We Need a Hero

By Markos N. Kaminis - Economy and Markets:

What we have here is a crisis of confidence. As a result, now more than ever, we need something or someone to believe in. We need leadership we can believe in, someone who can pull us together.

The stock market closed out one of the ugliest weeks in financial markets history Friday in wild fashion. The Dow Jones Industrial Index finished the week 18.2% lighter than it started it. Yes, 18% lower in one week! As a matter of fact, so far through October, the Dow has not had one up day. Even so, on Friday afternoon, the market offered something rare for this season of fall, a sharp rally. The Dow ended Friday down 1.5%, but that masked an approximate 500-point rally from the day's trough to its close. The day was so wild and volatile within itself that the difference between high and low was 1019 points.

That afternoon rally told me something. It told me that this market wants something to believe in. Not only does it need leadership, as we alluded to in the title of this article, but it wants a reason to buy at these levels. Friday's have recently offered good reason for investors to run, as an entire weekend of uncertainty lay before them. Even so, this past Friday, investors instead found reason to buy. Stocks had, after all, given back over 20% and valuations were screaming for a look.

The Cause

Over the last few weeks, we clearly outlined the cause of economic strife. At this point, we want to direct your attention to the reason for market turmoil over the last week and a half. On the announcement of the Paulson Plan, the stock market jumped on resulting enthusiasm. When Congress mislabeled the bill a "Wall Street Bailout" and failed to pass it the first time around, they deflated hope. Adding insult to injury, in order to get the bill passed on its second attempt, the Administration and voices in Congress were forced to announce how desperately the economy needed this aid. In so doing, they raised an alarm among American investors of all ages, but most importantly within our very significant senior segment.

The Catalyst

That alarm started a flow of funds out of stocks en masse. Congress' action to raise FDIC insurance for bank deposits to $250K may have calmed the intensifying run on the banks that had already taken down Washington Mutual (NYSE: WM, NYSE: JPM) and Wachovia (NYSE: WB, NYSE: WFC), and was threatening National City (NYSE: NCC), but stocks were left naked and vulnerable. As seniors witnessed their nest eggs cracking, they did what they had to do, preserve capital. In shifting funds from equity portfolios to safer vehicles, frantic investors forced the hands of pension fund managers. As capital redemptions mounted, these typically fully invested funds had to sell stocks in turn. In fact, they were forced to sell stocks that they would actually prefer to buy more of. And so, the death spiral is wound.

The Cure

Over this past week at least, the government followed my advice nearly to the T. I wrote they should cut interest rates in tandem with global central banks, and they did so. I said they should address the nation, and they followed suit.

We also warned that the perpetuation of fear was a dangerous route to traverse, because fear begets fear. The great river of 401K fund flows is one tough stream to divert. So only time and valuation work in favor of the long-term investor these days. With time, fear should subside, but unfortunately it also comes at the cost of asset values. As valuations inevitably become more attractive, the supply/demand balance for stocks is naturally restored, again at the cost of paper value.

Now more than ever, America needs something to believe in, or someone to believe in. However, the President's Friday morning address was a nonstarter. As I watched his numb words sadly fail before his feet, well short of finding a single soul in any dark American living room, I knew we needed someone else. This crisis of confidence requires someone of great respect to take to the television airwaves, and to settle Americans down. We need someone America admires and trusts to call us to action, to remind us that we have the power to undo, or to rebuild.

Warren Buffet immediately comes to mind, and if I were President Bush, I would put America's Grandfather on the air. The presidential candidates also have opportunity now to rally America while at the same time rallying the vote. As they contemplate purchases of half-hour prime time segments to win votes in late October, they should rather consider saving America today and winning our respect in the process.

The stock market is open on Monday, despite the Columbus Day holiday. It's fitting that on the day that honors the man who helped to discover America, America must decide whether to rediscover itself, or whether to get lost at sea. Our government must pull out all stops now, and do everything and anything it can to turn sentiment and stop the bleeding of fund flows from portfolios. We need someone we believe in to rise up now and lead us through the fog to the safety of sandy shores.



Please see our disclosures at the Wall Street Greek website and author bio pages found there. (Article interests: AMEX: DIA, AMEX: SPY, Nasdaq: QQQQ, NYSE: NYX, AMEX: DOG, AMEX: SDS, AMEX: QLD, AMEX: XLF, AMEX: IWM, AMEX: TWM, AMEX: IWD, AMEX: SDK)