Economic Review

5/10/2010

Last week’s activity in the US Equity market clearly illustrates the massive speculative and risk laden, casino type environment this sector has evolved into…and this should be no surprise for loyal market doctor followers !!

If you didn’t see it, you most likely read about it….the Dow Jones dropped some 1,000 points in a matter of minutes during chaotic trading in reaction to uncertainty surrounding the plight of Greece’s proposed bailout. Shocked you say?…that a US major Stock index gave up nearly 10% of its value in a matter of minutes and some individual stocks depreciated some 50% in value !!

As we mentioned at the heading of this piece…loyal Market Doctor followers should not be shocked. Why….because over the past years and especially over the past months we have been highlighting the massive underlying risk associated with gains in the Equity sector and that bubble-like speculative forces were playing a large part in share price valuations. A natural reaction to such a market underpinning is the potential for air to come out very quickly and come out it did last week. These massive losses registered last week also shoot major holes in all the positive hype regarding a robust recovery and the illusions of any Goldi-Locks economic scenario.

A major factor to consider now is, despite the rallies or losses in stock prices that will transpire over the next few weeks and months ahead, should investors continue to allocate significant sums of retirement moneys to this type of market structure….a market that can evaporate 10% of its value in minutes.

What can be done to bring sound fundamentals back to this market? Positive real short term rates would help.

Oh by the way….it appears that the EUROZone has adopted an aggressive bailout strategy for Greece and general support for the EURO…get the printing presses rolling again. Hey, the markets may even rally a good sum but how long will it last before another massive bout of air is released again?

Stephan Kudyba (MBA, PhD) THE MARKET DOCTOR

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