Free Newsletter: Stalking Stocks with the Shark - Choppy Session Yields Modest Losses - 10/1/08

Free Newsletter: Stalking Stocks with the Shark - Choppy Session Yields Modest Losses - 10/1/08

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Greetings Shark Investors:

Although the action between the bells was downright comatose when compared to what we saw over the past two days, by any normal measure, Wednesday’s trading session proved to be quite choppy. While news outlets were reporting that the Senate was planning on voting on their own version of a bailout bill later in the evening and many were likely relieved that, after spiking to nearly 7% the night before, Libor rates fell back to a more manageable, but still elevated level around 3.8%, indications were for sizable losses in the major indices following the previous day’s big gains.

Given the volatility and headline-driven nature of the market recently, it’s hard to blame market players for taking some quick profits or making a more graceful exit, but even though the market began the day with losses of just under 1%, they were able to hold those initial lows as the day got under way. However, stocks took a steep dive following the monthly reading on the ISM manufacturing index came in at 43.5, well below expectations of 49.5. Any reading below 50 indicates a contraction. Still, the selling pressures following that news failed to accelerate, and about an hour later, the market began to move higher as it became clearer that the Senate would likely pass their bailout bill and rumor began to spread that Europe was planning on a similar measure.

After briefly moving into positive territory, however, the indices dropped once again as the rumors of a European bailout measure were denied. But even that downward move proved to be short-lived after news broke about two hours before the close that Warren Buffet had stuck a deal with GE that was very similar to the one he brokered with GS a couple of weeks ago. According to the terms of the agreement, Mr. Buffet will be getting $3 billion in perpetual preferred yielding 10% as well as warrants to buy $3 billion in common stock at a strike price of $22.25.

Still, despite a great deal of gushing by the financial media about how this move by such an esteemed investor must mean that GE is an outstanding value at these levels, the thing to keep in mind is that the deal essentially means that Mr. Buffet is making a sizable loan which pays very nicely, with the possibility of reaping huge profits should the stock price move higher.

Regardless, the indices proved unable to move to fresh session highs or make a concerted effort to turn into positive territory, and instead chopped around for the remainder of the day, finally closing with modest losses of 0.45%, on average.

As we write, the Senate has passed their bailout bill, but we’ll have to wait and see if it is passes in the House of Representatives. At this point, the whole rigmarole surrounding what has turned into a political mess is starting to wear on many investors’ nerves. With the volatility that has resulted from such a headline-dependant environment, it’s no wonder why so many are finding it difficult to have much confidence – especially after the nasty surprise we got Monday afternoon.

However, the thing we, as individual investors need to keep in mind is that, as frustrating as it is to not be able to build positions in this market, we need to stay focused on protecting our capital. It is highly unlikely that we will wake up tomorrow and find ourselves left behind by a raging bear market, and if we can remain patient and wait for the pricing action to come to us, then we will be in a terrific position to profit when conditions do actually improve.