some more level headed market makers. Flash trades and High Frequency Trades take place on Wall Street in milliseconds. We don’t know about you, but we like to consider our decisions a little longer than a millisecond before we make them. If we don’t want to risk more meltdowns (or melt ups), we need to get some rational people back in front of the market, instead of just the computers that people have programmed to respond quicker that we can poor mortals can think.