Yesterday's Markets

As I reflected upon yesterday's trading, I have been in the business for a long time, over 19 years. I have seen assorted crashes, mini-crashes, Asian contagions, S&L crises, Mexican bond problems, Latin American defaults, the dot-com crash, Long Term Capital Management, and the housing-related selling.

Yesterday was one for the record books. It was without specific precedent. But it had a familiar ring for veterans. The Dow Jones Industrial Average, which finished the day down 347 points, was briefly down 1,000 points at during the late afternoon.

Press reports now indicate the extreme market dip may now have been triggered by a technical error. Reportedly, a trader accidently put in a sell order for a billion shares — rather than a million — of Procter & Gamble. The reaction by investors was over exaggerated, but the market was down Before the “error”.

Perhaps this was a long awaited pullback that was exacerbated by the debt issues in Greece. There was no news that could have triggered this and we don't think the market should have traded off as much as it did.

In any case, the market was headed lower yesterday on concerns the Greek issue might spread & become the next liquidity issue & cause a slow down in the global economic recovery. This I believe is mostly a European problem. The US and Asia are relatively decoupled. There'll be shock and chaos, but nothing devastating. In either case, it is an “uncertainty”, and the market dislikes “uncertainty.”

Some positives to continue to keep in mind:

•           The market is still up 1% for the year (may be up 1% today too).

•           US recovery seems to be well on its way as earnings are now coming from modest top line growth, not just cost cutting.

•           Job growth is coming. Today’s job growth number is up 200k (exceeding the 180k estimate)

That all said, as we’ve discussed before 5-10% corrections are “normal” – they happen 3-4 times each year; (We had a 7% correction in January; this correction is 5% so far)

We’ll monitor in case it becomes “more than normal” – in which case, we’ll look to take some money out of equities.

Conclusions:

As a long-term investor we have made nice gains in the last year. Corrections are inevitable and the specific timing is unpredictable. Keep focused on the long-term record.

One of the most difficult things to do — and the thing that distinguishes people like Warren Buffett — is the ability to remain calm in the face of non-stop media coverage of riots and the like.  The key point is there is always one side of a discussion that is easy to explain, and it gets a lot of buzz from the media.

Thank you for your trust & I am only a phone call away if you’d like to discuss your situation in more detail.