Top Ten Signs it’s a Terrible, Horrible, No-Good, Very Bad Market DaySeptember 22, 2008 11:38 am Uncategorized
When I was a child, one of my favourite books was “Alexander’s Terrible, Horrible, No Good, Very Bad Day” by Judith Viorst. Originally published in 1972, the story involves a young boy named Alexander, who is experiencing a heavy dose of Murphy’s Law. Simply, he survives a day in which absolutely everything goes wrong. For example, he wakes up with gum in his hair, trips on his skateboard, and drops his sweater in the sink. His brothers find cool toys in their breakfast cereal, while he finds only breakfast cereal. At school during a counting exercise, he leaves out 16. At lunch, he discovers that his mother has neglected to pack dessert. Shortly thereafter, he has a dental appointment and learns that he has a cavity; then he falls in some mud. Alexander proceeds to spill ink all over the place, miss out on the shoes he wants, and start a fight. As if these weren’t enough, Alexander’s bath was too hot and he loses his marbles down the drain. To cap off the day, he’s forced to wear the dreaded railroad-train pajamas, his pillow is missing, and his night-light burns out. With each indignity, Alexander wondered if life would be better in Australia. However, while lying in his bed, Alexander notes the following: “It has been a terrible, horrible, no good, very bad day. My mom says some days are like that. Even in Australia.”
Over the past several weeks, most investors have experienced these terrible, horrible, no good, very bad days, as market indices have plunged and commodity prices have collapsed. I have to admit that I find such days to be quite exciting. I’ve always been interested in crisis and my career is littered with attempts to understand how people react when the shit hits the fan. For example, my first conference presentation involved examining media accounts of the 1987 stock market crash. In another project, I looked at the influence of personality and cognitive variables in explaining how people respond to declines in their portfolios. Before becoming a faculty member, I worked at a 24-hour crisis hotline and trained their counselors how to respond to those who were suicidal and in crisis. You get the idea. I’m endlessly fascinated by terrible, horrible, no good, very bad days.
In terms of the market, I believe such corrections are healthy and necessary. They present an opportunity to remove speculative excess, bring valuations down to more reasonable levels, and often present a wonderful buying opportunity. I try to make the best of such days, even if my portfolio takes a bit of a hit. So as a public service (coupled with my need to drive this into the ground), I now present the top ten signs that you’re in the middle of a terrible, horrible, no good, very bad market day. Remember, I’m not just talking about bad markets days; they also have to be terrible, horrible, and no good…just trying to be clear. Now, on to the signs:
1. Central bank officials and politicians can be heard to utter the meaningless phrase, “the fundamentals of the economy are sound.” The judges will also accept “the economy is fundamentally sound.” I also really enjoy, “we’re monitoring the situation closely.” In other words, “this is bad, we have no idea what’s happening, and we have no idea what to do. When we decide how to proceed, we’ll probably overreact. Please don’t ask any more questions. Thank you.”
Quote of the week #1, from The Comedy Network’s Stephen Colbert: “The fundamentals of our economy are strong. We still exchange currency. We haven’t reverted to a barter system. Although I believe Bank of America bought Merrill Lynch for 2 goats and a bushel of oranges.”
Quote of the week #2, courtesy of PM Stephen Harper: “If a crash were coming, it would have already happened.” This logic would have caused Mr. Spock to cry like an infant before experiencing an aneurysm. Harper is the same man who recently promised tax incentives for new homebuyers. So the financial crisis began by making it too easy for people to obtain houses. How do we solve the problem? By making it easier for people to obtain houses. Got it. As Mark Twain suggested, “If stupidity got us into this mess, then why can’t it get us out?”
2. Everything is going down and I mean everything. The stock screens are a sea of red and have me thinking of that scene in The Shining when the elevators at the Overlook Hotel are spewing blood. Did I just write that? Let’s move on. The most fascinating days involve complete, total, unreserved capitulation. Stocks are blowing through their 52-week lows and are doing so with extreme vigor. It’s like the Terminator: It can’t be reasoned with, it can’t be bargained with, and it absolutely will not stop. Even the most bullish of analysts and market watchers are suddenly recommending that everyone stay on the sidelines until the dust settles. With apologies to Norm Peterson of Cheers, it’s a dog-eat-dog market and you’re wearing Milk Bone underwear. If you’re keeping score, this makes three 80s references in one paragraph. As an investor, the day will see you exhibiting a variety of bizarre behaviours, which include but are not limited to the following:
- staring at the computer with your mouth open
- refreshing your stock page like a hungry rat pressing the lever in a Skinner box
- trying to comment on the day and the best you can come up with is, “Holy shit.” Yup…it’s a holy shit market.
3. High trading volumes. It has to be difficult to get on to your brokers website or achieve access by phone. We may even hear about technical glitches and that some systems are having trouble keeping up with the activity. And since I have nothing else to add, did I mention that we’re headed to New York and will be touring the Federal Reserve Bank? Market Gal is thrilled (he noted sarcastically). Thankfully we also have tickets to a Broadway show and Letterman, so that should keep the peace.
4. People you know who usually aren’t interested in the markets start talking with you about the markets. This happens with people at work, buddies on MSN, in emails, etc. For example, the other day, my buddy Ozner in Nepean mentioned the failing of Lehman Brothers. Twenty-four hours before, he wouldn’t have known a Lehman from a Lohan. Friends and family who are interested in the markets call as well, only they call earlier in the day. For me, it’s Bouch in Embrun, Lloyd and Pat in Ottawa, and of course, Market Dad. The phone call usually begins with “geez” or “wow” or something to that effect. Next up is an accounting of how the portfolio is doing and an identification of which stocks are faring the worst. Misery loves company.
5. The newspapers and business web pages are littered with photos of exhausted traders, concerned investors, and gawkers congregating outside the offices of failing firms. The Friday edition of BNNs Squeeze Play included Andrew Bell and Kim Parlee interviewing traders at a downtown Toronto watering hole. The patrons looked as though they’d just finished a 5-day enema.
6. The story of the markets migrates from the business pages to the front pages. It’s the lead story and we are treated to headlines such as “Markets Collapse,” which the editors present in a really big font. You know it’s a really big deal when they bring out the really big fonts. I also appreciate the words “contagion” and “panic” making their inevitable appearance. The Globe and Mail recently offered, “A Day of Reckoning,” which I thought was a nice touch.
My favourite part of the coverage involves placing the day in historical context. For example, “this represents the largest decline in index A since date B.” In order to qualify as a terrible, horrible, no good very bad day, it has to be the worst day in several years. Saying it’s the worst trading day since March doesn’t cut it (unless that day was terrible and horrible)….we have to be making history. We’ve been hearing a lot about American stocks being wiped out. However, did you know that Nortel recently had its worst trading day in 28 years? That’s what I’m talking about. Incidentally, Nortel is trading under $3 and this includes a fairly recent 10-for1 stock consolidation. In other words, if they hadn’t consolidated the stock, it would be trading under 30 cents. Let us mourn the money that has been destroyed.
7. Business television behaves like a dog with a bone. There’s one story and one story only: The market collapse. Networks often dispense with goofy programming features because the day is all about chronicling the crisis. Each guest is there to talk about the market action and each moment brings us wonderful quotes such as this offering from BNN anchor Pat Bolland: “This is a sick market.” Regular programming seems more important than usual and the day is littered with “special editions.” For example, “today on BNN, it’s a special edition of Squeeze Play.” This reminds me of watching TV during my childhood…”this week, on a very special edition of Family Ties, Steven, Elise and the kids rally around Uncle Ned who is coming to terms with alcoholism. Tom Hanks guest stars.”
8. At some point during the day, we are reminded of the losses that could trigger a halt in trading or a, gulp, market close. This is a tough nut to crack, as it takes a 10% decline in the Dow Jones Industrials to initiate a 30-minute to one-hour halt at the NYSE. A 20% decline prompts a 1-2 hour halt, but if the decline is witnessed after 2pm, the whole place shuts down. A 30% decline closes the market for the day, irrespective of timing. Incidentally, the Russians shut down their exchange three times in the past week (twice for going too low, and once for going too high…perhaps one day it will be just right).
9. The business press starts interviewing the older brokers. Specifically, they are looking for brokers and analysts who traded through the ’87 crash. These archetypal wise old men are simply the best. They’ve seen it all, lived through some rough times, and always have great stories. Such figures provide a calming presence, and their reassuring voices remind us that, given time, the markets rebound. You can’t get this from a 22-year old just out of business school.
10. The attributional search runs into overdrive. When positive things happen in life, we tend not to reflect on what might have led to the good times. However, during bad times, we typically initiate what’s called the attributional search. That is, we attempt to determine the causal factors that led to the event. Basically, we’re asking “why did this happen?” The process is intensified if the event is unexpected. During a terrible, horrible, no good, very bad market day, we often hear that retail investors are driving the panic and that the smart money is staying put or being put in play. The last few days have elevated corporate greed, ignorance, and a lack of regulation to the top of the list of suggested causal factors (John McCain mentioned all three the other day). Given that we’re in the middle of a North American election bonanza, expect the list to grow. I’m still waiting for the religious right to somehow blame lesbianism.
In a related vein, it never ceases to amaze how many market participants claim they saw it coming and took measures to protect their assets. Sure, their top picks on BNN’s Market Call are down 72%, but they claim to have made it out just fine. Sure thing, guys.
So how am I positioning myself to deal with these volatile times? To be honest, I’m doing very little. Sure, my financial and international plays have been on a wild ride. But with a focus on high-quality, dividend-growing value stocks, my portfolio has been less volatile than the indices. So far I’m down 4% on the year and this compares very favourably to the TSX, S&P 500 and the Dow. Let’s just say I’m certainly not losing any sleep over it. Besides, it’s the down markets when my approach really earns its keep. I’m less interested in selecting big winners and more interested in avoiding big losers. There’s a huge difference. Meanwhile, my watch list is long and although the names are getting cheaper by the day I’m still not inclined to put a significant amount of money to work. And for the record, Friday’s 7% advance on the TSX feels about as shaky as Stephane Dion.
The past few days have been adventurous, but I can’t help but think we have more terrible, horrible, no good, very bad days in the near future. And as these days continue to come along, I expect to be a buyer. As Warren Buffett noted, “We simply attempt to be fearful when others are greedy and to be greedy only when others are fearful.”
The Market Guy is an Instructor with the Department of Psychology at Carleton University. He’s not a professional advisor. He’s just a guy who loves investing and talking about the markets…so do your homework before making any investment decisions. Basing any financial decision on his column would be really, really stupid and would demonstrate that you need therapy (he teaches psych, so he’d know). In addition to the Federal Reserve Bank of New York, Spamalot at the Shubert, and Letterman, he’ll also be holding a pilgrimage to Wall Street. He may need to be sedated. Get high on life over at email@example.com