Sunday, September 25, 2011

Fear Trumps Greed

Last week was rough for investors in all asset classes except for bonds which experienced a slight rise (in the chart above, BND=Total Bonds, SLV=Silver, GLD=Gold, VTI=US Stocks, VNQ=REITS, PFF=US Preferred Stocks, VNQI=Intl REITS, VXUS=Intl Stocks, VWO=Emerging Markets). Silver dropped an astounding 23.89% for the week, giving up all of its gains for the year. Anyone with exposure to equities or commodities got pounded. Only those who were 100% in bonds and cash managed to escape the carnage.

What Happened Last Week

What about the investment environment changed last week? Essentially nothing. The economy remains weak, Europe is bogged down in a debt crisis with no resolution in sight, US politicians seem hell-bent on turning the country into Europe, and the Fed is swapping short term bonds for long term bonds while hinting that recession is near. The media seized upon the drop in asset prices to talk up the possibility of recession and add fuel to the fire. This negative sentiment was far more powerful than anything positive going on in the US or World economies.

What to Look Forward To

Nobody knows what this week will bring, but expect more volatility. Weekly moves of plus or minus 5% seem to be the norm these days. The natural reaction to the wild downward move of last week would be to sell and head for safety. The market gurus will provide no clear direction as first one then the other contradict each other and provide conflicting advice delivered with 100% certainty. As always, you the investor are on your own.

The battle between fear and greed has been waged since there were markets. The Fed may have been successful in temporarily manipulating asset prices with QE1 and QE2, but their latest trick called the twist will probably prove less than a triumph, though they managed to drive down 30 year Treasury rates under 3%. Again, there will be little lasting impact from these actions.

I have little doubt in the long run greed will win the war, even though it will lose many battles. The markets will continue to be volatile and could suffer big loses again this week. But in volatility there is opportunity. Market plunges provide an excellent opportunity to rebalance portfolios or commit new money. I look forward to these types of opportunities.


  1. I agree. For those with a longer term perspective there are some really good values becoming available. Some tech companies held up very well last week.

  2. I'm mostly in O&G myself (the industry I worked in). Not a lot of deals to be had there unfortunately. Hopefully I'll have some money to throw at them when there are.