Tag Archives: stock market

Sometimes the bear eats you

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The bulls have begun to run again on Wall Street

It’s one of the oldest sayings around, likely attributable to an idea first passed into public consciousness by 19th century American writer Ralph Waldo Emerson: “Sometimes you eat the bear – sometimes the bear eats you.

For more than two centuries since even before the founding of the New York Stock Exchange, market up and downs have used the terms “bull” and “bear” to describe down and upturns and waves in markets.

A “bull market”comes about when the markets are rising, charging forward like a bull. A “bear market”comes about when they slow down and investors sell stocks off, almost as if they are hibernating.

That’s a simplistic explanation of the terms. There are a number of theories as to how they came about. But it serves well enough to describe how those terms are applied today.

Suffice it to say that since President Donald Trump was sworn in back in January of 2017, the markets had been charging forward. The Dow Jones Industrial Average rose more than 5,000 points during the President’s first year in office.

The “Dow” represents the stock performance of 30 major U.S. companies. These companies currently represent a wide swath of impact across the American landscape, from Microsoft to McDonald’s, DowDuPont to Disney, and dozens more.

As the bull market charged forward, the President took credit. He believes that the policies of his administration pushed those markets forward. From reducing and eliminating regulations on businesses to reducing taxes, the climate has certainly been favorable to business.

It has also been favorable to average Americans, as those companies have hired more employees and given out raises and bonuses. It was no wonder the President mentioned it during his first ‘State of the Union’ address just last week: 

The stock market has smashed one record after another, gaining $8 trillion in value.  That is great news for Americans’ 401k, retirement, pension, and college savings accounts.

However, a number of financial analysts have warned that a market ‘correction’ was inevitable. At some point, investors were going to look to capitalize on their gains, taking profits and sitting back to find their next opportunity.

Such a market correction would come in the form of a downturn. That correction finally came on Monday, and it came in a big way. The Dow plunged down over 1,600 points at one time before finally closing with a 1,175 point loss. It was the largest single-day loss in market history.

The bear was hungry, and it was eating.

The Democratic Party’s media propaganda wing, led by CNN, quickly seized on the moment to try and make a political statement. Their headline blared “Trump’s embarrassing split-screen moment on stocks.”

In the piece, CNN’s Stephen Collinson wrote the following:

As the President touted his economic agenda in Ohio on Monday, his face stared out of millions of television screens next to blaring red graphics and yellow numbers whirling like the reels on a slot machine, telling the story of a full-bore stock market plunge. For any president, the split screen moment showing an apparent disconnect between his message of a roaring economy and hemorrhaging equities would be a little embarrassing. But for Trump, who has constantly boasted about almost daily record highs on Wall Street since his election and told Americans that he alone is responsible for their healthy 401(k) balances, the mismatch was even more pronounced.”

However, the embarrassingly biased cable news giant forgot a simple, basic rule of the markets. Just as the bulls will run for awhile, the time will come for the bears to slow, eat, and hibernate. History shows that those bears only eat so long before the bulls inevitably come charging back.


Derek Thompson for The Atlantic wrote about the rise of the markets under Trump back in October 2017. He stated it succinctly:

“It’s important to remember that the stock market is not a referendum on the state of liberalism or conservatism. It is not a barometer of moral progress. And it is not a report card on the president of the United States (even if he wishes it were). The stock market is a collective daily wager on the future performance of the nation’s public companies. And they are, to employ a technical term, making a boatload of money right now.”

 



And now, just like that, here we go. I suppose that the bears may have had their fill on Monday. Because now on Tuesday, as I write this with five minutes to go before the closing bell on Wall Street, the Dow is up nearly 500 points.

Oops, CNN. What will your headlines have to say about that?

The fact is that the history of the U.S. stock markets is that they go up, over time. Sure, there will be corrections down. Sometimes they will be big ones. The key is not to panic, and not to politicize such market movements. Remember, when you are betting on U.S. stocks, you are betting on the American economy to succeed.

