Tuesday, December 16, 2008

Stock Market Volatility

Recently Warren Buffett said that if you wait until you hear the birds sing, it will already be spring. In other words, if the S&P 500 is forming a V formation, there will be a quick move back to the last ten years' usual price range. If the S&P falls back to 720 as it did a few weeks ago (actually 750), there's a good buy. Many people are saying that the Dow might fall to 5,000 which would correspond to an S&P of 500 (the Dow is currently 8924 and the S&P about 900 and at their heights the Dow was slightly over 14,000 and the S&P about 1480.) A number of my students are bearish. In contrast, in 2000 they were all buying Internet stocks. This is true at both Stern School of Business and Brooklyn College. Both student bodies were buying Internet stocks in 2000 and are many are talking bearish now. When I said that I bought some GE shares a number of my Stern students scoffed, saying the financial risk was too great. However, a Forbes writer, Ken Fisher, is bullish. Nevertheless, the majority of media hype has been very pessimistic. My mother, who does not invest in stocks, is extremely pessimistic. She believes that unemployment is at an all time high, forgetting that for most of my early professional life (from the time I graduated college in 1975 until the time entered the doctoral program in 1986) the current 6-7%unemployment rate was viewed as low. Howard S. Katz believes that this has been a rare, media-driven bear market. The vast monetary expansion of the past four months would seem to be a fundamentally bullish short-to-medium term phenomenon.

There is a certain illogic to the media's coverage of credit swaps. According to the media, the banks could not value the derivatives properly but invested in them anyway and now are losing their shirts. Now, they are experiencing unanticipated defaults and risk. But if they could not value the derivatives intelligently three years ago, why can they value them intelligently now?

I recently obtained a car loan for 6%. For much of my life car loans were above 10%. In 1991 I paid 11% to buy a Ford Probe. Now, I pay 6%. Does that suggest a massive catastrophe in the circulation of money?

It is difficult to grasp the current market downturn--is it purely a psychological panic, or is there something to the derivatives devaluing? Bears believe there is something, bulls (and they seem to be few right now) are skeptical. If the market decline is psychological as Howard S. Katz suggests, then spring may come in late winter.

I hold a fair amount of mining and gold stocks that have been hurt in this downturn but they went up very strongly today, about 10%. Overall, my portfolio is down about 11%, almost all of it due to the gold stocks and some commodities etfs. I have been buying stock during this downturn, though. It is possible that the Dow will fall to 5,000. In case, I am keeping some powder dry.

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