Reversal of Fortune, Part I

Said an equity trader named Corso:
"After last week, I certainly swore so
That the Dow was at pains
To give up its gains,
But this week it looks even more so."

The Dow Jones Industrial Average suffered its worst one-day drop for the year to date on Tuesday, falling 213.66 points, or 1.7%, to 12715.93. On the heels of a disappointing, holiday-shortened previous week, that made for a 4% decline over five trading days. After celebrating its best quarter in a decade, it's as if the market paused for reflection, looked around and didn't like what it saw. The Fed seemed to hint last week that no further stimulus would be forthcoming, and the European debt crisis heated up again on Tuesday, with rising Italian and Spanish bond rates reflecting renewed risk fears. Perhaps the rudest shock of all came from China, where we learned that sales of Caterpillar plunged 50% in March, casting doubt on both the company's prospects and the Chinese growth outlook.

Time To Invest?

Said a broker, in recommendation,
At a client's undue hesitation:
"Throughout time, we deduct,
Sh^t has always been f#cked;
Pray be bold in your risk allocation."

In times like these, after a prolonged economic slump, isolated indicators may offer glimmers of hope; an improving jobs number here, more manufacturing there. And yet, the economy as a whole is not clearly improving. At such times, investors may become paralyzed by the conflicting data, waiting for all the stars to align and thereby missing a rocket launch to the moon. Investors may need the equivalent of a "snap out of it!" delivered with a bracing slap. Here to meet this pressing need is Joshua Brown, the investment advisor and blogger known as the "Reformed Broker". Urging investors to "Get Your Shit Together," Mr. Brown says:

I have no idea when this secular bear market and the attendant economic malaise will truly be over - but I know for a fact that if you're not planning for its end you're going to miss your chance.

Overheard at FedEx

"A drop in the pricing of oil
Should sweeten the fruit of our toil,
But since shipping has slowed
In the air and the road,
The fruit of our toil may spoil."

When should shippers not rejoice in the falling cost of fuel? When it indicates a slowing economy, according to the Wall Street Journal's Kelly Evans. Her Ahead of the Tape column points out that lower oil prices have coincided with weakness in the price of $FDX and the S&P 500 generally. Although cheaper fuel is clearly a benefit when looked at in isolation, it may be correlated with global economic activity, as is the shipping business.

From Deep Pool to Bottomless Pit

When volume and confidence rise up,
Investors approvingly size up
The debt of a nation
In great circulation;
Less so when liquidity dries up.

Now that the Athenian contagion has spread to Rome, the thing that made Italy's sovereign debt so attractive - namely, the shear amount of it - has become a focal point for investor fears and issuer nightmares. At €1.9 trillion ($(2.6 trillion), Italy ranks behind only the USA, UK, Germany and France in the league table of sovereign debt. As the Wall Street Journal noted, big investors felt comfortable with Italian bonds, despite the country's 120% debt-to-GDP ratio, because they knew they could always sell their position. Suddenly, this is no longer true, and Rome must figure out how to roll over the next €300 million of maturing bonds, which the market now prices at over 7%.

Bear Assets

The time-honored stock market lowdown,
In a global economy slowdown,
Is: a market advance,
Like a loose pair of pants,
Proves that what may go up, has to go down.

Stock markets around the world on Thursday heeded the lowdown on the slowdown, and proceeded to go down. Grim economic signs were intercontinental: in the US, where the Fed warned of "significant" downside risks to the economy; in China, where the latest manufacturing data appeared weak; and in Europe, where the crisis of banks and sovereign debt showed no sign of resolution. Proving that bad fundamentals trump all in the stock market, the S&P 500 sank 3.2% to 1130, and other indices also reversed recent gains. Ironically, belt-tightening may not help the situation, but that is a limerick for another day.

Check Your Emotions

Investors, with faces quite ashen,
Their holdings may clamor to cash in,
But advisors persuade
That it's best not to trade
In a greedy or panicky passion.

Down 600 points, up 400 points, down 400 points again - the volatility of the stock market this week may induce emotional volatility on the part of those whose retirement savings are tied up in it. However, at such times it is best to remember that the investor's two worst enemies are their own fear and greed, which may prompt rash decisions with adverse long-term consequences. As the legendary early 20th century trader Jesse Livermore once said: "The successful trader has to fight these two deep-seated instincts. Instead of hoping he must fear; instead of fearing he must hope." For more on this topic, listen to this weekend's Marketplace Money on public radio, where an expert panel will answer listeners' questions about how to respond to the market upheaval.

Disclaimer: nothing in this post should be considered as investment advice, for which the reader should turn instead to a qualified investment advisor.

Belt-Tightening Blues

In the stock market sell-off's severity,
There's a White House political rarity:
While private demand
Is too soft to expand,
There's a Democrat talking austerity.

As millions of Americans fretted about S&P's Friday night downgrade of US sovereign debt, Monday's stock markets saw a tsunami of selling that began in Asia and rolled across the world, ending with the S&P 500 stock index down 6.7% for the day. However, the downgrade itself was not the catalyst, as evidenced by the fact that Treasury prices actually rose. The market was much more spooked by waning growth prospects, caused in part by government belt-tightening at a time of slack private demand. How ironic that, following a Republican President who stimulated the economy with spending and tax cuts, and his Democratic successor announces years of growth-dampening spending cuts ahead.

Weekend Worriers

Whenever a bombshell discloses
After Wall Street on Friday night closes,
The market is fraught
All weekend with what
The chance of new highs or new lows is.

Listening to the weekend's feverish speculation as to the market effect of the S&P downgrade of US sovereign debt, one could not help but hark back to the Lehman failure in 2008, when the world waited breathlessly for the Asian markets to open and point to our global economic fate. Early results this time around indicate a sharp sell-off of anything risky, though not necessarily US Treasury bonds themselves, the risk perception of which has not really changed.

Why Did the Market Fall?

Said an equity trader, "I'll cop to this:
I can't tell why we tanked from the top to this,
But the punters of punts
All concluded at once -
There's no basis for being an optimist."

From London and Frankfurt to New York and Tokyo, stocks fell around the world on Thursday and continued on into Friday. The S&P 500 closed at 1200, a level not seen since last December. Many were caught by surprise and looked for the catalyst that would explain such a dramatic global correction; but, as Marketplace's Heidi Moore put it in her blog,

"No one knows... 'The Market' is too large, too sprawling, and is filled with people moving their own investments for their own reasons. Saying “the market was worried about recession today” is like saying “all the waves in all the oceans started to worry about global warming.”"

Still, once may hazard a guess that, with the removal of the US debt ceiling as a focal point for fear, market participants could look around and notice that nothing else was going right.

The Hindenburg Omen

A little-known stock chart formation 
Claims to presage a market deflation;
Did the ominous name
Bring the "Omen" to fame,
Or is there a true correlation?