Daily market fluctuations... a losing game

greenspun.com : LUSENET : TimeBomb 2000 (Y2000) : One Thread

"The Dow Jones industrial average fell 359.58, or by 3.2 percent, to close at 10,997.93 in heavy trading. It was the fourth-biggest point drop ever for the Dow but was not close to its largest daily percentage decline."

Today's drop in the Dow has been a burst of energy for resident Chicken Little's. In reality, daily fluctuations in the markets are irrelevant to the overall economy... and to the astute investor. The market dropped 23% in a single day back in October 1987. It was not the beginning of another Great Depression... because the underlying economic fundamentals were far better than in 1929.

As noted earlier today, the Federal Reserve took Y2K seriously enough to keep the liquidity spigot open. Investors who realized this made December our "relief rally." Given high growth rates, tight labor markets and increasing commodity prices... most expect the Fed to hike interest rates. In a debt-bloated economy, interest rate changes have a profound influence... as those who have adjustable rate mortgages or heavy credit card debt will discover. As interest rates hit consumers, businesses feel the pinch. And like many Fed tools, interest rates are not a delicate instrument. It might be tough to slow the economy with stopping it in its tracks.

In the coming weeks and months, we will see some dizzying market fluctuations. The key for savvy investors is to look at underlying economic fundamentals... not daily market gyrations. Even a serious drop in the markets does not indicate impending doom. The Dow will eventually find reasonable valuations This might mean a scary ride down to 7,000 or 8,000.

This will be the end of the MARKET as we know it NOT the end of the world as we know it.

And, folks, that might not be a bad thing.

-- Ken Decker (kcdecker@worldnet.att.net), January 04, 2000


I agree with the conclusion, but Ken you didn't go QUITE far enough. As those folks who went to their banks and got loans to go into the market (at highly leveraged rates) get hammered in the drop, you will see a series of economic domonioes fall that are going to be VERY HARD to handle. This will also be a problem with the yuppies who are not of the understanding that the market has 2 directions it can go and have invested the money they are using to pay off mortgages, etc.


-- Chuck, a night driver (rienzoo@en.com), January 04, 2000.

Nasdaq down big time, "Can you say, margin call, sure I knew ya could"

-- Squid (ItsDArk@down.here), January 04, 2000.

NASDAQ P/E ratio up 7-fold in five years?

-- Dave (aaa@aaa.com), January 04, 2000.

>> Even a serious drop in the markets does not indicate impending doom. <<

In my view a stock market crash is not guaranteed to doom the economy, but it certainly will expose the vulnerabilities of the system that have accumulated during a long period of excess. Traditionally, the longer the period of expansion, the greater its legacy of bad debt when a downturn comes.

When banks and investors start to bet the farm that each successive year will be better than the last, they are certain to lose that bet some fine day, and consequently lose the farm.

>> And, folks, that might not be a bad thing. <<

Perhaps. It depends heavily on the extent of the losses. When personal and institutional losses grow large enough, the pain is not confined to the losers, but quickly spreads to the whole community. That was the motivation behind the LTCM bailout and a whole series of bailouts before that.

But you understand better than most folks here, Ken, that the constant demonstrations by the Federal Reserve, that every failure will be cushioned and every risk mitigated after the fact, only encourages the institutions we rely on to become ever more risk-addicted and vulnerable. The policy of privatizing profits and socializing losses has been running full-tilt flat-out for two decades now. In the process, we have glorified speculation and marginalized caution.

Some day soon we may find out that caution was a lot more valuable than we gave it credit for and we'll be sorry we kept such a scanty supply of it for the inevitable rainy day.

In the meantime, let us hope that the stock markets correct in a somewhat orderly way, not an unseemly panic and trample for the exits. However, recent history suggests the start of a bear market could begin with a sudden and dramatic collapse rather than a slow retreat. Like you, I'm watching.

-- Brian McLaughlin (brianm@ims.com), January 04, 2000.

Ken Decker,

I wholeheartedly agree with your quesstimate Sir, which is why I am quietly parked in laddered 90 day TBills at the moment, and not playing shoot the moon.

Care to hazard a SWAG at Mr. Greenspan's action on 1 - 2 Feb 00 at the FOMC?

I think another 1/4 point up in both the fed funds & the discount rate personally, but I am not an Economist either.

Either way it goes, this market is way out of tune for any reasonable prospects short of the second coming, and will come down.

Boy, if I only knew exactly when !!!

Thanks for your insight Sir.


-- sweetolebob (buffgun@hotmail.com), January 04, 2000.

I have one friend that mortgaged his home and plunked all of it into the stock market a couple months ago. He chided and made fun of me for prepping and called me a fool for not jumping into the market frenzy. He called me up Sunday and asked me what I was going to do with all those beans and rice and I got a little ribbing from him. I think I'll call him up tonight and ask him if he needs some beans and rice. I figure he lost one hell of a lot of money today.

-- Beano (beano@beanooo.xcom), January 04, 2000.

Seems like when the "markets" rise, then all the pollies start gloating. Is there any difference?

-- A (A@AisA.com), January 04, 2000.

Nice bit of writing Ken. You just parrotted what another fellow has been telling me for about six weeks. Since, I know nothing about that world, I will tell you he is a professional broker of some twenty five or more years experience. He is an expert in his field in the same way that Cherri is in hers, or Flint in his, or many others on this board are in theirs.

Scary thing is that one hell of a lot of people have pulled their retirmemtn out of CD's in the last 18 months of so to jump into the market. When was the last time the market saw 8000? That is a legit question, not intended to be trite.

Anyone know the answer to that one?

-- Michael Erskine (Osiris@urbanna.net), January 04, 2000.

Michael Erskine,

15-Oct-98 (I think)

OPEN: 7953.10

HIGH: 8375.60

LOW: 7885.60

CLOSE: 8299.40

Why? Relevance? Query.


-- sweetolebob (buffgun@hotmail.com), January 04, 2000.

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