Sometimes you will run with the bulls. During those times you will do a lot of bear-eating. And then sometimes the bear will eat you, taking a bite out of your 401k and retirement funds. 

Don’t worry. Don’t pull out of the market. The bulls will be back, charging harder than before. Just look at today’s Dow results if you need a little reassurance right now.

Betting on America

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The idea of the United States stock market is actually a very simple concept to wrap your arms around at it’s most basic.

A company, let’s pick an old standard that everyone knows like Coca Cola, wants to make some more money, beyond the simple sales of its products on store shelves.

It wants to make more money for many reasons: it can pay its employees better salaries and offer them better benefits, thus attracting better workers; it can build bigger and better facilities, and purchase newer vehicles to transport their products to market more efficiently; it can research and produce new products that will get them new customers; it can purchase another company that has a product or service which Coke feels would be compatible with their own; it can allow them to advertise more on TV, radio, the internet and thus sell more of their products.

All of these efforts by Coke are in order to make their company better, stronger, healthier.

So the powers at Coke decide to ‘go public’ by offering ‘shares’ of Coke on the stock market. This means that you can purchase an ownership stake in Coke by purchasing a ‘share’ at a certain price.

A number of people decide to buy these shares, basically giving the company some amount of money out of their wallets in order for Coke to do those things which they feel will make their company stronger.

The market determines what that price will be, so for instance initially Coke might offer shares in their company at $15 each. If you believe that Coca Cola is run well by good people, that their company is healthy, and that it is going to thrive and even maybe expand strongly in the future then you may buy a share.

By doing so, you are basically betting on Coke, and you are putting up $15 of your real money in order to get a share. If you buy 10 shares, you have $150 invested in Coke.

Now let’s say the company – Coke or whichever other company you choose to invest in – does well over the next few years. As they achieve success and that success is recognized by those in the financial industry, the price of their stock goes up.

It does so because more and more people begin to believe in Coke as you did. So, the price to purchase a share in the company rises because people are willing to pay that higher price.

Say a couple years later the price of Coke shares is now $25 per share. Those 10 shares that you put $150 into two years ago? Well now they are worth $25 per share, or $250 total, and you have made yourself $100 on your investment.

On the flip side, if Coke did poorly, if their company assets were mismanaged or stolen, or if their products were no longer as valuable to the public (in other words, fewer people liked to drink Coca Cola), then the value of those shares would go down.

Say the share value went down to $5 per share. Then your 10 original shares would now be worth just $50. You would have lost $100 on your investment in Coke. That is how the stock market works at its most basic level.

What you hear on TV every day as the ‘Dow Jones Industrical Average’ or simply as ‘The Dow’ going ‘up’ or ‘down’ is basically the world betting on America. Will the companies which make up a representative share in the U.S. economy succeed or fail?

You get in on this action, get to ‘play the market’, by purchasing shares which are sold by that thing which we call the ‘stock market’.

Not unlike going to the grocery market for your food, you shop in the stock market, purchasing shares in companies that you like. Those can be companies who share your own personal values, or that you believe have the best chance of growth and success. You decide the reasons to purchase your stock shares.

The main place that Americans do their purchasing is at the U.S. Stock Exchange, located on Wall Street in New York City. Thus, you hear the market sometimes simply referred to as ‘Wall Street’.

The Dow is the total cumulative value of 30 selected stocks which key investors have determined as reflectingof a wide range of important companies in America.

For instance, if Coke is worth $15 per share, and McDonalds is worth $10 per share, and Home Depot is worth $16 per share, and Comcast is worth $20 per share, you would add them together and get a total of 61 ‘points’, or the dollar value of all the ‘costs per share’ of the companies in our little example index.

If tomorrow the overall share value goes up, and the new total is 81 points, our index of those four companies has gone up by 20 points. It doesn’t matter if one of the company shares goes down a point or two – or ten. If their cumulative value goes up or down, your stock portfolio goes up or down.

