Email – #404

The markets never sleep…

And tomorrow may seem like a nightmare. Overnight, Asian markets plunged by more than 5%. This morning, Europe is selling off to the same tune. Already, Dow Futures are down more than 350 points and Nasdaq and S&P futures are down with similar magnitude. There are two possible scenarios tomorrow and you should be ready for both.

First, the market may open sharply lower and plunge in a one-day mini-crash. This would likely signal a near-term bottom and set the stage for a rally.

Second, there could be real intervention in the credit markets – something along the lines of a government credit guarantee for the bond insurers who are the latest and most important cog in the financial mechanism to unwind. If this were to happen, the market would likely stage a rally that may actually be sustained.

Markets fear uncertainty and they react irrationally in response. There is value to be found everywhere, but the share prices are not reflecting this. Instead, they are reflecting the fears of short-term traders and panicked speculators. Margin calls, fears of a financial meltdown, continued economic trash talking serve the purpose of creating a psychological barrier to investing. Regardless of evidence to the contrary, certain sectors are being hammered mercilessly.

Nowhere is this truer than in the financial sector. Here, all companies are trading as if they were one. No heed is being paid to companies that are better managed, raining dividends, buying back stock, or experiencing the most insider buying in a decade. Nothing matters right now but the unknown. As absurd as that sounds, fear is the new King on Wall Street.

I have seen times like this on many occasions. Those who panic are usually missing the opportunities that markets present during selloffs that are overdone. Those who stay the course and even have the guts to buy good assets at even cheaper prices will come out ahead. Unfortunately, most investors fall into the first category and panic when they should be rational and sell when they should buy.

If the market gaps down tomorrow, you will see wild “prints” on stocks. Some may open down 20% or 30% on the bid with spread wide enough to drive a tuck through. Others may not open for hours. These are classic signs of a buyers strike and sellers will rule. By the end of the day or the week, things will look different. If you judge a market’s worth based on a few hours of trading, you will be making a mistake.

There is an old Wall Street axiom that you should pay heed t “Don’t fight the Fed.” Right now, the Federal Reserve, The Treasury Department and both houses of Congress are on the same side – a very rare occurrence. Their mandate is to avoid the very type of panic that we may see tomorrow. It may happen regardless, but you can place your bets that there will be pump priming of a magnitude that we have not seen in while – whether that comes in the form of monetary stimulus or a financial bailout package similar to the S&L crisis, it will all be on the table.

In a few hours, you will have to decide what type of investor you are. I hope the markets do not free-fall tomorrow (even though a part of me would like nothing more than to buy some companies on my list for lower prices.) But if they do, keep in mind that one trading day or even ten trading days are mere blips on the screen in hindsight. Also keep in mind that it is during panics that the real money can be made.

Karim