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"May"hem in Markets !

Market action in first week of May gives new meaning to English word "mayhem". Dictionary meaning of this word is: needless or willful damage or violence. The afternoon action in stock markets on Thursday May 6 was so true to this dictionary definition. It was indeed needless/willful damage to the confidence which was just getting started to build up. Many folks are still searching for answers what exactly happened at 2.45 pm EST on May 6 when DOW had its biggest intra-day points loss in its history !
I was amused that my previous post about selling in May would be so much on target - unfortunately when it comes to selling, I don't follow my own advise !

Storms were building for this fateful day for last few months with slow and erratic European response to Greek debt mess. Now the problem has become much bigger since contagion virus has spread to other European nations and may cross to other nations outside Europe. Unless Europe acts decisively over this weekend and next couple of weeks, we may be heading towards repeat of Sept 2008. So here are some suggestions for European policy-makers:
  • Guarantee sovereign debt of EU members for next 3-5 years and let governments work debt reduction over these 3-5 years
  • Tighten monitoring of members finances so nations like Greek cannot lie on their finances
  • Be ready to kick members out of EU if major violations are found
  • ECB should buy sovereign debt at 1-2% interest immediately - this would be equivalent of Fed buying mortgage bonds and treasuries which helped during this credit crisis
  • Create a "TARP" fund of over 500 billion Euros to help EU member nations
It is possible that Germany may be happy with this European problem since weak Euro is good for country like Germany which is second biggest exporter in the world but those short-term benefits may vanish if Euro falls apart - so Ms Merkel needs to tread carefully about how far she can stretch this issue without breaking Euro.

Job report on Friday was good but market ignored it due to all the volatility but its good to know that US economy has started creating over quarter million jobs per month. Given all these factors, how do one invests ?

My prediction is that volatility would continue to be higher over next few weeks and it is likely that DOW may see 10,000 before climbing back above 11,000. Under such conditions, I would recommend to stay on sidelines, prepare your list of stocks to buy (you can check some of old posts on this site for few ideas) and start nibbling at them when DOW reaches just below 10000. Long term market fundamentals still look good provided Europe fixes its issues quickly.

That's all for now - heading for IRON2MAN - first summer movie of 2010 !

Have a great weekend !

/Shyam


Comments

Sudarsan said…
Looks like your predictions about volatility continuing are turning out the be true. Did not check computer for a couple of days and suddenly realize everything is down. Looking forward to your next post and stock picks.
5:36 AM
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