This is a Trader’s Market

Market volatility continues apace. Not only have we been buffeted by one
triple-digit Dow day after the next, but those triple-digit closings have masked
much wider moves from low to high, and high to low. Tuesdays 153-point Dow gain
last week came after a 4.0% swing from high to low and back. That and Sept.
22's move ranked as two of the most volatile days since August, when the
debt-ceiling debate and S&P downgrade were roiling markets. For the same reasons
that I dont believe investment markets deserve to drop by several percentage
points, I also dont think they deserve to rise by that much. Do investors really
believe that a company like, say Exxon Mobil (NYSE: XOM ), valued at about $350
billion, can be worth $14 billion more (or less) in the course of one day when
no particular news relating to that company is released? What about Procter &
Gamble (NYSE: PG ), a $175 billion company with a rock-steady global business
selling food and diapers? Can its value change by $7 billion in the course of a
six-and-a-half-hour trading day? Were witnessing a traders market, not an
investors market. The stock market was created as a mechanism for financing
businesses businesses with long-term objectives, goals, strategies, production
cycles, selling cycles and the like. Sales of diapers, cars or computers dont
dramatically change in the course of six-and-a-half hours, and stock prices
shouldnt either unless theres a big piece of news that comes out directly
related to that companys services or products. For investors like us, these
market moves are opportunities opportunities for the managers running the funds
in our portfolios to pick up some shares in a company that are temporarily
undervalued, or to sell shares in one that are temporarily overvalued. The
volatility is good for a manager whos willing and able to take advantage of it,
but for you and me, volatility should be a catalyst for sitting on our hands.
Only when values get out of whack does this create an opportunity for portfolio
changes. Yes, the screens filled with red, and the massive single-day declines
in the Dow at several points in the past two weeks were unnerving. At the same
time, knowing what I know about the managers running the funds in my portfolio,
I was pretty sanguine about the opportunities they were salivating over. As an
investor, not a trader, I was encouraged by Mondays read on manufacturing which
echoed the early indicators we got from the Chicago report Sept. 30 and the
report that rail freight traffic is near a three-year high. Nationally,
manufacturing activity expanded, rather than contracting as it did in July and
August. And, as I suggested last month, slack retail numbers came back strong as
shopping picked up in September. Thursdays report on chain-store sales was a
good one, and could have been one of the catalysts behind the Dows third
triple-digit jump in as many days.