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Stock Market Is Volatile, Explosive, Changeable, Fickle

Roller-Coaster Ride Makes It Difficult To 'Keep the Faith'

March 22, 2008       Leave a Comment
By: Jerry Cole - Retirement, Investment

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Volatility in the market place is about as - - well volatile -- as I have seen it in the past 30 years. What is different this time is the market won't reach a point of capitulation where you have a massive sell-off and the market cleans itself out to begin again. If something is volatile it is explosive, changeable, fickle. That definition sure seem to fit our present market.


On Tuesday the market roared higher from the opening bell sending the Dow Jones Industrial Average up 420.41 points, or 3.51%. This was due in large part to the Federal Reserve cutting interest rates by three-quarters of a point, although not the full one point some had expected. It was the Dow's biggest point gain since July 2002. Earnings reports from Lehman Brothers and Goldman Sachs provided no unpleasant surprises and Citigroup and J.P. Morgan Chase were up 11% and 6% respectively.

Then on Wednesday stocks tumbled again giving back 293 points of the 420 points it had gained the day before. This despite a reassuring earnings report from Morgan Stanley, another stalwart financial institution, and the initial public offering of Visa, which ended the day 28% above its beginning price of $44 per share. But wait - on Thursday the Dow rallied again, moving up 261.66 points led by the financial sector as banks and brokerages snapped back. This closed the week (the market was not open on Good Friday) with the industrials at 12,361.32, now off 6.8% this year and 12.7% below their October record close.

Much of the ups and downs in the market has been caused by the financial sector. The arcane workings of the various securities backed by mortgages that financial institutions manufactured over the last decade, has left many investors bewildered, suspicious, nervous and lacking any confidence in these securities. This in turn has left the securities without a valid market in which to price them. It kind of reminds you of the Enron debacle. But there is a major difference.

Enron's magical rise was based on its reputation. That reputation was based largely on its intangible assets, i.e.its intellectual properties, innovative technology and financial services. These are not assets which you can touch or feel or go out in the field and kick. Enron at one point handled a quarter of over-the-counter electricity and natural gas trades in the country. But when they were up against an examination of their use of questionable partnerships to hide debt, they faced a confidence crisis. Their hard assets kept them going for a while, but eventually it was the intangible assets that pulled them down.

In the present subprime crisis, there is a lack of confidence in the various securities that have been used by the hedge funds and financial institutions to fund mortgages. There has not been much market in which to value the securities. Under existing accounting rules, financial firms must value the securities based on what market there is out there. That has caused massive write-downs on the books of many firms and caused the out-right demise of other firms. However, at the end of the day there is a hard asset underlying this financial upheaval. The home, condo or apartment is not intangible, it is a hard asset.

How long it will take to clear the smoke and mirrors that went into home prices, no one knows. But clear it will. The worry is that the credit crunch the subprime debacle produced will back up onto main street and cause other parts of the economy to suffer. Some believe that has already happened and that we are indeed in a recession.

It is difficult to keep the faith, but what is the alternative? Meanwhile, remember to keep your risk within you tolerance and keep ahead of inflation.

I invite your questions.

Or Contact Jerry Cole at:
509 Center Ave, Suite #102, Bay City, MI
(989) 892-5055

(The opinions expressed are solely those of the author and not Gen worth Financial Securities Corporation.)



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Jerry Cole - Retirement, Investment

Jerry Cole has been a Financial Planner for almost 30 years in the Tri-City area and holds and MBA from USC.
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