by John M. Curtis
(310) 204-8700

Copyright March 1, 2007
All Rights Reserved.

lunging 416 points, the Dow Jones Industrial Average took its worst beating since Sept. 17, 2001, when the stock market reopened after Sept. 11. Unlike a pack of Marlboros, stock market investing comes with no warning label, cautioning investors that it could be hazardous to your savings and retirement accounts. Most investment professionals counsel nervous investors to take a “long horizon” when dabbling in stocks. Judging by Tuesday's performance, you can see why, when programmed sell programs from the nations' biggest investment funds take profits, they euphemistically call it a “market correction.” While the Dow tanked 3.29%, the tech-rich Nasdaq dropped 96.65 points or 3.86%. Wall Street reacted to a 9% drop in Chinese stocks and comments by former Fed Chairman Alan Greenspan, warning a Hong Kong financial conference about a possible U.S. recession.

      When Greenspan talked about “irrational exuberance” in 1998, former President Bill Clinton's bull market took a pause, resumed to its frenzy but eventually crashed in March 2000, wiping out $4 trillion worth of wealth, decimating the savings and retirement accounts of countless investors. Back then, long-term investors watched their portfolios liquidated, taking six long years to recoup losses in only blue-chip stocks. Nasdaq share prices are 50% of their March 2000 highs, with most tech portfolios still down 80%. “All that invested should feel grateful that we've had such a great run for the last 12 to 18 months,” said Washington D.C. investment attorney Joel Kleinman, forgetting that average investors watched their portfolios go up in smoke. Only large funds that control the market are programmed to sell when managers decide its time to take profits.

      Without warning labels on stock market-related investing, investors have no clue when programmed trading can tank the market. “This corrective consolidation phase isn't just going to be one day, but we don't believe this is going to be a bear market,” said Bob Doll, BlackRock's chief global equities investment officer. Calling programmed selling a “corrective consolidation” fails to acknowledge the way fund managers manipulate the market with programmed selling. No small investor can time the market when big funds decide its time to liquidate equities and move to cash or bonds. Watching history repeat itself should compel the Securities and Exchange Commission and National Association of Security Dealers to give small investors advance warning of major sell-offs. Small investors loose their shirts when fund managers decide to dump stocks and take profits.

      Unlike fund managers, small investors must take their lumps or wait until investments return to prior values. Brokers warn investors about “timing the market,” while fund managers dump shares, drive down prices and eventually buy back stocks at bargain prices. “When you get this far away from a recession invariably forces build up for the next recession, and indeed we are beginning to see that sign,” said Greenspan yesterday via a satellite video-link to a business conference in Hong Kong. Greenspan is privy to the same data as Fed Chairman Ben Bernanke, who could have offset a slowdown by lowering interest rates at the Jan. 30 Open Market Committee meeting. Lowering interest rates usually helps the stock market and hurts the bond market, where treasury yields begin to drop. With foreign investors already hurt by the dollar's decline, lowering rates makes matters worse.

      China's Shanghai Composite plunged 8.8% after fund traders decided to take profits after a yearlong run-up, doubling share prices. Giving back 8.8% doesn't begin to erase inflated share prices, still high by historic standards. Sell-offs save profit for institutional investors and opens the door to bargain hunters looking to get into an otherwise bloated market. “Corrections usually happen because of a catalyst, and this may be it,” said Ed Peters, chief investment office at PanAgora Asset Management, hoping today's slide doesn't continue. Like U.S. markets, the Chinese have learned how to take profits while creating the illusion that small investors can survive when fund traders decide to sell-off. Small investors only pray that big traders believe they've taken enough profits to begin buying again. Until that happens, small investors are at the mercy of calculating fund managers..

      Programmed selling decimates small investors, who can only sit back and watch portfolios shrink in value. Like wildfires, there's little to cheer about in the apparent devastation, raising the empty hopes of “buying opportunities” and arcane rationalizations about dollar-cost averaging. When brokers urge long-term investing, they refer to small investors, not the big funds that use programmed selling to drive down share prices and programmed buying to prop up prices. Wall Street's PR machine always finds convenient excuses to camouflage and justify greed and profit-taking at the expense of small investors. There's no excuse for investing a dollar, turning it into 10 cents and telling investors to hang in there until they get back to square one. Before Wall Street ruthlessly takes profits and tanks the market, small investors should be given plenty of advance notice.

About the Author

John M. Curtis writes politically neutral commentary analyzing spin in national and global news. He's editor of OnlineColumnist.com and author of Dodging The Bullet and Operation Charisma.

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