Rally again?

Wall Street managed to reverse all the previous day losses after a report
showed new home construction unexpectedly jumped in February. Stocks ended
higher led mainly by the tech stocks.
The Dow closed back up at 7,395 with a gain of 178 points, erasing the
extreme negativity from yesterday's bearish "shooting star" candlestick.
Very unexpected. But volume trend is losing strength.

At their core, stocks are a bet


DURING Thursday night's verbal drawing and quartering of CNBC's Jim Cramer by Comedy Central's Jon Stewart, the inevitable conclusion emerged: Long-term investing in the stock market is a sick joke.


Stewart: 'My mother is 75. And she bought into the idea that long-term investing is the way to go. And guess what?' Cramer: 'It didn't work.'

Distill the last 16 months of financial hell down to one thought, and that would be it for millions of Americans. The US stock market's plunge has wiped out more than a decade's worth of accumulated wealth, driving blue-chip indexes back to 1997 levels.

Twelve years qualifies as 'long term' for most people. Ergo, it would seem, the stock market doesn't work. If this were only an academic exercise - a study of numbers and the alternating human emotions of greed and fear - we could all shake our heads in disgust, or resignation, and get on with our lives.

But the question of whether to keep even a dime in the stock market anymore isn't academic to many Americans who either are retired or old enough to be thinking about retirement.

Down 30 per cent, 40 per cent, 50 per cent or more from 2007, their natural urge is to sell stocks and protect whatever remaining nest egg they have. Many already have done just that in the last six months.

How much more pain?




Those who still have some portion of their portfolio in stocks undoubtedly have thought about how much more pain they can stand. With last week's market rebound, which lifted the Dow Jones industrial average 10.3 per cent from Tuesday through Friday, the focus of many kitchen-table discussions isn't, 'Is it time to buy?' but 'Should we sell before it dives again?'

Financial advisers have been reduced to begging their clients to be patient, to stick with stocks in a diversified portfolio, and to put their faith in long-term market performance data that get longer-term with every conversation. Did you know, your adviser might point out, that the total return on the Standard & Poor's 500 index hasn't averaged less than 8.5 per cent annually in any 30-year stretch between 1955 and 2008?

In the period from 1925 to 1955, which includes the Great Depression years as well as the post-war boom, the stock market's average gain was 10.2 per cent a year. In the 30 years ended in 1981, which encompasses the go-go period of the early 1960s and the inflation-racked economy of the 1970s, the average gain was 9.9 per cent a year.

The upshot, of course, is that if you can just hang on, the next 30 years in stocks should be OK, assuming history is a guide. Even if it is - obviously, a big if - the problem is that we have to live through the short term to reach the long term. What if the next 10 years are like the last 10 for stocks, or not much better, before some glorious new era of growth arrives in 2019? If you're 30, you can wait. If you're 60, it may be a bridge too far.

Options for investors

Running away from stocks now is the safe thing to do, if you can't bear the thought of another meltdown. You also might succeed in protecting yourself from being fleeced by the next Bernie Madoff or by a no-name broker whose self interests will never take a back seat to yours.

But leaving the market entirely exposes you to another risk: running out of money in retirement, if the alternatives to stocks generate returns too low to cover your cost of living.

Investors who bought the US$18 billion of new 10-year Treasury notes that the government sold on Thursday know they will earn 3.04 per cent a year for the next decade, and then their principal will be returned in full.

If that yield is all you require for a comfortable retirement, the stock market needn't enter the picture. But if your financial future depends on earning, say, 7 per cent a year for the next 20 years, you may be hard-pressed to keep stocks out of your portfolio. People of average means just don't have that many investment choices other than the basics: stocks, bonds, cash accounts, gold and real estate.

On one level, what Jon Stewart's assault on Jim Cramer demonstrated is that the desire for payback trumps any interest in a rational analysis of the stock market's prospects. Any discussion immediately becomes clouded by the rage we all feel toward Wall Street.

The financial markets' geniuses designed mortgage-backed securities that were too complex even for their creators to fully understand. They borrowed excessively in an effort to multiply the returns on their market bets, pretending that the risks inherent in that leverage didn't apply to them. And they paid themselves outrageous fees and bonuses and believed they were worth every penny.

'Criminal enterprise'

At times like this, Wall Street fully lives up to its image as a vast criminal enterprise. And yet, there isn't much that's new in this debacle. It's just a matter of degree. In any decade, the list of financial market scandals and despicable behaviour goes on for miles.

The computer-driven stock crash of 1987, the dotcom bubble, the Enron Corp collapse - after these, and many more sordid episodes, some investors swore they'd never trust the market again.

Why do we keep coming back? Because in a capitalist society, equities remain the easiest way for most people to make a bet on economic growth. If a company prospers over time, so should its shareholders. Simple concept, right?

What is exposed in desperate moments like this one is that stocks indeed are a bet - a game of chance that offers probabilities but absolutely no assurances of a payoff. -- LAT-WP

Source: BT