Monday, May 31, 2010

Putting the Market into Perspective

May was a topsy-turvy month for the stock market, with the emphasis on the turvy. Although the S&P 500 finished last week’s wild ride with a tiny gain, it lost nearly 9% on the month (the stock market isn’t open today). That is the worst monthly loss since February of last year.A

A decline of this size officially qualifies as a “correction.” Here is a more precise definition:

Stock market correction is usually when the stock market, usually the Dow Jones Industrial Average, declines 10% or less in a relatively short period of time….A stock market correction can help the stock market catch its breath and hit even higher peaks.”B

Yes, well, maybe. All bear markets start out as market corrections, and we won’t know for several months which one we’re dealing with at the moment. But for what it’s worth, if one subscribes to Millard’s axiom that markets always overdo their movements regardless of the direction, I’d say we had this coming. That’s because the recovery moved with breathtaking speed and force.

In other words, we overdid the recovery, so it was time for a correction. But then, if Millard’s axiom holds true, we will overdo the correction as well. But hey, what do I know? About as much as anyone else, which is to say, not much at all.

Now here’s a thought that puts this conversation in its proper perspective: Today is Memorial Day. Generations of gallant young men and women have paid the ultimate price so that we can live in a free and open society. Let’s not waste too much of this precious life talking about market corrections.

Have a great week.

A -

B -

Sunday, May 16, 2010

Good News and Bad News About a Strong Dollar

As I write this, my son Drew is in Sevilla, Spain visiting a friend en route to a summer-long study and internship in London. Europe’s economic woes have, in this case at least, come to our family’s aid in the form of a stronger dollar versus the euro and the British pound.

When we visited Great Britain in 2007 for Drew’s high school graduation trip, a U.S. dollar would buy only about half a British pound, and we groaned about the sky-high prices (the equivalent of $20 for a hamburger). In today’s reality, however, a dollar buys almost seven-tenths of a pound. That means that Drew’s purchases will cost about 27% less than they would have three summers ago.

While a strengthening dollar is good news for Drew and anyone else traveling abroad these days, it could be bad news for our country’s overall economy. A stronger dollar means that our exports become more expensive for other countries’ consumers, which could lead to further reductions in our manufacturing base. It could also lead to a resurgence of imports into the US, which could worsen our trade deficit.

This economic stuff can be tricky, can’t it? Good news can be beneficial in one respect while being harmful in another. Whaddya gonna do? From a selfish perspective, I’m grateful that Drew’s summer abroad will be a little less expensive than it might otherwise have been, and my national pride likes the idea of a strong greenback. But as an American pulling for the recovery to continue, I’d like to see foreign consumers buying goods and services that we create in the Land of the Free.

Enjoy your week!

Monday, May 10, 2010

A Stomach-Turning Drop

Last Thursday’s fast and furious drop in the stock market appears to have been influenced—at least in part—by a typographical error. The Dow plunged 1,000 points in five minutes before it partially recovered. A number of trades had to be cancelled because of errors related to technology problems.

Events such as this emphasize the futility of trying to predict the short-term direction of the market. We also shouldn’t read too much into this regarding where we’re going. As I have said many times, we’re entering a new economic era. We don’t know exactly what it will look like or how long it will take to get there, and many factors will contribute to the process. We just have to position ourselves as advantageously as we can, and let the process run its course.

Have a great week!

Sunday, May 2, 2010

Mad at Madoff

You may be aware of the current efforts in Congress to reform our financial system. You might want to pay particular attention to how the lawmakers treat the enforcement of financial frauds, because up to now, investors appear to have enjoyed very little protection from financial crooks.

I recently listened to the audiobook No One Would Listen: A True Financial Thriller by Harry Markopolos. It tells the story of how Markopolos and a small team of investment professionals discovered the Bernard Madoff fraud and reported it to the Securities and Exchange Commission (SEC) repeatedly, beginning as early as 1999. But, as the title suggests, no one at the SEC would listen.

Madoff, as you know, is the man who pulled off the largest Ponzi scheme in history, and is estimated to have robbed investors of upwards of $60 billion. The lives of thousands of innocent investors were turned inside out by this charming monster of a human being.

Markopolos describes himself as a “quant,” a math whiz who is able to recognize patterns and relationships in numbers that most of us can’t. He worked for a Madoff competitor, and his employer tasked him with discovering—and replicating—the secret to Madoff’s too-good-to-be-true returns. It didn’t take Markopolos long to discover that Madoff’s claimed returns were mathematically impossible to achieve.

Despite repeatedly laying out a clear case to regulators, Markopolos was routinely ignored or treated as a pest by SEC investigators. While the SEC jealously protected its turf and shuffled papers, Madoff managed to reel in sucker after wealthy sucker as he funded a lavish lifestyle that included making many apparently generous charitable donations. At the same time, in a cruel irony, Madoff was accepting massive deposits from many charitable foundations. He was certainly aware that he was guaranteeing the eventual bankruptcy of every foundation that invested with him.

The only thing that brought Madoff to justice was the tumbling stock market of 2008. As investors withdrew their money to pay for other obligations brought on by the national financial crisis, Madoff quickly ran out of money (he had spent it all, of course) and abruptly turned himself in to the FBI.

In appearances before Congress and on 60 Minutes following the debacle, Markopolos excoriated the SEC for its arrogance and incompetence. The agency suffered well-deserved national humiliation, and has promised to reform itself. That possibility may be out of its hands, however: Congress may well restructure the SEC, or possibly replace it with an entirely different organization.

Stay tuned, and have a great week!