Thursday, July 2, 2009

Market Correction?

A lot has happened since I took a break from blogging... actually not really. The market has pretty much moved no where. At that is precisely the point. All these market analysts, who may I remind you made mistake after mistake in 2008, losing tons of money for their firms, are saying that we are due for a huge correction. Well, I don't believe that. My view may be slightly biased because I am an inherent optimist, but what can I do about that? I take negative view points about the U.S economy into consideration, but even then I still see a bright future. Here is why I don't think we will have any major correction.

The stock market can create and destroy wealth like no other. People can make more money in the stock market in one month, than the amount they would have made in years of working. Minor day to day movements in the stock market create and destroy billions, if not trillions, of dollars of wealth in the world everyday. Where else would you ever see that being done? Just as the stock market can create money for us to live off of for retirement, pay for a new house, college tuition for our kids, or a vacation, the market can also destroy that money. And that is what has happened this past year. In fact, the market has destroyed so much money, that only the market can bring it back. It would take this generation of people years and years to rebuild that wealth by just working in jobs alone. And it is for that reason alone, that more than ever in history, we are so desperate for a rally. So we can create billions of dollars a day, instead of losing the billions of dollars a day we have become accustom to as of late. We got a rally, a historic one, but the problem was, it came from no where and not enough people were in the market at the time to take advantage of it. Yes, it is true that in history, after such a huge market rally, we typically see a correction. But I want to remind people, that there is no law that says history has to repeat itself. Just because the correction happened before, does not mean it is going to happen again. More importantly, this rally has something that no rally has had before. It was a rally that people desperately needed, in order to retire and to witness their dreams again. But it is a rally that most people missed. Now, people are fearful of missing the next leg up, and there will be one. This economy has show signs of significant improvement and the market has not priced it all in yet. And the only way we will get back to our living standards before this recession will be through the stock market creating wealth again.

The analysts on wall street are forgetting the enormous power that fear has in controlling the market. Fear of the financial collapse drove this market to the ground. But now the fear in the market is a different fear. It is a fear that you will miss the next rally, and you will not be able to attain back the wealth you had prior to this recession in your life time. And it is that fear that will prevent any correction from happening. At any sign of a small downturn, buyers will swoop in, seeing this as their opportunity to get back into the market for the next leg up. In my opinion, this is the strongest factor that will prevent a significant correction. It is a fear that we have not witnessed before, fear of missing out on market gains, not of the market going lower.

Another thing that is annoying me is that every analyst I hear says they think that the market is going to have a correction, but then go up again. In case they were sleeping during their economics 101 class, I think they forgot that is not how prices work. You cannot believe that prices will fall a little tomorrow, and then the day after they will go up a lot. If that is the case, that prices today will automatically adjust to the farthest outcome, in this case the day after tomorrow's market gain. You can't say that the market is going to correct itself in July, but then go up again in August. Prices will just adjust automatically to the expected gain in August right away, bypassing any July correction. And that is what most analyst have been saying, correction before we go higher again. That does not make economic sense. At all. If it is KNOWN to go up in August, why would it bother going down in July... If you think a significant correction is going to happen, you can't think the next day there is going to be a sudden upward trend.

Unemployment hit 9.5% today, better than the expected 9.6%. I don't know why everyone suddenly panicked about it, it is priced in and assumed by all that the unemployment rate is going to go north of 10%... so why is 9.5% such a surprise. Most CEOs have said that business has bottomed out, and as their business bottoms out, they will slow down layoffs. For the 90% of people who still have their job, they are living in fear of getting laid off. Because of that fear they are not spending any money and really clamping down the economy. But as that fear goes away, as the unemployment rate growth begins to slow down, that fear will go away and spending will bring this economy back. We used to have the unemployment rate jump by .5 percent, but now its only .1. Obviously, it can be argued that the labor market is in more peril that a simple .1% gain in unemployment. But the important thing is that a .1% gain doesn't seem as scary as some of those other gains we have had. And that matters a lot because the 90% of employed people need to stop being fearful and need to get out and spend because odds are, your job is safe. And once that spending goes up we will see the recovery we all want.

The market has had a month to correct itself and its only gone down 5%. Given that we don't get any fundamental change, the market is not going get down much lower. We had a huge downturn today and I heard some analyst on CNBC bragging about how he called the downturn for a month. Well I am glad after a month of saying it, he finally got his downturn. That is like telling someone for a 100 years that one day they are going to die... eventually you will be correct but that doesn't make it a good prediction.

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