In The End - The Dow is Up (Slightly) For The Week

Lots of questions swirling around market activity

August 12, 2007
By: Jerry Cole - Retirement, Investment

The market was in a frenzy this week.

Was this a temporary madness or was it more of a sustained movement to the downside? To be sure there was a lot of volatility, but in the end the market was up slightly for the week.

How does the average investor know what to do in times like these? How serious is the subprime loan mess?

These are all valid questions, and like most things in life, there is no definitive answer. There are however, matters we should consider. For example, how does the speed and scope of trading impact the markets? There are huge markets in derivatives out there that are largely unknown to most of us.

Nonetheless, these activities can directly effect the stock market we are familiar with. An example of this is the so-called credit default swap - in which traders make bets on the likelihood of companies defaulting on bonds or loans.

Believe it or not, derivatives help to keep some equilibrium to the markets under normal conditions. But when fear strikes, derivatives can exaggerate the markets movements.


In the face of large price swings there will be a growing aversion to risk. This in turn will effect liquidity because traders find positions are tougher to get out of or hedge. The gap widens between the prices buyers say they will pay and the prices sellers say they will take.

And then you have to consider what role the media plays in any crisis. Bad new sells! The media will invariably accentuate the negative. And in doing so, the media can help to make a bad situation worse and sometimes become a self-fulfilling prophecy.

This is not to say the mortgage problem is not real. The U.S. Federal Reserve Friday took the unusual step of providing large amounts of funds for the second day running as markets fretted over credit conditions. The Fed said this was "to facilitate the orderly functioning of financial markets". The last time the central bank made a similar statement was after the Sept. 11, 2001, terror attacks, when it also said it would do what was necessary to keep market functioning normally.

Meanwhile, it was reported on Friday that consumer confidence rebounded to a 5-month high. Receding gasoline prices and a mostly solid employment climate made people feel better about the economy's prospects and their own financial situations. The improvement came even though the market has been turbulent and investors are worried that the problems in the housing and mortgage markets will hurt the broader financial system.

Another piece of positive news came out of Washington this week. Surging tax receipts continued to shrink the federal deficit. Since Oct. 1, when the fiscal year began, the government has run a deficit sharply narrower than the year ago period. This was due to record tax receipts.

As we become a more global economy, it gets more difficult to manage our investments. We have to continually go back to the fundamentals. Reexamine your risk tolerance. Redefine your goals and objectives.

Keep the faith!

I invite your questions.

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