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How the Market Works

Donkey (Hong) Kong

Posted by kdadmin on October 2nd, 2014.

Imagine this: You are sitting in a quiet, elegant, first class section of a bullet train from Zurich to Lucerne, Switzerland. You’ve heard some chatter about how the protests in Hong Kong are causing global markets to tank and you notice an American (me) across the aisle watching the market plummet on his iPad. As the train stabilizes at it’s cruising speed, the American stands up, throws his arms above his head, and shouts, “Ta Da!”

If you’re Swiss, you keep politely to yourself. But if you’re not, you ask him, “Why are you cheering? The market is plummeting!” He says…

“Yesterday the market closed down 26 points, or roughly 1.32%. But of more intrigue, is that’s 5 points lower than it closed on June 9, 2014, when we sold our overweights in high yield bonds (down 3.53% since then) and our small cap (down 7.5% since then), and went to a heavy cash stake.

“While the market pundits have rationalized the selloff in several different ways (i.e. the protests in Hong Kong), none of these theories really matter, as the long term trend / economic data still point to a significantly stronger U.S. economy, and healthier market in general. Just because consumer confidence is down a bit doesn’t mean the consumer is right. ‘Confidence’ is an emotional statistic. Worse yet, it’s an amateur opinion, based on consensus. In other words, volatility + group think + fear = paranoia.

“The nice thing about paranoia is that it is often contagious. So those of us (my clients) with heavy cash positions just have to wait for others to loose their mind in panic selling, so that we can buy at a discount.

If you’re not drooling already, you should be.


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