- Money Morning Australia

In the Market Or Under the Mattress?

Written on 26 January 2012 by MoneyMorning

In the Market Or Under the Mattress?

The next 1,000 points on the Dow Jones Industrial Average in either direction are going to be determined by what happens in two cities thousands of miles from our own shores…

Athens and Berlin.

What’s more, the risks associated with Europe’s redemption, or its failure, are more concentrated now than they were before the crisis began.

There are two reasons: a) Europe won’t help itself and b) Wall Street may still have $1 trillion or more in exposure to European problems.

What makes me crazy right now is that European chatter is what’s driving the markets.

Every sound bite from Europe is critical these days. Not because there is anything relevant in the political babbling from financial ministers tasked with fixing this mess, but rather that there is a cascade of events that could take us in either direction.

Fix this mess and the markets will take off for a 1,000 point gain that will leave anybody who is on the sidelines hopelessly behind.

Fail and the markets could tank.

It certainly fits the pattern established in recent months. News leaks suggesting solutions have brought on rallies, while negative leaks have caused a ripple effect that has quickly dumped stocks into the hopper.

Yet, it’s not really the numbers that matter at the moment – even with the Fed rumored to be considering another $1 trillion stimulus and reports that the European Central Bank (ECB) and International Monetary Fund (IMF) may be seeking as much as $600 billion each.

No. The market swings we are seeing are all about confidence or, more specifically, the near complete lack thereof.

The Mattress vs. The Market


A recent report from TrimTabs shows that [US] checking and savings accounts attracted eight-times the money that stock, bond and mutual funds did from January to November 2011.

That is a whopping $889 billion that went under “the mattresses” versus only $109 billion that went into the markets.

In fact, CNBC is reporting that the pace of money headed for plain-Jane savings and checking accounts from September to November accelerated to nearly 13-times the average monthly flow rate of the preceding nine months from September to November.

What’s significant about this is that the money has headed for the sidelines when the markets have rallied. Usually it’s the other way around. Normally money floods into the markets when they move higher.

The other notable thing here is that, generally speaking, up days this year have had thinner volume than down days. This means that most investors just can’t handle the swings. In other words, every time the markets dip, they’re packing it in.

Pessimism is the Breeding Ground of Opportunity


Bottom line: Investors are making a gigantic mistake – especially those with a longer-term perspective.

Periods of maximum pessimism – when everybody “knows” something – usually make for a variety of great buying opportunities.

For instance, do you remember the following quote?

“The economy is staggering under many “structural’ burdens, as opposed to familiar problems.

The structural faults … will take years to work out. Among them the job drought; the debt hangover; the banking collapse; the real estate depression; the healthcare cost explosion and the runaway federal deficit.”

I remember it like it was yesterday.

It’s from TIME magazine in September 1992 – right before the markets took off on a breathtaking 16-year run.

To be clear here, I am not suggesting that the markets are about to go on a triple percentage point bender, only that investors would be foolish to ignore the possibility.

In fact, the very notion that Wall Street remains in denial about Europe and Europe itself still refuses to confront the seriousness of its situation bodes well for almost anybody willing to go against the grain.

That’s been the case throughout history.

Take the Panic of 1873. It was the world’s first truly international financial crisis and, by many measures, actually far worse than what we’re dealing with now.

Things were so bad that more than 18,000 businesses closed, sending unemployment soaring to 14%. The NYSE even closed for ten days.

The depression that started in 1873 lasted until 1879 here in the United States and another 20 years in Britain — where it’s known as the “Long Depression” in history books.

Yet through it all, the market’s dips, twists and turns turned out to be extraordinary buying opportunities.

The same thing ultimately will be true today, especially if you’re building long-term investment positions in “glocal” stocks with experienced management and fortress-like balance sheets that produce high dividends.

I feel the same way about energy, commodities and very specific microcap companies with promising inventions, medical technology or some other catalyst that can create game-changing returns.

It takes a lot of nerve, but that’s how the markets work.

Keith Fitz-Gerald
Chief Investment Strategist, Money Morning (USA)

Publisher’s Note: This article originally appeared in Money Morning USA

From the Archives…

Are ASX Energy Index Stocks Worth The Risk?
2012-01-20 – Aaron Tyrrell

Why the World Bank Wants Your Money
2012-01-19 – Kris Sayce

Could $50 Billion In Unpaid Credit Card Debt Drag Aussie Bank Stocks To A Record Low?
2012-01-18 – Aaron Tyrrell

The US-China Power Struggle… and What it Could Mean For Oil and Australian Energy Stocks
2012-01-17 – Dr. Alex Cowie

How Global Oil Supplies Could Fall 40% Overnight
2012-01-16 – Dr. Alex Cowie

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11 Comments For This Post

  1. DM Says:

    Great article.
    Good to see MM doesn’t just spruik doom and gloom.

  2. Peter Fraser Says:

    Yes, one of the best articles yet.

    Pessimism in markets breeds opportunities. Picking them may be difficult, but if it was easy everyone would be a millionaire. They are there and that is the important issue.

    Are we seeing a paradigm shift in editorial thinking?

  3. Drood Says:


  4. Drood Says:


  5. Peter Fraser Says:

    drood the question you need to ask is whether India got a bargain price by using gold as a currency, and why does Iran want gold rather than USD. Would it be because they have less capacity to use USD seeing that any conversion to other currencies becomes difficult with US and EU embargos in place. With gold they don’t have that exchange problem.

    What I am suggesting is that it isn’t so much a drift away from USD as a reserve currency, it is a means of trading brought on by a necessity that Iran faces, but other countries don’t.

    Otherwise Iran would bleed to death.

  6. neil Says:

    Yes great article – but what of the massive sovereign debts & unfunded liabilities; will these catch up with the indebted nations sooner rather than later?

  7. Drood Says:

    PF ….. Just seeing it for what it is, Iran and its oil trading partners really have no option and the yanks ( who dont seem to have thought this out ) have just made Asia,s oil supply cheaper. BTW one refinery ( that relied on Iranian oil ) has already closed in the UK causing qeues at the bowsers, many more are saying they too will have to close if the embargo goes ahead. Where will europe get oil from? How will the yanks stop Iran selling oil to the east and if they do where will we get ours from?

    Looks like the Aussies may have have caught on to the fact that their currency is not doing them any good. Too late methinks.

  8. Peter Fraser Says:

    drood – this may interest you – http://www.businessspectator.com.au/bs.nsf/Article/Iran-to-enforce-single-exchange-rate-QVSAU?OpenDocument&src=eid&ir=4

  9. Bob C Says:

    The end of the petro dollar ?


  10. TRB Says:

    See now why there is very few comments in the last few days.

    Where was this bullish talk and buy in dips in Febraury 2009 when the market was down over 50%.

    FED was printing money like no tomorrow?

    That was the time for great bullish articles.

    You are buying at the top of a one of the greatest bullish runs in history from Feb 2009 to now.

    Infact this poor research article is a mesasage that a bear market is near again I stand alone in my dug out waiting for real buying opportunities.

    Opals anyone?

    Or poor research articles to buy more shares at the top of this market?

  11. Jim Says:

    For hundreds of years the major players like the Rothschild banking family have deliberately caused booms and busts and they have also caused wars ( very profitable if you are lending money and supplying military equipment to both sides) but on average every sixty years a massive bust occurs then the markets slowly build up again over several decades.
    It’s all deliberate manipulation by the private banks who when everyone is ruined and lose their homes, tend to clean up big time.

    We are due for a huge bust and most people will be big losers


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