The Flight Log: 30 Days Later

Publish Date: March 29, 2007

February ended with the markets in what the press referred to as “a meltdown”, “in turmoil”; resulting in just a few of the negative descriptions they came up with. In other words, the bull was shot dead and the bear is in command. In my opinion, the market decline was triggered by three items:

The crowd still listening to Greenspan when he warns of the big “R” (recession). Fed Chairman Bernake is working on building his credibility with the markets; however it will take time to overcome Greenspan’s effects. The Federal Open Market Committee at their March 2007 meeting decided to keep its target federal funds rate at 5.25%.
The announcement of tightening in the Sub-prime mortgage market, which could add to the housing market slowdown. The Sub-prime mortgage market problem is now being redefined as a group of poorly managed businesses. The corporate failures are being bought up or bailed out by smart money. It appears that some of these lenders were giving out loans like Halloween candy, with no regard for ability to repay taken into account. Weird, lets loan money to people who can’t pay it back. Now that’s good business.
The overnight slide of the Chinese market, which in my opinion was overblown. In less than 30 days, the Chinese markets have made new highs. The government is currently making attempts to slow the speculation in their markets, with no avail.

So here we are April 1, 2007. We have 14 days to supply congress with OUR money for THEIR use. (Always a special time every year) Where do the markets take us? I still remain cautiously bullish. This market is begging for bad news. New home sales came out March 26th and the Dow promptly sold off 100+ pts, with the majority of that loss being made back before the close. I saw the Singapore ETF (EWS) sell off at the same time. Point here is, their market is closed and what exactly do U.S. new home sales have to do with Singapore? A global recession would maybe have a significant affect on Singapore, but not US home sales to the same degree. Is this the speculators looking to get something started? EWS by the close of the U.S. market was trading at the highs. With no solid basis for the decline, investors are seeing these small intraday moves as buying opportunities.

There is a lesson to be learned during volatile days in the markets. The Wall Street Journal reported in the Saturday/Sunday, March 17-18 issue, that some of the ETFs tracking error increased dramatically on days of volatility. As an example, on February 27th U.S. investors were speculating that the Chinese Market would continue down on the 28th. They had pushed the iShare symbol FXI which tracks the Chinese stock market down 9.9%, yet the index it tracks had only closed down 2.1% during Chinese trading hours. The next day the index was only down another 3.1%. So U.S. investors who sold toward the close on February 27th would have lost far greater than the actual index they thought they were mirroring. The lesson is; during market volatility the fast money comes in to these markets and can cause value discrepancies between the ETF and the index they mirror. Positions held before, during and after the volatility were left unaffected by the increase in tracking error. Only the investor who traded during these times was affected either positively or negatively. The markets and corresponding ETFs came back inline on the 28th during U.S. trading hours. The problem came about mainly from the fact that the ETF is trading when the market it tracks is closed. Which brings about speculation on where that market will open the next day?

The quantity of articles about the explosion of the number of ETFs is increasing at about an equivalent pace. I’m guilty of bringing the explosion up in previous issues. The real point of the matter is it’s just like buying paint, the selection is overwhelming but once you define your needs, the choices are reduced dramatically. If you know you want a shade of brown why look at shades of red? When the universe has been narrowed selection is much easier. At this point who cares how many ETFs there are. It just gives us choices. The concern is the investment objective we are trying to accomplish. Once that is defined then you can look at the appropriate color palette to make your selection.

The opinions and commentary provided by the advisors in the My Automated Advisor Newsletter are the opinion of those advisors and not of My Automated Advisor.

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The Flight Log: 30 Days Later

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