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Monday, August 8, 2011

Stocks close at lows

The Dow lost 635, the S&P 500 lost 80, and the NASDAQ lost 175 today.  That's nearly a 7% drop in the NASDAQ today alone.  Wow.  Investors are freaking out.  There is definitely a buyer's strike.  I think today's activity underscores one of the fundamental flaws in the investment industry, which is that the current way in which investment management services are sold--through an asset allocation strategy approach-requires that managers stay fully invested at all times.  This means that, unlike me, they have no flexibility to step in when markets drop as they did today, and buy quality names.  This characteristic of the markets leads to higher levels of volatility, but also to good opportunities for those of us who do hold cash balances, and who do have the flexibility to buy when markets are down hard.

We are seeing market drops similar to where we were at the end of 2008, just after the financial market implosion, the Lehman Brothers failure, and the mortgage and derivatives meltdown.  I would submit to you that things are significantly more positive today.  There is no new news.  I have been talking about the possibility of a double-dip recession and slow GDP growth for months and months.  Today's move as well as that of last week in general, also shows that the small investor-those who really don't understand what is going on, are driving the bus.  Small investors are almost always wrong in the longer-run, and I believe they will be proven wrong this time.

This is a huge buying opportunity and those who do not step up and step in will be kicking themselves in a month or two.  I promise you that investors will not even remember why the market was down in a few weeks (not that they understand why right now!)  The S&P 500 is at 1,119.  Remember that level.  I am not saying we can't go lower - we probably will go lower in the short-run.  But down the road, that level is going to look very, very attractive indeed!

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