Investors' Worst Fears Continue to Weigh on Dow

Three demoralizing developments have forced the stock market to its knees in recent weeks, as the level of fear for investors ticked upward and the major indexes slumped over 5%. The old stock market saying, "Sell in May and go away," could not seem closer to the truth given the near uniform collapse of the Dow Jones Industrial Average (INDEX: ^DJI  ) , S&P 500 (INDEX: ^GSPC  ) , and Nasdaq (INDEX: ^IXIC  ) indexes since May 1.

Through the month of March, all three seemed poised to deliver record returns for investors, gaining an average of 11% across the board during that time frame. April was basically a wash, however, and May has been utterly dismal. The chart below illustrates this devastating decline.

Dow Jones Industrial Average Chart

Dow Jones Industrial Average data by YCharts

At this point, the underlying reasons for this collapse have become all too familiar. In fact, it would be hard to think of a worse sequence of events that would rehash the gut-wrenching market events of the past decade or so.

First off, the convoluted European saga continues to depress markets around the world, lingering on like a gloomy guest at an otherwise boisterous dinner party. At this point, the austerity requirements for Greece would cut so deep that the country will probably be extracted from the euro experiment altogether. It's only fitting, perhaps, that one of the smallest players in this tragic drama could yet lead to the demise of the currency in a domino-like fashion. Nevertheless, investors seem to be sitting on the sidelines to watch how this plays out.

As we recoil from the Greek tragedy, investors faced another unpleasant surprise in recent weeks when JPMorgan Chase (NYSE: JPM  ) revealed substantial trading losses in its chief investment office. Whether the amount is $2 billion or $5 billion is irrelevant, since the utter lack of visibility into the trades granted by leadership brings to mind the worst memories of the 2008 financial crisis. So much for placing systemic banking risks in the rearview mirror.

Finally, the most recent blow to investor confidence arrived last week in the shape of an ill-conceived Facebook (Nasdaq: FB  ) IPO. The debacle unfolded in the following sequence: Facebook amended its IPO filing just days before the debut to note slower growth in advertising, the company issued shares at the high end of the IPO pricing range, and the stock fell substantially in the first three days of trading. Not surprisingly, lawsuits emerged from all angles, claiming insider information was delivered to the most powerful players on Wall Street, while the retail investors were left in the dust. While Fellow Fool Morgan Housel points out that chasing a fast buck was never a good idea, this stock offering still reeks of foul play.

Each of these events shocked the markets, and investors are reminded in one fell swoop of the financial crisis, the failed currency experiments, and the IPO bubbles that have crushed our confidence repeatedly over the past 15 years. The most logical response to all of this turmoil is a flight to so-called "risk-free" assets like Treasuries for many investors. With yields hitting record lows, however, is there a more attractive way to ride out the market? One could do worse than invest in high-yielding stocks, and your first move should be to read our recent special report, "Secure Your Future With 9 Rock-Solid Dividend Stocks." In the midst of a roller-coaster market, these stocks offer stability in the form of cold, hard cash.

Isaac Pino has no positions in the stocks mentioned above. The Motley Fool owns shares of JPMorgan Chase. The Motley Fool has a disclosure policy. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. Try any of our Foolish newsletter services free for 30 days.


Read/Post Comments (1) | Recommend This Article (11)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On May 31, 2012, at 6:05 PM, MHedgeFundTrader wrote:

    This is far and away the world’s premier banking institution. Estimates of the huge trading losses by the London “whale”, initially pegged at $2 billion, have since skyrocketed to $6 billion. I’ll ignore the Internet rumors that speculate about a $30 billion hickey. As you well know, almost everything on the net is not true, except what you read in my own newsletter.

    Back in the 1980’s when I was at Morgan Stanley, the inside joke was to look for nice office space for ourselves whenever we visited clients at (JPM). The expectation was that they would take us over when Glass-Steagle ended, as they were both the same institution before the Securities and Exchange Act broke them up in 933. When the separation of commercial and investment banking finally came in 1999, Morgan Stanley had grown far too big to swallow and the egos too big to manage.

    I’ll tell you another way to look at this trade. (JPM) lost 4.7% of its capital, so Mr. Market chewed 30% out of its capitalization. Sounds a bit overdone, no? The bad news is already in the price. A large part of the offending position has already been liquidated.

    I have analyzed the specific trade that got (JPM) into so much trouble, the now infamous “Investment Grade Series 9 Ten Year Index Credit Default Swap.” The chart of its recent performance and its hedge is posted below. It was in effect a $100 billion “RISK ON” trade that came to grief in early May.

    Few outside the industry are aware that this was a $6 billion gift to two dozen hedge funds who are now shouting about record performance. It is, after all, a zero sum game. Didn’t Bruno get the memo to “Sell in May and go away”? He obviously doesn’t read The Diary of a Mad Hedge Fund Trader either.

    Even if the worst case scenario is true and the $6 billion numbers proves good, that only takes a 4.7% bite out of the bank’s $127 billion in capital. It is in no way life threatening, nor requiring any bailouts. These shares at this price are showing an eye popping low multiple of 7X earnings, and have already been punished enough. Getting shares this cheap in this company is a once in a lifetime gift, and twice in a lifetime if you count the 2009 crash low.

    You don’t have to run out and bet the farm right here. Scale in instead, and if the market drops, you can always cost average down. If Greece forces us into major meltdown mode, we can also hedge this “RISK ON” trade through taking more aggressive “RISK OFF” positions, like selling short the (FXE), (SPX), (IWM), (GLD), or the (SLV) by buying puts.

    Mad Hedge Fund Trader

Add your comment.

Sponsored Links

Leaked: Apple's Next Smart Device
(Warning, it may shock you)
The secret is out... experts are predicting 458 million of these types of devices will be sold per year. 1 hyper-growth company stands to rake in maximum profit - and it's NOT Apple. Show me Apple's new smart gizmo!

DocumentId: 1895386, ~/Articles/ArticleHandler.aspx, 11/27/2014 8:39:29 PM

Report This Comment

Use this area to report a comment that you believe is in violation of the community guidelines. Our team will review the entry and take any appropriate action.

Sending report...


Advertisement