May 2010 Market Update

May 2010 Market Update

 

Two recent occurrences serve to confirm the appropriateness of our current investment strategy:

1.        $1,000,000,000.00 (one trillion dollar) bailout of Greece by the European Economic Union to prevent the collapse of the Euro and hence the European economy.

2.      Flash Crash on the NYSE

 

GREEK BAILOUT

 

This is crisis economics of the worst kind when entire countries, not just companies, declare bankruptcy.  Europe owns so many Greek bonds that they could not allow Greece to default, or their own countries would go down.

 Now they must attempt to grow their way out of a severe recession while paying off this mountain of debt.  Hard to do without deeply cutting expenses (as California is trying) or raising taxes which cuts off any nascent recovery.  We are in the identical situation.  Our debt / GDP numbers are not as bad yet.

What is obvious is that the world economies’ are still in crisis mode.  There was a stampede into Treasuries by investors as this scenario unfolded, driving up the value of the treasuries which we already own.  The charge continued this week as the DOW plunged.  Leaders are trying to get their financial houses back in order, but until they do; we do not need the drama in our portfolios.

 FLASH CRASH ON THE NYSE

 

On May 6th the NYSE experienced a drop of 1000 points in a matter of minutes.  Stocks trading for $30.00 or $40.00 went to being worth pennies.  The exact cause of the turmoil is still and may never be known or understood.  The likely culprits are the high speed trading systems that computer technology has enabled us to design in recent years and also the complexity and lack of transparency of the derivative market which we have discussed in past Market Updates.  (Please refer to our Market Update Archive Section for prior reports).  You can’t fix something you cannot see.  In this instance the market recovered quickly but not completely.  Who is to say that the next time we will be so lucky?

 The volatile and fragile nature of our current economic and market systems are likely to continue this pattern of rolling crisis for quite some time.  There are no opportunities in this environment for the small, long term investor – but this too, shall pass.

FINANCIAL REFORM BILL

 

The senate has passed a financial reform bill that addresses the major problems that led to the crisis.   Now, it must be reconciled with the House version which is a much weaker bill.  There is enormous pressure being imposed on lawmakers to water down this legislation by the banking industry.  Let us hope they can withstand the pressure and do the right thing.  This will go a long way toward making it safe for us to be in the equities markets again but the rest of the world’s markets must follow suit.  Germany outlawed trading in naked shorts (selling stocks you don’t own) last week and the market plummeted.  The big players are dead set against reform.  It will be interesting to watch this unfold.  I will keep you posted.

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