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"Hedge Funds, Derivatives, Debt, China and the Risk of Systemic Market Panic" | Main | "Hedge Funds: Four Reasons Why You Should Not Invest in Them"

Posted on March 5, 2007 -
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By John Reizner |

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In view of the late February/March 2007 sudden market decline, there are some investors who are questioning the value of long term investment in the stock market as a way to build wealth. These and other readers can read my article, Hedge Funds - Derivatives - Debt - China and the Risk of Systemic Market Panic, to gain insight into what types of systemic events I believe could cause stocks to surrender their investment value.

There is no doubt that a rapid market decline can engender fear and cause investors to sell into the decline. I myself had been selling some stock prior to the recent market fall in order to diversify my assets, as I was fully invested in stocks for some time before the price decline. I even bought a small amount of puts before and into the drop, though not enough to offset the fall of the paper value of my portfolio.

I am still 85% invested in stocks and mutual funds, and still believe in their long run prospects for success. I believe the long term record of the stock market suggests the advisability to do so.
I believe the stock market will find its bottom in the coming months and hold its value if not resume its advance in the intermediate term. My view is that the Dow average will likely find technical support at the 200 day moving average (Dow 11800), though could slice through this support into a selling climax.
A caveat here is the direction of interest rates. Should the discount rate continue to be increased, that could tip us into a bear market. Many a bull market has been stymied by a series of discount rate increases, though it often affects the market with the time lag. I believe a series of discount rate decreases would be extremely constructive for a bull market. In general our market has been very resilient over the last series of incremental interest rate increases.
Many people are pointing to a “debacle” in sub prime mortgage loans as a possible threat to the banking system and to our stock market. You may recall the savings and loan crisis which reverberated through our banking system and stock market in the late 1980’s and early 1990’s. This crisis was portrayed by bank failures, plummeting bank share prices, and a real estate collapse. This was enough to cause a general bear market, punctuated by Saddam Hussein’s invasion of Kuwait. The factor of today’s sub prime lending and the “crisis” mentality which is being daily discussed on financial television everyday is just not enough, in my opinion, to bring the system down. The only thing that I believe could affect the economy and equities would be for the authorities to starve the system of providing mortgage money to potential borrowers – in other words, a credit crunch.
All the fishing for stock market direction aside, the stock market has been a wealth building machine since the depths of the Great Depression. Super bull markets may last as long as two decades, followed by periods of sideways to down markets. in many situations, this is plenty of time to make money in good stocks, or to hold mutual funds through thick and thin in order to create your own wealth over the long term.



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