Change in Direction

Early Tuesday morning, September 20th I saw a fundamental change in the stock market. What precipitated my real concern was the combination of changing dynamics coming from Asia, the intransigence of world governments and the inversion of supply and demand indicators. In the case of the change in Asia, it was reported that freight and air shipment capacity was being underutilized. The meaning of this is that fewer goods are being manufactured and shipped. This in turn means that the dynamo, that has been Asia, has scaled down dramatically in a very short period of time. At the same time, world leaders, attempting to deal with the debt crisis in Europe, seem stalled. US lawmakers seem unable or unwilling to compromise in a manner that would relieve the strain on consumer confidence that has been in free-fall since late July. Finally, on the technical side, the graph of supply and demand crossed over with demand for stocks dropping while supply increased considerably. This sent a caution signal that would indicate the need to lighten up on stocks and return the funds to more liquid and stable investments. With manufacturing slowing, consumer confidence reduced, government paralysis and technical factors pointing in the wrong direction it seems action is warranted. Although the markets made a turnaround in the latter part of last week and today, the indications for the balance of the year do not provide much solace. When comparing where we were at the end of May and where we are today the forward-looking perspective is that there is a need to be more conservative with funds. This is not anything like I saw in October of 2007, when we moved decidedly to a defensive position, but rather is an attempt to conserve funds to allay investors’ concerns with the turmoil in their statements that have occurred during the past three months. I still believe better days are coming but for now we are in a down draft. Ed Mallon

Stepping up the Market

Since the latter part of July, we have witnessed volatile markets. On many days, the DJIA has changed as much as 300 points. Yesterday (September 12) was not nearly as bad as some days, but as an example, the low point of the DJIA the market was down 167 points from the day before, but closed up 69 points, a change of 236 points. More meaningfully, the market showed a 98% down day at one point yesterday and closed as a 54% up day. If you didn’t tune in until the end of the day, you might have thought “good day in the market.” It is difficult to be a long term investor if you are looking at day to day or even month to month results. If you add to this the media hyping everything that is negative, you can become very depressed. The question that you need to ask is always “is the market getting better or worse?” To answer that question, you need to first look at the ongoing pattern. Many small investors got out of the market on August 8th. Thus far, this has been the bottom point in the current market seesaw. Since then, we have witnessed increasingly higher lows each time the market has dropped. When you see negatives on your account statement for July followed by August, it’s easy to feel bad. If you bailed on August 8th, you should feel sick, because you did exactly the wrong thing at the wrong time. In a Wall Street Journal article on Monday, September 12th, they reported on a study that was done by Prof. Richard Sylla, a financial historian at New York University. Prof. Sylla studied market behavior from 1790 to 2000. “By analyzing patterns detected years ago with two colleagues, he accurately predicted in 2000 the decade of overall declines that haunted investors.” At the request of the Wall Street Journal, Prof. Sylla has made a new forecast. “Better days lie ahead,” he says. If past market patterns hold true, as they did over the last decade, stocks should bottom out during the next few years and begin a recovery. He is not talking about a week, a month or a year, but a decade. Here is the best part. Prof. Sylla says, the DJIA could climb by 84% by the end of 2020 and the S&P could climb by 99% from last Friday’s close. He is expecting a 6.5%, inflation adjusted, real rate of return over the next decade. Is he correct? I don’t know about his numbers, but his attitude of taking the long view is what is so important. Ed Mallon