So it goes with The Dow, with the prices of those 30 American companies that I mentioned make it up.

So in other words, when The Dow is going up, people are betting that America is healthy and strong. They believe that, in general, the future looks bright for business here, which means that products will get better, that their will be good jobs available, that companies will succeed.

When the Dow is down, people believe that America is not going to succeed, that companies will fail.

When too many people begin to dislike too many things about too many companies, they may decide that they don’t like having their money in shares of stock any more, and so they pull the money out of the stock market and do something else with it. This makes the shares in the market drop, because they are not as valuable if many people no longer want them, and so the market goes ‘down’.

If enough people pull enough money out in a short enough period of time, as has been happening recently, we have a market ‘downturn’ or even a ‘crash’.

A ‘crash’ is generally defined as when the overall stock market loses 20% or more of its value in a very short period of time.

Historically, true crashes happen about once every couple decades or so. They are usually seen as being a ‘correction’ in the market. This means that people have found that prices on company shares were a bit too high and stopped buying them until they got to levels that people were again comfortable with.

What always happens is that a time comes when people look at the prices of stock in companies and say to themselves “hey, that stock is getting pretty low, it’s really worth more than that” and they jump back in to the market. More and more people do this, and the market goes back up again.

The very bottom line here is that buying stocks in good American companies is like betting on America to succeed. Do you believe that the United States of America is going to fail? Really, ultimately, completely fail?

Or do you believe that five, 10, 50 years from now there is going to be a United States of America that is still a free republic, remaining a world leader, and that still bases its economy on capitalism and the value of rewarding hard work by both individuals and business?

If so, then you should do exactly what I am doing by keeping the shares of my retirement plan invested in ways that reflect the market.

Despite all the doom and gloom seen on television broadcasts today, I am betting on America.

Despite a few hiccups along the way, she has never, ever let me down in the long term of my 47 year life.

She might struggle for a bit over the next few months, even the next few years, while some details are worked out and some badly run companies are weeded out.

We might even suffer a bit more should Barack Obama get elected and Democrats control Congress, thus raising our taxes and our spending and worsening our situation in those next few years.

But in the long run of the next decade or so, she will be back strong, of that I have no doubts. The bottom line for me is that I’m staying in the market, I’m betting on America.

The bailout and the bloodbath

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The Down Jones Industrial Average, the most popular and famous benchmark to guage the strength of the American economy, plummeted down almost 700 points today.

The index, which is based on the scaled average of the stock prices on 30 of the largest and most widely held companies here in America, was celebrating the one-year anniversary of closing at it’s all-time record high of 14,164. Today it closed at 8,579.

Just last Friday, October 3rd, the U.S. House of Representatives passed a $700 billion bailout of Wall Street and the banking industry. US News & World Report stated “A failure to pass the bill would have been devastating for markets.”

But you can’t just pick on one publication, because there were many individuals and media outlets, and quite obviously the Congress and President Bush, who believed the same thing.

So despite calls from myself and many like me that they were bastardizing capitalism, they passed the bailout package and signed it into law to keep us from devastating losses and to save our economy.

Oops! Here we are a week later, and the Dow has been devastated by a stock market crash.

Today’s collapse marked the 11th-worst percentage loss in Dow history. The Dow has declined by more than 20% over the past week, something that has traditionally defined a ‘crash’ when it happens close together like this.

None of this is to say that the market would have been fine had Congress never passed the bailout bill. It clearly wouldn’t have been. But neither has the bill been the panacea that it’s proponents, including George Bush who signed it into law and both presidential candidates John McCain and Barack Obama who voted for it, sold us on it being.

What the bailout accomplished was to relieve financial pressures on fat cats at the taxpayers expense. When the government borrows $700 billion dollars, we all borrow that money, because the government is us. We have to pay that money back, with interest, using our tax dollars. That is not simplistic – it’s simply the truth.

