Holy cow! Did you see that?

Yesterday, stock markets around the world walked out on a high ledge and threatened to jump.

The US stock markets fell about 2.5 to 3%. The rest of the world fell comparably or worse.

Was there a threat of imminent nuclear war? Did the Antarctic melt? Were we attacked by Jupiter? No. Two things seemed to set the market off – yet again. First, there was a monthly report that consumer confidence has drooped in China. And second, in light of the weekend’s economic summit in Toronto, in which austerity seemed to trump more government spending, the market concluded, “Uh-oh, if government printing presses are turned off, consumers and businesses will NEVER make up the difference in lost demand.”

Now I don’t mean to make light of lower estimates of possible consumer spending in China nor of the virtues of austerity over profligate governmental spending, but we’re in a time when no matter what event arises, the market keeps seeing all events as a portends of more disaster. We’re trapped in a web of pessimistic thinking.  There is no hope. The glass is always and forever half (or less) empty.

Help! Get me out of here!

The last thing I want to do through these blogs is encourage any of us to fear, to despair or to “trade” stocks in your retirement account to profit from this ongoing market chaos OR to flee the market outright.

Instead, as I boringly recommend: Stay the course. Diversify. Hang in there. Things will change. That I can promise. They will even get better. I don’t know when. I don’t know what precise catalyst will encourage the market to think positively once again. But it will happen.

Why?

Well, let’s think, rationally, for a moment, even if the stock market is rarely rational in the short run.

If you can remember back in early 2000, the S&P 500 broke through the 1,500 level. It was on a tear – upwards, too, if you can remember. Since then – 10 years! — it has declined by about a third (1,500 to under a 1,000 currently). And much more than a third if we factor in inflation. Yet all the while, total U.S. corporate profits have doubled (rising from about $800 billion in 2000 to about $1.6 trillion today), and the 10-year Treasury bond yield has fallen by over half (from about 6.5% in 2000 to under 3% today)!

Now I know a lot of our eyes may glaze over when numbers are introduced, but try to think about this: if in 2000, you knew that over the coming 10 years US company profits would double and interest rates would be cut in half, don’t you think it would have been smart to bet on the stock market rising?

And if you had, you would have lost money BIG TIME!

Yet, there has been an amazing revaluation over the past decade with respect to stock prices, corporate earnings, and interest rates – each of which has always been a useful signal telling us which way stocks will move. This time, however, those signals keep telling us, no matter how cheap stocks are, that they are still too expensive. Despite one of the biggest stock market revaluations in history, most people still don’t want to touch the stock market, let alone believe that this 10 year market correction has been a little overdone. After all, if the world is ending, who in his or her right mind wants to buy a stock?

But suppose, as I believe, that the world isn’t ending just yet? That we’re coming through an extended time of worry and adjustment?  That we would do well to hang on to hope and rational thinking?

This “adjustment” highlights the equally amazing “investor reassessment” that has taken place during the last decade. In December 1996, Alan Greenspan gave an economics talk in NYC in which he made famous the two words “irrational exuberance.” At the time, and for three years to come, investors seemed blithely willing to plunk down good money on any manner of investment garbage, the more speculative the better. Thus, what ended in the year 2000 was an era of “irrational exuberance” (many were buying stocks of companies without earnings and without regard to value).

But today, we are clearly in an era of “irrational pessimism,” We live in a time of such horrendous fear that anything that “goes bump in the night” will cause investors to sell first and analyze value later on, if at all. Stocks, in this mindset, cannot get too cheap. Too many were too exuberant back in 2,000. Making money in the stock market seemed too easy. People quit real jobs to become day traders. But today, too many are too pessimistic.

Just as it proved correct to bet against the “irrationality” of 2000, it will likely prove correct to bet against a different manifestation of irrationality today.

I want to take a break from “all things Europe” and “all things debt.”  I’m sure we will return to those topics soon.

There are other things going on in our fallen world, and they are important, too.  Let’s look at the oil spill in the Gulf of Mexico for a few moments, certainly something of momentous importance to the environment, to politics, to investing, and for all people of good will.

What is one to think?

One could take the position that I hear some politicians hold, that BP acted carelessly and, in the words of Ken Salazar, our Secretary of the Interior, the government must keep its “boot on the neck” of BP. Such a view pictures serious business people as a bunch of drunken clowns who don’t know what the “(*&%” they’re doing except taking advantage of other people.  To imagine that BP - which is on the hook for $750 million so far - does not want to solve this problem as soon as possible is breathtakingly shortsighted.

