Post-Vacation Thoughts

Wow. What a week and a half to take a vacation. Either it was a great time to miss, or it was the opposite. Obviously I’m biased, but I’d have to go with the former. Sometimes the daily volatility of the market sends investors on more of an emotional roller coaster than anything else, and that isn’t usually helpful. After all, roller coasters end up right where they started for the most part.

It looks like the S&P 500 traded in a 8.9% intraday range during the 8 trading days I missed, from 1370 all the way up to 1503. Despite that, when all the dust settled, stock prices dropped only 2 percent during my time away, so really my trip (I was in Boston and Cape Cod) saved me some emotional highs and lows.

I haven’t had a lot of time to catch up yet, but one thing did get my attention, so I thought I would share. I don’t know if it got a lot of airtime or not (likely not given it was pretty eventful with the Fed moves, etc), but the market finally got the long awaited 10 percent correction (at least on an intraday basis — 11.9% — it was only 9.6% on a closing basis).

Now, normally this would be unimportant enough that I might not even mention it, but there are a couple reasons why I think it is notable this time around. First, there were tons of people who were refusing to jump in with excess cash until we got that “official” drop. It sounds silly, but when investment strategists think the market is overbought, as many had for several months as the S&P crossed 1400 and then 1500, they need a significant sell-off to be convinced some excesses are removed. I have no doubt that market players who were waiting for a 10% down move are beginning to put some cash to work slowly.

Normally, a 10 percent correction is no big deal. We expect them to happen. I don’t have any statistics handy, but I’d guess we see one every year or so on average. They are normal and very healthy. Amazingly though, we had gone four and a half years without a full 10 percent drop in the S&P 500 index. This worried a lot of people because it was the longest streak ever without a sizable market drop. I don’t think it signaled the end of the world or anything to anybody, but when you go that long, you are due for a fall, and while nobody knows exactly when it will happen, it still prevents investors from getting overly bullish and firmly committing investment funds. The streak, in the eyes of many, was simply a symbol of the times, an overbought market that was being powered by many things, including the private equity M&A boom, which appears to be normalizing.

As I comb through the individual company news times of interest from the last week and a half, I’ll be sure to share anything that catches my eye that would have otherwise been posted had I been in the office. Feel free to let me know if there is anything you would like me to write about in coming days. It’s good to be back, and thanks for your patience during my vacation time.

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4 Thoughts on “Post-Vacation Thoughts

    Welcome back, being from the South Shore in Boston and enjoying the Cape during summers in my youth. I’m quite jealous. I agree that your timing was perfect as the week you missed, while eventful, was more a stomach churner than anything of consequence. I did notice the 10% correction and was quite happy to see it. I think you are definitely right about it being a significant psychological point given that the day that each market fell 10%, we saw a huge buyback into the close. While the markets ended down, all the charts showed very pretty little hammers at the end of the day. The next day, Mr. Bernanke provided a little extra push and we were off the races.
    I was wondering what your thouhts were on the Fed finally making a significant move, though maybe only symbolic, to acknowledge the credit crunch.

  2. apologies for that URL in my comment. I’m not sure what it is…

  3. Chad Brand on August 22, 2007 at 12:36 PM said:

    Hi Dan.

    As for how the Fed played this, I don’t have too many complaints. We can always say they should have moved faster to address the credit crunch issues, but the Fed is always slow to act since they are backward looking. When you look at statistics that are months old in some cases, you are rarely ahead of the curve. Most Fed watchers are well aware of this.

    For those who would like the Fed to dramatically lower the Fed Funds rate to help bail out mortgage borrowers, I disagree completely. Bailing out people (lenders and borrowers) is not what we need. People who made bad decisions should face the consequences of their actions. If you make a bunch of large loans to poor people and don’t do adequate financial checks, I have no problem with a mortgage lender going under. If you borrowed money to buy a house that you really couldn’t afford after a mortgage rate reset, and you didn’t find out how much your payments couold rise to, then you probably deserve to lose your big house and be forced to move into one that you can afford.

    That might sound harsh, but I don’t think there was a lot of shady activity going on, from a legal standpoint. I think the lenders were too easy with their credit adn the borrowers were so thrilled they jumped at the chance without asking any important questions.

    Bailing out these parties, after the choices they made, does nothing to help prevent this from happening again. I also don’t think the Fed should lower rates just to boost the stock market. That is not in their job description.

    As for what they did do, essentially aid in providing liquidity, that seems like a much better solution. Having problems because of the secondary market being too illiquid is something that the Fed should help with. If companies are going to go under, stop giving out loans, or whatever, I would want it to be because defaults are really astronomical and they stop giving out ill-advised loans, not because they simply don’t have a market to sell even higher quality mortgages into.

    Hopefully the Fed’s actions will help with the liquidity issue, because people who deserve to get mortgages shouldn’t be affected by the sub-prime mess. Hopefully we won’t go back to the times when the less money you have, the easier it is to get a cheap loan. Obviously, it needs to be the other way around, and in most cases, it is.

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