Insights & Advice

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What’s that sick feeling in your stomach?

It has been some time since investors have experienced the kind of volatility that has afflicted the global stock markets over the last two weeks. The best thing I can say for the present down draft is that it is happening rather quickly. Hopefully, by the middle of this week it will be time to buy this dip.

A week ago, I wrote that the supposed ‘computer glitch’ that sent the markets tumbling last Thursday was nothing of the kind. The ‘flash crash’ as some are calling it, was real and it looks to me that the markets are determined to re-test the lows made that day in short order. The Dow’s 1,000 point crash ended at 9,787, the NASDAQ fell to 2,185 while the S&P rebounded off its 200 day moving average at 1,065. Look for these levels (or a little above them) as the end to this particular correction.

The markets certainly have a number of reasons for selling off. Over in Europe, despite the near $1 trillion bailout plan announced last weekend, investors worry that it may not be enough, especially if some of Europe’s bigger members come into financial difficulty. Of course, it didn’t help that President Nicolas Sarkozy of France, in a pique of anger, threatened to abandon the Euro if certain EU members did not back the Greek bailout plan. Although French officialdom quickly denied any plans to exit the Euro, it was too late. Both the currency and world markets plummeted on Friday.

Here at home, we have our own drama. On any given day it seems some government agency or official is lobbing another lawsuit at the U.S. financial sector. It appears New York’s Attorney General (and democratic candidate for Governor) is planning to prosecute anyone wearing wingtips and a suit right up until Election Day. At the same time, the SEC is looking at everything from credit agencies to mortgage lenders to money center banks. The Administration-controlled agency, after two years of non-action, is suddenly hot on the trail of supposed wrong doing.

As regular readers are aware, I am no friend to the likes of Goldman Sachs, big banks and other brokers who got us into the financial crisis in the first place. Yet, I have wondered at the timing of these charges, beginning with the lawsuit against Goldman Sachs. There is no coincidence. The financial reform bill that is being debated in Washington right now and the expanding charges against Wall Street are an orchestrated attempt by the Obama Administration and a Democratic Congress to pressure lawmakers to pass a massive financial reform bill on their terms.

Now, I’m all for more regulation of the financial services industry. I have written many columns revealing what I perceive are unethical practices and abuses perpetrated on the public by said industry. Unfortunately, these political tactics have also had major side affects: both trashing the markets while at the same time scaring off retail investors, who were only recently thinking of re-entering the stock markets.
Of course, the politicians figure that once the reform bill is passed, investors will take heart and go back into the stock market, protected by a raft of new regulations. I suspect a lot of these so-called legal charges will quietly disappear for ‘lack of evidence’ or because the charges were ‘too difficult to prove’ at about the same time the bill passes or shortly thereafter.

My take on investor’s European worries are that they are overblown. Now that the EU has put a trillion dollar safety net under European economies, similar to our own successful TARP strategy implemented two years ago, the put is in. As for all the noise about suing financial companies, remember, elections are coming and my cynical view is that politicians need Wall Street’s money to get re-elected. In the end, they will not bite the hand that feeds them.

This correction is therefore giving investors another chance to buy the dip with both the financial and technology sectors taking the lion’s share of the downside. Gold, on the other hand, has reached my target of 1,250/ounce so I wouldn’t be chasing the precious metal here. Hang in there even if it feels like the end of the world, this too will pass.

Posted in A Few Dollars More, At the Market