Then, too, there is the view that this oil spill proves we must stop drilling for oil in the Gulf, or even drilling for oil altogether.  It’s too dangerous, dirty, and hazardous to the environment.  Even if this view is true, we can’t stop drilling. At least not yet.  Alternative forms of energy make up much less than than 10% of our current energy needs.  And these alternatives are, currently, still wildly expensive compared to fossil fuels, oil and natural gas.

Then, there’s a view that, as our government gets bigger by the day - having taken over health care, student lending, a huge hunk of the auto business and now the banking sector - why not have it take over fixing of the oil spill.  After all, the government has all the answers to the problems besetting us and that business people seem less interested in solving.  Besides, government isn’t in the business of making money; it just spends money trying to fix things private enterprise that been too greedy to fix, trying to take away real people’s problems away, helping them, unlike free market interests, avoid the uncertainties of life.

Right!

And if you believe that I have a post office department to sell you, along with an impeccably managed and funded social security and medicare system to turn over to you, as well.

Hey, everybody, it’s time to be adults.

We live in a dangerous and imperfect world.  We can try never to make a mistake or have an accident.  But both will happen in a fallen world.  In fact, the more one does something, the more likely accidents and mistakes happen.  If I were a heart surgeon doing one operation a year, I might not ever have a disaster.  If I were an oncologist treating cancer patients, and I attended one patient a year, I, too, might have a flawless record of healing over a long period of time.  But if I operate on hearts daily and attend many cancer patients, catastrophic events will occur. And I will be part of them.

So, too, with the job of drilling for oil.  What is unlikely to occur over a short period of time is almost guaranteed to happen over decades.  NO MATTER HOW CAREFUL WE ARE. The US has a splendid record of drilling for oil.  The last noteworthy accidental spill was in 1969 off the California coast. That one spill has stopped further drilling off the west coast forever.  In 1989, human error, or maybe human inebriation, caused the Exxon Valdez spill on the Alaska Coast.  Now, in 2010, we have another horrible spill.  But we will learn from it.  And we will incorporate that learning into making future drilling safer.  That’s how progress occurs, not by governmental decree.

We are drilling in the Gulf of Mexico over 5,000 down because all the easy oil supplies have been gotten.  We take the risks - environmental and human alike - because the world currently runs on about 85 million barrels of oil a day. And the world currently supplies just about 85million barrels of oil a day.

There ain’t no excess oil hanging around in our garages, our gardens or in our attics to tide us over in a pinch.

The cheap, easy-to-find oil we used to have in the U.S. 50 years ago no longer exists anywhere in the world except for maybe (and even that’s a big “maybe”) in some very hostile nations that have little affection for the West, the US (in particular), or for modernity. Some would like us, however, to do all our oil drilling in those places, but none here in America or off our coast.

Offshore drilling may take a temporary break in order for the government and the companies involved to research the cause of this spill, but such a pause will be only a temporary break. Even President Obama, who ran as no friend of Big Oil, was starting to relax a little on offshore drilling before this oil spill put the environmental risk back into the headlines. Why was he relaxing with respect to off-shore oil drilling? Not because he suddenly became hostage to Big Oil or because it became a new-fangled, pro-environmental thing to do.  No, he did it because we really need to find oil in as many places as possible to reduce our reliance on Middle Eastern oil.

But fixing an oil spill at 5,000 feet below sea level is not the same as plugging a leaking swimming pool, in spite of what our politicians may be inclined to believe for purposes of political theater.  Yes, the leak will get fixed.  As soon as is humanly and imaginatively possible, too.  But how? When? I don’t know.  Yet know for sure:  BP is under HUGE! motivation to fix it, anyway possible, as soon as private ingenuity permits.

Finally, let me turn this to some investment thinking, which is, sort of, what this blog is supposed to be about. I know, it’s discomforting to think that money is to be made on misfortune.  But in a fallen world, it is. And it can be helpful, too, to those who need the help.

Now, I’m not one to advise any of my readers to buy individual securities, but this is a situation where some enormous overreaction to the companies involved in the the oil spill has occurred.   Take Transocean, for example, the owner of the deep-water oil drilling rig which blew up and sank the day the oil leak spouted back in late April.  It’s stock has fallen 31%.  BP shares have fallen by a third.

Yet oil will still need to be found to power the world for years and years to come.

I leave you to draw your own conclusions.  But for sure, we still live in a deeply fallen, imperfect world where accidents will happen.

God bless us and help us through this latest mess.

It was nothing short of a stunning day on Wall Street yesterday with the Dow Jones Industrial Average suffering its worst intraday decline in its history.  The afternoon freefall saw the Dow drop 600 points in about six minutes.

Breathtaking  - WOW!

Why did this happen? Well, investor sentiment over Europe probably accounts for about 350 points of the loss.  The rest – a loss that had the Dow down just about 1,000 points at one time - has been blamed on a wave of computerized sell orders to electronic networks where liquidity wasn’t sufficient to do the trades. 