So now we not only have our stock market crash, those ‘devastating losses’ that we supposedly needed the bailout to avoid, but we are $700 billion in debt on top of it. And perhaps most importantly, the line to get more bailouts is forming.

The hard lessons of capitalism, allowed to play out in their fullest, will always weed out the bad actors and those who take negligent risk over time. Again, if they are allowed to play out naturally. By bailing out many of these bad actors and fool-hardy risk takers, the government sends the horrible message to “go ahead, do whatever you want, and if you lose, we got your back.”

For U.S. taxpayers, this was not a bailout silver bullet, or even one necessary piece to a financial recovery puzzle. This bailout was just more bullets fired into a wounded economic carcass that each day gets worse in what we can now rightly call the ‘bailout bloodbath.’

God help us all if Obama wins the election and Democrats retain control of both houses of Congress. The tax increases and spending increases that they initiate over the next few years will deal a further blow to American capitalism and greatness. And that is no over-exaggeration.

$700 billion dollar roller coaster quick fix

Our government is considering, and is at this moment negotiating, a $700 billion dollar package to ‘rescue’ the economy from what is being sold to us as certain ruin.

This ‘ruin’, of course, was completely and totally self-inflicted. Interest rates at historic lows combined with a loosening of lending policies, especially by mortgage companies, resulted in a number of bad loans to poor credit risks that was inevitably going to come crashing down around many people and companies.

Those who bet on an ever-expanding economy were right in the long run, because the fact is that over time the economy will likely expand, assets will increase in value, and investments will rise.

But some people also forgot that the economy takes ups and downs, much like a roller coaster, on the way to the ultimate thrill of an ending. Some people are going to get caught in a ‘down’, they are going to lose in the market. That is the risk involved in the ride, that every once in awhile one is going to run off the tracks and crash.

The ride is often a true thrill, because you have great highs where you soar, where your investments rise and you feel invincible as your account balances inflate. However, you also have to suffer the anxiety of the downturns.

The economy will adjust from time to time, weed out the bad, and hit that roller coaster dropoff. Your stomach may rise into your throat at this point, and you may even scream out of sudden fear for your safety, the safety of your assets in this case.

Thankfully on a real roller coaster, as on the roller coaster of life, we usually rise again. There are brakes and seat belts and safety bars to protect us, and there are also ‘the odds’, which say that the overwhelming majority of the time you will survive that dropoff and rise once again.

Over time in the economic world, you will rise to a point higher than the point at which you started. However, like real roller coasters, every once in a blue moon one is going to go crashing off the rails. Often this will be as a result of poor maintenance, or a sudden brake down in a normally reliable part.

The same thing will happen with the economy. It will run off the rails, and those on the roller coaster are going to go down – hard – some to never get up again.

It should never be the role of our government to bail out capitalist companies that live and die with their bottom lines. Individual investors, as well as companies big and small, take risks in order to experience rewards. Many will ultimately succeed. Some, and sometimes many, will fail and will collapse.

It is these collapses and negative adjustments that the rest of us learn from, and that create opportunities for others to come in and build a better mousetrap. The government has no business bailing out this economy with our tax dollars.

The government does not have any money of it’s own, it has only the funds collected from you and me in taxation. In taxing our businesses, our incomes, our investments, and in the interest they make on the investments they make with our money. Key words being ‘our money.’

Businesses, banks, mortgage companies, individuals were riding high on the up-slope for years, and they also need to go through the down-slope for the free market to naturally adjust at the bottom of its drop-off.

It may be a long, hard, jaw-dropping, stomach in your brains drop, and some may not survive the scare. But the fact is that the real crash will occur by artificially propping up this economy with a bailout. It will have the ultimate effect of putting glue on a broken roller coaster rail.

The force of the coaster will, sooner rather than later, overwhelm the glue. The rail may actually need to be taken up and replaced. The roller coaster may need to be taken off-line for a short period while true repairs are done.

But in the long run, this will be best. The rail will be fixed, the rides will begin again, and the thrill will come back.

