<<I think it is going to take many years before the world will trust or recover and just like a lot of money flowed into the US, slowly that money is going to start flowing out, though it wont affect the markets that much, lots of people are distrustful of the US now. Deathly afraid, but distrustful non the less.>>
I was reading something earlier today, but cannot seem to find it again, that made the same observations regarding lack of world trust in the US markets and a likely outflow of capital over the long term as a result. I agree with your general point and with that sentiment.
However, it made the point that this would adversely affect the market because of the reduced flow of cash and demand
Of course, the two points do not seem consistent.
Frankly, anything that takes long term money from the US markets is not a good thing for long term growth and stability. Even if the flow into the US markets is not what it was in 1997-2000, the market cannot grow, meaningfully, if cash flows out rather than in -- it is the basic law of supply and demand.
The US needs to take strong steps immediately to restore worldwide confidence and trust in its markets. The US has been begging Japan for a decade to bite the bullet and take some strong medicine for the sake of better long term stability. We should follow our own advise. I do not, however, hold out much hope that we will be any more likely to do so than Japan has been. Tough steps are always, "Do as I say not as I do" and for all the great things this country is, it is one of the worst in that regard.
The gains of the past week have been refreshing but there are still serious underlying problems that have not gone away just because there has been a short term rally. Personally, I am going to lock in some profits and-or (depending on the position) sell some calls for a hedge.
Then again, there is the story below that argues that this is just a sign that things are turning. It is below.
Troy
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aol.multexinvestor.com
Death of Equities II 2002-03-02
Thanks to Enron, investors are starting to despair. And it's about time.
by William Valentine, CFA
Coming soon to a theater near you: "Death of Equities II: Return of Despair." You could think of this as the sequel to "Death of Equities," the infamous headline on the cover of Business Week from August 13, 1979. Grab your popcorn, bear with an annoying Britney Spears Pepsi commercial, and settle in for a trailer on the upcoming show in the market.
The missing element from stock rallies of the past year has been despair. Until we get it, the market can't enter the next bull phase. Sure, we've had disappointment, but that's what happens when you wipe out 30 percent of someone's net worth. However, that hasn't translated into downright despair. That is, until now, thanks to Enron (ENRNQ). And it's about time.
The end of all bear markets is characterized by a change in belief about the wisdom of investing in stocks. I'm not talking about folks pulling money out of the market until conditions improve. I'm talking about investors being tempted to believe that they shouldn't be in stocks at all, ever!
As I said last week, the Enron scandal has taken on a life of its own, well beyond the scope of the ultimate implications of Enron. In the process, it has shattered some people's faith in the institution of the market. They think, "Why own stocks if we can't trust __________ (fill in the blank: financial statements, corporate executives, auditing firms, brokerage analysts)?" Pile that on top of two years of lame returns for equities, and it's an understandable question. And yet it's consistent with the despair reached in past bear markets, just before they turned around.
A similar feeling prevailed in 1979, but for different reasons. Then it was caused by prolonged inflation and an anemic market and economy. What is similar is the feeling of despair and the temptation to believe that a permanent paradigm shift has occurred, boding poorly for stocks into perpetuity.
Consider the following quotes from the previously referenced edition of Business Week:
"For better or for worse, then, the U.S. economy probably has to regard the death of equities as a near-permanent condition—reversible some day, but not soon...Even if the economic climate could be made right again for equity investment, it would take another massive promotional campaign to bring people back into the market...For investors, however, low stock prices remain a disincentive to buy [so much for buying on the dips]...Today, the old attitude of buying solid stocks as a cornerstone for one's life savings and retirement has simply disappeared."
And yet, seven months later, in March of 1980, the market embarked on the Greatest Bull Market of All Time.
Enronitis is a reasonably contained disease, and one whose lasting legacy will be the positive reform to the reporting process, already occurring via marketplace pressure upon all companies to come clean, rather than anything that will come out of Capitol Hill.
The market isn't broken, and ultimately the growing despair won't result in significantly more money being withdrawn from the market—just enough to sap the market of supply so that marginal increases in demand for stocks, driven by evidence of a recovering economy, are met with disproportionate price increases. This elastic behavior defines a bull market.
While the rewards for riding out this latest bear market seem far off, and the despair may be unsettling, know that we've been here before, and we know this movie ends.
Chartered Financial Analyst William L. Valentine, IV, runs Valentine Ventures, LLC, an investment management firm of individuals’ assets, using global stocks and bonds. Valentine is also a contributing editor at Quicken.com, and a syndicated investment columnist. |