Yikes!  Think of Hal the Computer in the movie “2001, a Space Odyssey”

The result was not pretty, resulting not only in a historic intraday loss but sheer chaos – sort of electronic, financial terrorism (but I’m not suggesting that there was human intent behind the madness.)  Add to that, the human error caused a single trader who meant to sell “16 million shares” of a holding but erroneously entered “16 billion shares,” and the day was truly one for the record books and the loony bin.  At one point, for instance, with no company news of any kind, blue chip company Proctor and Gamble was down $27 a share on a $60 stock. 

Though the market’s recovery was almost as impressive as its dive, still, the market closed down — big time!  At its worse it was down 9% during the day, but closed down “only” 3.2%.  Only about a week ago, the sun, financially-speaking that is, was shining, the flowers were blooming and the temperatures were mild.  Now, our financial landscape looks like it’s gotten two feet of snow, and the plows are not working.  In about a week, the stock market drooped about 7.5% below its late April highs.

What’s up?

Anyone claiming to know for sure is a fool or a liar.  But the more optimistic might claim that this is just an ordinary 10% correction in a market that has risen about 75% in 14 months.  And it may be that. But things in Europe are worrisome. Before yesterday’s computer glitches in New York stock trading, markets around the world were already reeling from the concerns about contagion risk from a, so far, ineffective European Central Bank, a remarkable rise in the Japanese yen, and images violence and social breakdown in the streets of Athens.

News today that the German parliament has approved the financial aid package for Greece and that the growth in U.S. nonfarm payrolls for April was stronger than expected – both of which are great – has not done much to lift the stock market’s spirits.

Moreover, the U.S. unemployment rate actually rose during April to 9.9% from 9.7%, which is not surprising given that improving economic conditions are leading more long-term unemployed people to look for work.  

Where do we go from here?

I don’t know.  If this is a modest correction of a market that was getting ahead of itself, great.  But Europe’s problems, and excessive debt problems around the world and here at home, are not yet being fixed, regardless of what the EU does to help Greece in a pinch.  Contagion from little Greece to bigger, troubled debtors like Portugal, Spain, or Italy is what could happen; and if it did, we, our economy and markets around the world would be in whole lot more ugly soup.

There is so much pain and adjustment that still awaits this world and our nation from too much spending and too little fiscal discipline.  Some think it was the “bad” banks that caused the crisis, or maybe spendthrift homeowners.  Now we see that sovereign governments are to blame, as well.  Yet, they keep spending more to get out of trouble.  Our debt crisis come from, not just those home owners who bought bigger houses than they should have and then could not afford them.  Our problems also extend to entire nations that have made generous but unaffordable promises to people and programs.

And the bill is coming due. 

Is the stock market getting ahead of economic reality?  Is it about to roll over and die?

I doubt it, which might be good news to retirement savers who use the stock market, or stock mutual funds, to fund their retirement savings plans.

After the 57% loss that was experienced by the U.S. stock market from Oct. 2007 to March of 2009, it’s not unusual for many people to remain skeptical of investing in stocks or of even going back into the market.

However, such skepticism fuels market rallies.

Look at the Chartoftheday below.

It illustrates beautifully, I think, several rallies that have followed massive bear markets. By the way, a ‘massive’ bear market is a decline of more than 50%.  Such swoons are not common.

Since the inception of the Dow Jones Industrial Average in 1896, there have been only three bear markets wherein that index of stock values declined more than 50%. (They occurred in the early 1930s, the late 1930s into the early 1940s, and then much later, during the very recent financial crisis). The chart below happens to add in the rally in the NASDAQ that followed the dot-com bust of 2000 to 2002, when that index drooped a whopping 78%.

It may interest any reader that the current Dow rally has followed a path that is fairly similar to that of the NASDAQ rally that began in late 2002. It may also be worth noting that each of the rallies that followed the BIG market busts lasted from about 300 to 370 trading days before morphing into a trading range, or a choppy phase, that lasted another year or more. Right now, we’re closing in on Day 300 since the current rally commenced.

History tells us that the rally could run a while. For big rallies following BIG market declines are not unusual and are not quick to end, either.

So, if you’re “in,” take some encouragement from this news. And if you’re “out,” maybe you should think of putting “your toe back in the water.” For while I can’t foresee the future, I can share results of what’s happened in the past after similar catastrophic market falls.

Blessings to you all.

We can’t continue to do this. It’s like an addiction.

As a free nation of free people, the charts below present a condition that is NOT sustainable, nor even tolerable for people who will choose to remain free and responsible.

What more can one say?

Today’s chart is courtesy of the Bespoke Investment Group