Friday, August 05, 2011

Stand Corrected

The equity market has a way of humbling even those with the sharpest pencils.  No matter how brilliant or successful, analysts and traders were dealt the harshest of critiques yesterday.  Yesterday, on August 4, 2011, the U.S. markets declined by the largest percentage since the Fall 2008 financial system crisis.  Some pundits have called it a “correction.”

What is a market correction anyway?  It is defined as a downward movement in the equity market from 5% to 20% that is not large enough to be called a “bear market.” 

If you subscribe to the most strict form of the Efficient Market Hypothesis you believe that stock prices always fully reflect all available information about a company, both that which is reported in filings to the SEC as well as the information known only to insiders.  Yet the fact the several European countries as well as the U.S. are having debt problems is hardly a revelation.  The problems have been widely reported for months, even years.

Perhaps it is not a matter of information distribution.  It is a matter of capitulation  -  giving in to what investors are wont to do  -  admit they are wrong.  Valuations placed on U.S. equities were simply too rich against the backdrop of European and our own domestic debt problems.  A growing number of investors had adopted this view, yesterday spilling over into a crowd of sellers.  Today we all “stand corrected.” 

Tomorrow we begin the hunt for cheap stocks.

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