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Dear Subscriber, Oh, boy. Yesterday morning, every newspaper, website, and television show was talking about the stock market debut of Facebook in glowing terms. The New York Times said that "the mania surrounding the offering means Facebook shares will almost certainly rise on the first day of trading." Well, no. This morning's edition of the Times included a quote from a market observer: "It was supposed to be something what would excite the retail investor. But that didn't happen." Instead we got a mesmerizing spectacle. There were all sorts of problems with the market machinery (apparently we are better at sharing photos and life events using technology than we are at running the innards of modern finance) and demand for Facebook stock was underwhelming. So much so that the sponsors of the public offering spent mightily to prop up the stock in order to avoid the embarrassment of seeing it decline on the first day. Still in the news is J.P. Morgan and its leader, Jamie Dimon, thought to be the smartest banker on the planet. He enjoyed poking regulators in the eye, proclaiming that banks were better able to manage risk and that regulatory burdens were getting too onerous. However, nine days ago, Dimon had to announce that a unit of the bank had lost a couple of billion dollars and would likely lose more (in fact, now already has). Dimon's mea culpa included an admission that the bank and he had been "stupid and sloppy." Given the size of Morgan, the loss is not that large, but the news has triggered a re-evaluation of the bank (its stock is down markedly) and of regulatory policy. If the reverberations from reckless behavior did not have the potential to shake the financial system, we shouldn't really care. But today the "too big to fail" banks control a larger percentage of assets than before the crisis. That's why a relatively small loss in the scheme of things has had a big impact. Just six weeks ago, the stock market was riding high. Summaries of the first quarter activity were full of superlatives and forecasts from market pundits looked for more of the same. It has been going down ever since, including an unrelenting slide this month, when it has moved lower during all but three days. Almost all of the large gains that were in hand by early April have been given back. Now you read about how the warm weather distorted economic numbers in the first quarter, how the European situation continues to erode, and how the prop provided by the Federal Reserve's massive monetary stimulus will go away. My goal is not to depress you with these stories, but to remind you that the news of the day can be very misleading. None of the outcomes mentioned above should have come as much of a surprise given information that was available beforehand. But that information was buried and ignored. Each of the examples also contributes to a downbeat assessment of the stock market as a rigged game, good for the insiders but not for the average Joe or Jane. One of these days, that skepticism will become so pervasive as to present a great opportunity for investors. We may not be there yet, but just remember that when we are, you won't find it on the front page. Sincerely,
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Nothing in this email constitutes investment advice, which is only offered subject to a contractual relationship and based upon your unique financial circumstances and tolerance for risk. Original material and links to other sources are provided as educational information for your financial decisions. |
