Sunday, January 27, 2008


During all the recent insane volatility in the U.S. and world financial markets I’ve been wondering about the mental stability of some of our illustrious investors, market managers and traders. Aside from the recent angst over the sub-prime mortgage market losses, the economy has been with some ripples, mostly robust. After earlier losses, last Friday the market lost 177.44 points or 1.38% all after the previous day’s gain of almost 300 points up from a -300 point start?

This week as a response to rising interest rates and to counter fears of an impending credit crunch the Fed lowered the Funds interest rate by .75% and is expected to do so again next week. The White House just announced a substantial stimulus package. On Friday Caterpillar announced a better than anticipated performance matched by other positive earnings reports from several companies including MicroSoft which reported a 79 percent rise in quarterly profits.

All this excellent news would appear to benefit the consumer and give them easier access to money and fuel some positive spending. Despite all the good news some only heard the bad hence the huge losses.

These same investors, market managers and traders all seem to delight in reacting to their negative perception of the world. Oh reality where art thou? This pea in the mattress perception seems to be everything in the marketplace right now. We now hear that this august group will be carefully studying the wording of the Fed's upcoming announcement this next week. Carefully studying? God knows what they will read into that announcement. Our economists now have to be counseled by psychologists and linguists lest they be misinterpreted.

I guess that we shouldn’t be surprised that traders are paid by transaction and in this flurry of buying and mostly selling, they stand to make a bundle. Hmm. Now they wouldn’t manipulate the market would they? Can you say sub-prime mortgage securities?

In order to infuse more confidence (not) I thought to include a recent comment from the New York Times who quoted Jim Cramer, hedge fund manager turned television stock picker who commenting on loss aversion stated that drugs tended to reinforce traders' inability to spot a looming downturn, "Prozac and all those other drugs banish the 'this is the end of the world' thoughts. Which means you are not as anxious as you should be about an obvious downside." Other studies reflect that traders who suffer losses tend to speculate more in order to make up these losses. Inspires confidence, eh?

A recent headline screamed,

Analysts warn that markets could remain volatile for a number of weeks!

That said, some believe it and it becomes so (could or might now equals will be). This self-fulfilling prophecy is typical of the headlines we see these days. Instead of paying realistic attention to the nuts and bolts of our economy, we hear the likes of former U.S. Federal Reserve Chairman Alan Greenspan, who recently stated that, “a recession in the U.S. was "possible" later this year”! With that statement, the markets around the world tanked. Smart man, maybe, but let’s get him a gag for the time being or lock him up without a phone or ability to communicate with the outside world. Gees!

Panic and the lack of rational thought have prompted even more panic and a huge overreaction. The smart folks are now out there looking for bargains and they should be aplenty. On the other side, however, if enough people buy into the negative scenario and believe that something is true, then they can make it happen in our world. So, while many flock to gold, bonds and treasury notes most of the smart money stays put and waits for calm.

OK, I’ll admit that this is an oversimplification of the situation and there are other factors to be considered. All things being equal, however, let’s give the market a fair chance to recover without the unfounded and ill advised blather from doom sayers about a possible recession.

Maybe we should all contact our congressmen/women and senators and ask them for a bill in Congress to require background checks, drug screening (full panel) and psychological profiles for all market managers, traders and, yes, analysts too! Sadly, it probably wouldn’t hurt.

Just ask the French Societe Generale Bank about rougue trader Jerome Kerviel who unexplicably held fraudulent positions that cost the bank tens of billions of dollars.


Ned Buxton

No comments: