- Nov 19, 1999
- 5,435
- 234
- 106
I decided to try and write down a few of my thoughts on the stock market. There have been a few threads started in OT on this subject and I?ve noted that there is a fair amount of confusion and lack of experience with how the market works.
The first important point to make is that Monday was an incredible victory for Wall Street and Wall Street firms. After a huge attack on the infrastructure that supports trading, the markets stayed open and allowed huge numbers of shares to be traded. The trading was orderly and there were not any signs of panic. Free and available markets are a cornerstone of our country and getting and keeping them open is crucial. I have a friend who is a disaster recovery officer for a Wall Street firm and he was up for 36 hours after the attack and he was confident that the infrastructure will hold even if it is a bit shaky right now.
I saw a bunch of posts yesterday about buying stocks to strike back against terrorism and there was some muted talk about a rally to try and show that we will overcome the attacks. That sort of talk shows a poor grasp of the situation before the attacks and what sort of effect the attacks really had.
Stock valuation is based on a combination of expected future cash flows (earnings) and mob psychology. Markets in Asia and Europe already had fallen after the attack. Under the first definition, the already weakened economy probably will weaken further because of a combination of shaken consumer confidence (how many people here were out buying and spending as they usually do last week ? I bet most were glued to the TV watching news) and the ripple effect of the blow to the air travel industry. Under the second definition, there is a great deal of fear and uncertainty in the market right now. Now one knows who is responsible for the attacks or what for the counter-strikes will be in. Until there is time to settle some of the uncertainty, the markets will be very volatile.
The major Wall Street banks and large investors (such as Warren Buffet and Prince Alwaleed bin Talal) made it clear that they would not be selling and that they would be acting to support the market. For all the talk of heartless greed in Wall Street, it actually has a long history of acting together during times of crisis. From what I have been told by friends in the industry in NYC, rival firms are even sharing office space and resources to ensure that everyone can operate to the best of their ability. The Fed even stepped in and did a rate cut and it has been working behind the scenes to ensure that Wall Street and banks have enough liquidity.
When I look at the damage to the economy, the one industry that is very troubling is the airline industry. Business travel and tourism is a big part of the economy. Purchases of airplanes and spare parts is a big demand driver for our industrial base (Aerospace is an industry with much of its manufacturing located in the US). Airline companies have many loans and leases with large banks and leasing companies. Failure to make payments on these loans will strain the financial system some more. I think that Congress will act to support and protect US air carriers, but I think that aerospace companies without a heavy defense part of their business will suffer. As well, hotel companies and other tourism related companies will suffer. The airlines are already laying off employees and I think it will spread.
The above paragraph may seem bleak, but if you look at past recessions, this is pretty much the pattern that has been followed in the past, just sped up and compressed. The industries have always recovered and there always has been some failures and consolidation because of it.
The other sector that will take a hit is insurance companies. This actually will have a bigger effect than just the hit to their earnings. It is important to understand how insurance companies make money. They don?t really make money on their premiums, they make money on their investments. The idea is to invest premiums and then make money off the investments. This just isn?t the stock market, it is real estate, venture capital, and bonds. Insurance companies will have to either sell holdings (adding to the downward pressure) or redirect premium income to pay claims instead of investing (reducing demand). This is where the Federal Reserve and the other large banking companies are working to ensure that there is appropriate liquidity in the system.
I treat the financial markets as a long range method to build assets for my family. I have read past history and jumping into a market like it is right now is foolish unless you have risk capital that you can fully afford to lose. What also is important is to stick to your normal investment plan. My 401(k) deduction is continuing. I send $300 a month to save for a college fund for my daughter (I started when she was born, the monthly amount is small if you start early). That will continue. I usually save up a few thousand every couple of months and then pick a stock to invest in with it. That will continue. I have plans this year for a couple of major consumer purchases (like a new TV). I will continue to do that.
I think that everyone should be rational and try and forge on with his or her normal lives. Invest. Spend. Don?t let the terror attacks crush your spirit. Of course I will be cautious with my spending (I work for a technology company and I?m afraid the recovery will be pushed out further) so as not to endanger my family?s welfare, but I will not let this attack hurt the economy more than it naturally will.
Michael
The first important point to make is that Monday was an incredible victory for Wall Street and Wall Street firms. After a huge attack on the infrastructure that supports trading, the markets stayed open and allowed huge numbers of shares to be traded. The trading was orderly and there were not any signs of panic. Free and available markets are a cornerstone of our country and getting and keeping them open is crucial. I have a friend who is a disaster recovery officer for a Wall Street firm and he was up for 36 hours after the attack and he was confident that the infrastructure will hold even if it is a bit shaky right now.
I saw a bunch of posts yesterday about buying stocks to strike back against terrorism and there was some muted talk about a rally to try and show that we will overcome the attacks. That sort of talk shows a poor grasp of the situation before the attacks and what sort of effect the attacks really had.
Stock valuation is based on a combination of expected future cash flows (earnings) and mob psychology. Markets in Asia and Europe already had fallen after the attack. Under the first definition, the already weakened economy probably will weaken further because of a combination of shaken consumer confidence (how many people here were out buying and spending as they usually do last week ? I bet most were glued to the TV watching news) and the ripple effect of the blow to the air travel industry. Under the second definition, there is a great deal of fear and uncertainty in the market right now. Now one knows who is responsible for the attacks or what for the counter-strikes will be in. Until there is time to settle some of the uncertainty, the markets will be very volatile.
The major Wall Street banks and large investors (such as Warren Buffet and Prince Alwaleed bin Talal) made it clear that they would not be selling and that they would be acting to support the market. For all the talk of heartless greed in Wall Street, it actually has a long history of acting together during times of crisis. From what I have been told by friends in the industry in NYC, rival firms are even sharing office space and resources to ensure that everyone can operate to the best of their ability. The Fed even stepped in and did a rate cut and it has been working behind the scenes to ensure that Wall Street and banks have enough liquidity.
When I look at the damage to the economy, the one industry that is very troubling is the airline industry. Business travel and tourism is a big part of the economy. Purchases of airplanes and spare parts is a big demand driver for our industrial base (Aerospace is an industry with much of its manufacturing located in the US). Airline companies have many loans and leases with large banks and leasing companies. Failure to make payments on these loans will strain the financial system some more. I think that Congress will act to support and protect US air carriers, but I think that aerospace companies without a heavy defense part of their business will suffer. As well, hotel companies and other tourism related companies will suffer. The airlines are already laying off employees and I think it will spread.
The above paragraph may seem bleak, but if you look at past recessions, this is pretty much the pattern that has been followed in the past, just sped up and compressed. The industries have always recovered and there always has been some failures and consolidation because of it.
The other sector that will take a hit is insurance companies. This actually will have a bigger effect than just the hit to their earnings. It is important to understand how insurance companies make money. They don?t really make money on their premiums, they make money on their investments. The idea is to invest premiums and then make money off the investments. This just isn?t the stock market, it is real estate, venture capital, and bonds. Insurance companies will have to either sell holdings (adding to the downward pressure) or redirect premium income to pay claims instead of investing (reducing demand). This is where the Federal Reserve and the other large banking companies are working to ensure that there is appropriate liquidity in the system.
I treat the financial markets as a long range method to build assets for my family. I have read past history and jumping into a market like it is right now is foolish unless you have risk capital that you can fully afford to lose. What also is important is to stick to your normal investment plan. My 401(k) deduction is continuing. I send $300 a month to save for a college fund for my daughter (I started when she was born, the monthly amount is small if you start early). That will continue. I usually save up a few thousand every couple of months and then pick a stock to invest in with it. That will continue. I have plans this year for a couple of major consumer purchases (like a new TV). I will continue to do that.
I think that everyone should be rational and try and forge on with his or her normal lives. Invest. Spend. Don?t let the terror attacks crush your spirit. Of course I will be cautious with my spending (I work for a technology company and I?m afraid the recovery will be pushed out further) so as not to endanger my family?s welfare, but I will not let this attack hurt the economy more than it naturally will.
Michael
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