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Saturday, June 5, 2010

Is it time to capitulate?

I don't know if anyone's tried to rank the words investors least like to hear, but contagion and capitulation have to be, I would think, somewhere near the top of the list. Both were bandied about on Friday. Capitulation because of the big down draft in stock prices and contagion because of Hungary's debt woes.

I spent a good part of the day Friday glued to the TV set watching the hysteria build on CNBC. By the time Maria Bartiromo came on, it was at a fever pitch. She ramped it up a notch as she's wont to do by screeching that it's the President's fault because he had promised the market a good employment report at his press conference earlier in the week. Huh? She said the President had said he would keep his boot to the throat of BP. Huh? I watched that press conference; and as I recall, a reporter had asked the question in those terms and the President had said he wouldn't phrase it like that. Apparently, hysteria on CNBC knows no bounds. Look up Rick Santelli in the dictionary if you're not convinced.

According to Ms. Bartiromo, the President had gotten investor's expectations up and apparently was responsible for the disappointment experienced when the numbers were released. All I've got to say is that investors moving in and out of the market on the basis of one economic report deserve what they get - good or bad. It isn't investing, it's speculating. Unfortunately, most viewers probably don't know the difference between the two and are getting whipsawed by Ms. Bartiromo, Mr. Santelli and their ilk.

All of this provides a teaching moment. In calm times, it is not as easy to get people's attention. Investors, as opposed to speculators, do a lot of work on their asset allocation and arrive at an allocation appropriate to their goals, risk tolerance, capacity to take risk etc. Investors recognize that there will be periods like now. Investors understand that a key is to not let emotions rule their investment decisions.

Investors recognize that the current market environment means different things to different people. Younger investors should have their buying hat on. This is why they hold bonds. At this point they should be thinking of incrementally reducing bonds and adding to stocks. Older investors, who have more assets than they need and plan on leaving a sizeable inheritance, should be of a similar mindset. For those tossing and turning at night and generally afraid to look at their account, you may want to think about putting 5 or 10% into bonds (actually bonds have done great in this market).

The point is to concentrate on making rational, non-emotional decisions. Waking up at 3 am and going on line to sell everything you own typically backfires.

On the contagion issue, it is possible to hyperventilate imagining the whole world defaulting. Recall that this first became an issue in 1997 with the East Asia crisis. Contagion in that episode eventually spread to South America. The important point is that it was contained and followed by strong markets.

Disclosure: This is not investment advice to any specific individual but is the opinion of the writer and is intended only for instructional purposes. Investors (and speculators) should do their own research and consult with an investment advisor before making investment decisions.


  1. As Warren Buffett says--- A simple rule dictates my buying: Be fearful when others are greedy, and be greedy when others are fearful. Looks we're heading into one of those times to be greedy.

    Or as Kipling says--- If you can keep your head when all about you / Are losing theirs...

    CNBC's job is to sensationalize the business news, and they do a good job of it. If people listened to them religiously, they'd be whipsawed in and out of markets on every little whim.

  2. I'm sure they thought of it but somebody should offer Warren Buffett a weekly tv show. It could go a long way towards helping individuals manage their assets. He could call it "Financial Literacy with Warren Buffett". It would probably be a big hit if it didn't put everybody to sleep.

  3. I watched Friday too. Can't agree with the hype thing. The president used the words boot on the throat of B.P.. He also said Focus on jobs like a laser beam. LOL- LASER BEAM!!! I don't get the Santelli thing either, HUH? I couldn't believe the president was hyping the markets, I was like HUH!!!! I think Obama and the markets whipped sawed everyone, and sounds like your blaming the messengers.

  4. If I recall correctly somebody did a cartoon or a children's book with Buffett in it offering his sage advice....... The Secret Millionaire's Club, I believe.

  5. re:Anonymous...I would like to see a transcript of the press conference. I remember a reporter using the phrase "...boot on their throat" and Obama saying he wouldn't put it that way. He then went on to say that they were going to be real tough with BP etc. Maybe he did use the I say I would like to see the transcript.
    My view on the hype thing...After 1994 the Federal Reserve decided that it was going to tell the market what it was going to do. That holds true today. Today the Fed tells the market it is going to keep interest rates low for an extended period. This enables (and has enabled for a long time) the so-called carry trade whereby Wall Street makes billions borrowing practically for free and lending at higher rates around the world. This has created the equivalent of a "nanny state" in the investment world. This morphed into the so-called Greenspan put where he came in at the hint of a slightest softening in economic activity to prop up markets. Now we interpret the President saying that he expects a great employment report to be a guarantee. Well...that's not the way investing works or should work. You put money on the table and you get an exceptional reward over the long term if you take extra risk, on average, and yes you can lose big on occasion. No the president (and it shouldn't be by the Fed either).
    Just a point of view.
    Thanks for stopping by Anonymous.

  6. Mr. Wasilewski, It was actually Robert Gibbs speaking for the Obama administration. I agree with 99% of your reply. Seems to me that today's investment environment has no confidence, there are to many political game changers. I think investors listen to every word the administration speaks, and watches every action. The president did speak to the jobs number two days before it's release in a speech, broadcasted on T.V.. Considering the Dow closing below 10,000, a terrible jobs number, no handle on the oil spill, Europe, etc.,mix that with politics and I think CBNC did a great job. Besides the cheap shots at Santelli,( you never really said what your grip was) I enjoyed your blog, even if we have a small difference of opinion. Thanks for the reply.

  7. Thanks for the clarification on the comment. I'm sure we agree that Obama made a mistake in saying what he thought the employment report would show. He shouldn't comment on upcoming economic number, especially in this environment. Hopefully, he's learned.
    On Santelli here's Jon Stewart's take on his infamous rant:
    Granted that Stewart is the flip side of the entertainment industry and goes over board in the other direction, I guess it's a matter of taste.
    I'll admit I keep CNBC on with the sound mostly turned down so I can keep one eye on the euro these days as I read and I turn up the sound when Santelli comes on.

  8. Stewart's funny, but not my cup of tea. I think he took an empty shot at Santelli too. He never really said anything about Santelli, just some others like Jim Cramer. If you think about it Santelli was right about the housing plan. He also was right about the how many,many people in this country feel. I also love the fact that with the tea party movement, more people are getting involved, it's not politics as usual, all politicians will be under scrutiny and held accountable. How can that be bad? I'm sure Stewart likes Santelli too considering that video had millions of views. Stewart may be a liberal entertainer(?), but we all know he's a capitalist at heart.

  9. Here's my take and I know we disagree on this but that's ok - that's what makes for a good discussion. I know a lot of people put the whole housing crisis mess on borrowers taking on too much house and not being able to meet their obligations. They point to the political push to get everyone to own a house and so forth. Admittedly that was part of the problem.
    To me,however, it's a drop in the bucket. The bigger problem was the investment banking crowd that got exceedingly greedy and turned its head as all of this was going on. This crowd includes Santelli and CNBC and the CEOs of California banks they brought on the show and lavished in praise - the exact same ones they bash today. It even includes the trading floor that was ready to get pitchforks and go after the "losers" as Santelli labels them.
    Santelli and Stewart for that matter try to paint themselves as ordinary people but they are obviously not.
    I assume you saw Santelli label Liesman (sp?) (I believe it was Liesman) "weird" last week in one of their exchanges.
    Here's my prediction (write this one down); if the market continues volatile, which I think it will, Santelli will pull a Don Imus within the next 12 months!