The government needs to let the market do its work, and save us all the irresponsible $700 billion dollar quick-fix that it is trying to push on those of us who understand what riding a roller coaster is all about.

Freddie & Fannie getting some help

You may have heard of them, but you probably don’t know a whole lot about them. They are your good friends in the area of housing, and their names are Freddie and Fannie.

That would be Freddie Mac and Fannie Mae, to be more precise, and as Treasury Secretary Henry Paulson was quoted recently they “play a central role in the housing system and must continue to do so in their current form…”.

On Sunday, Treasury and the Federal Reserve moved to secure the finances of the two giants, to ensure that they do not drown under the weight of what is termed the current ‘correction’ in the housing market.

Freddie Mac is the Federal Home Loan Mortgage Corporation, a mortgage finance system that makes home ownership and quality rentals a reality for more American families, reducing the costs and expanding the choices by linking Americans to the world financial capital markets. It is stockholder-owned, and is authorized to make loans and loan guarantees.

Freddie Mac was chartered by Congress back in 1968 in order to provide competition for Fannie Mae, so the two are not so much a couple as they are competitors in the housing capital market.

Fannie Mae is the Federal National Mortgage Association, which was founded back in 1938 as a part of Franklin Roosevelt’s ‘New Deal’ programs. Fannie is also a stockholder-owned company that is authorized to make loans and loan guarantees.

The basic premise is that both of these Federally designed, but publicly owned, corporations provide the money that props up the U.S. secondary mortgage markets. Stay with me for a quickie and simplistic lesson on the process here.

For instance, you own your home and you have a mortgage with your bank for the financing of that home. Your mortgage is bundled in with a group of others to form what is known as a ‘collateralized mortgage obligation’, or CMO. This basically reduces the risk for the lending institutions, since the larger group is less susceptible to individual mortgages being defaulted on if a homeowner fails to meet their obligation of paying the mortgage.

The grouping is then further sold to other investors as a product called a collateralized debt obligation, or CDO. These CDO’s can then often be bundled with other CDO’s to make giant CDO’s made up of numerous mortgages.

The CDO’s are then publicly traded as investment products. So when housing is going good, the value of mortgages go up, and the value of the CDO’s goes up as well. When housing prices and sales fall, the value of your mortgage declines, and thus the value of the larger CDO’s also declines.

Fannie Mae and Freddie Mac’s role is that, for a fee, they guarantee that the money on each mortgage will be paid back, regardless of whether the actual individual mortgage-holder every really pays back their particular mortgage. Investors in CDO’s with Fannie & Freddie allow the two to keep the fees based on this guarantee.

However, when particularly nasty down markets occur, such as is happening now, many individuals default on their mortgages and walk away, never to pay them off. Fannie & Freddie are stuck with having to payoff these obligations, and thus the risk is very real for these corporations in a poor market.

On Sunday, the government moved, through the Treasury Department and the Federal Reserve Bank, to ensure that Fannie & Freddie would be able to remain solvent today.

Both corporations have a $2.25 billion dollar line of credit with Treasury that is designed to get them through tough times until the market can turn around again, which it historically has always done. However, this downturn has been so severe that both Fannie & Freddie could exhaust these lines of credit this week.

So today, Freddie Mac is planning to attempt to sell $3 billion worth of securities on Wall Street for financing. There is real fear that they will not be able to sell these securities, and that this failure would set off a crisis of confidence in the world markets, and a worldwide sell off in all types of securities.

If investors don’t believe that they will get paid back on their investments, they will sell. That is where we are at. This is all high finance stuff, but it is all backed and affected by your own individual mortgages.

The Sunday moves by the Fed and Treasury ensure that, should these debt securities sales fail, Fannie & Freddie will still be supported by the increased federal credit lines.

Bottom line for the long haul is that what is needed is for the market to again turn around, as it always has, and begin another upturn. This will happen again at some point, but the sooner the better for the stability of American and world markets, as well as for individual mortgage holders.