The next 1,000 points on the Dow, in either direction, are going to be
determined by what happens in two cities thousands of miles from our own shores:
Athens and Berlin. Whats more, the risks associated with Europes redemption or
its failure are more concentrated now than they were before the crisis began.
There are two reasons: Europe wont help itself. Wall Street still might have $1
trillion or more in exposure to European problems . What makes me crazy right
now is that European chatter is whats driving the markets. Every sound bite from
Europe is critical these days. Not because there is anything relevant in the
political babbling from financial ministers tasked with fixing this mess, but
rather there is a cascade of events that could take us in either direction. Fix
this mess, and the markets will take off for a 1,000-point gain that will leave
anybody who is on the sidelines hopelessly behind. Fail, and the markets could
tank. This certainly fits the pattern established in recent months. News leaks
suggesting solutions have brought on rallies, while negative leaks have caused a
ripple effect that has quickly dumped stocks into the hopper. Yet, its not
really the numbers that matter at the moment even with the Fed rumored to be
considering another $1 trillion stimulus and reports that the European Central
Bank and International Monetary Fund might be seeking as much as $600 billion
each . No. The market swings we are seeing are all about confidence or, more
specifically, the near complete lack thereof. The Mattress Vs. the Markets A
recent report from TrimTabs shows checking and savings accounts attracted eight
times the money stock, bond and mutual funds did from January to November 2011.
That is a whopping $889 billion that went under the mattresses versus only $109
billion that went into the markets. In fact, CNBC is reporting the pace of money
headed for plain-Jane savings and checking accounts from September to November
accelerated to nearly 13 times the average monthly flow rate of the preceding
nine months from September to November. Whats significant about this is the
money has headed for the sidelines when the markets have rallied . Usually its
the other way around. Normally money floods into the markets when they move
higher. The other notable thing here is, generally speaking, up days this year
have had thinner volume than down days. This means most investors just cant
handle the swings. In other words, every time the markets dip, theyre packing it
in. Pessimism Is the Breeding Ground of Opportunity Bottom line: Investors are
making a gigantic mistake especially those with a longer-term perspective.
Periods of maximum pessimism when everybody knows something usually make for a
variety of great buying opportunities. For instance, do you remember the
following quote? The economy is staggering under many structural burdens, as
opposed to familiar problems. The structural faults will take years to work out.
Among them the job drought; the debt hangover; the banking collapse; the real
estate depression; the healthcare cost explosion and the runaway federal
deficit. I remember it like it was yesterday. Its from Time magazine in
September 1992 right before the markets took off on a breathtaking 16-year run.
To be clear here, Im not suggesting the markets are about to go on a
triple-percentage-point bender. Im only suggesting investors would be foolish to
ignore the possibility. In fact, the very notion Wall Street remains in denial
about Europe and Europe itself still refuses to confront the seriousness of its
situation bodes well for almost anybody willing to go against the grain. Thats
been the case throughout history. Take the Panic of 1873. It was the worlds
first truly international financial crisis and, by many measures, actually far
worse than what were dealing with now. Things were so bad, more than 18,000
businesses closed, sending unemployment soaring to 14%. The NYSE even closed for
10 days. The depression that started in 1873 lasted until 1879 here in the
United States and another 20 years in Britain where its known as the Long
Depression in history books. Yet through it all, the markets dips, twists and
turns turned out to be extraordinary buying opportunities. (You can learn more
about a similar opportunity that I recently discovered in todays markets by
clicking here .) The same thing ultimately will be true today, especially if
youre building long-term investment positions in glocal stocks with experienced
management and fortress-like balance sheets that produce high dividends. I feel
the same way about energy , commodities and very specific microcap companies
with promising inventions, medical technology or some other catalyst that can
create game-changing returns. It takes a lot of nerve, but thats how the markets
work. This article originally appeared on Money Morning .
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