by Mark Scheinbaum
American Reporter Correspondent
Angel Fire, N.M.
February 28, 2007
DOW'S PLUNGE NOT SO BAD AS IT SEEMS
ANGEL FIRE, N.M., Feb. 28. 2007 -- Yesterday's six-year record dive in the Dow Jones Industrial Average should not be a great concern to longer-term investors, and in fact it's not all that it seems.
First of all, the 200-point drop in the DJIA in one minute and a 400-point drop in four minutes was brought to you by the nice folks at Dow Jones & Co. and the New York Stock Exchange. In the NYSE's rush to eliminate floor traders and "specialists," replacing them with "hybrid" NASDAQ-style computers, there was a glitch in the way the Dow was computed. By the time the error was corrected, a mini-panic had set in, blamed on everything from former Fed Chief Alan Greenspan's negativity two days earlier to the long overdue deflation of the Shanghai stock market bubble.
Two weeks ago I sat in a meeting in Panama, listening to a respected economist who serves as the nation's vice president for foreign affairs, explain that it was Shanghai and not New York or London which topped the global market charts over the past year, and sooner or later there would be a pullback.
The Chinese pullback came yesterday on stocks which have no track record or creditworthiness by Western standards. At best, there are some global growth candidates with European financial backing, mostly in the telecommunications sector, which might be legitimate investment-grade instruments for conservative U.S. investors - someday.
At worst, the market is a paper tiger propped up by the currency whims of a Communist regime, using nonexistent anti-pollution measures and low wages to undercut the rest of the world. After opening lower this morning, even Shanghai actually rebounded to close in the plus column Wednesday.
The U.S. markets have technically been positive for 45 months on the broad spectrum tracked by the S&P 500 Index. The problem is that not every mutual fund or investment-grade stock portfolio has dovetailed the Index, and even some "index funds" do not perform up to the actual index numbers because of expenses, management procedures, huge size, and other factors.
The bright spot in the real, imagined or hybrid drop of 3 percent in the Dow is that "total return" investors who own government bonds, and other quality fixed-income instruments, saw the bond portion of their portfolios rise strongly after yesterday's close. Even if it was an overreaction to a flawed computer program, it reminded people that there are other investment venues than the equity markets. Accordingly, so-called balanced, asset-allocation, growth-income, dividend-income, and investment-grade corporate and government bond funds might be in for a better week than the pure stock funds.
Finally, when the scaremongers are done with their tv reporting, a housecleaning and scare such as yesterday might actually help turn around the languishing housing markets. For the first time this weird-weathered winter, applications for new mortgages in the United States were up more than 3 percent last week.
For folks with good credit, in many parts of the country the 30-year fixed mortgage rate averaged 6.33 per cent or less - still extremely low by historic measures.
At 11:46a.m. ET, the DJIA was standing at 75, about 35 points loweer than earlier, as Federal Reserve Chairman Ben Bernanke testified before a Ciongressional banking committee and was charged by some critics on Wall Street with undercutting an incipient rally.
AR Correspondent Mark Scheinbaum is chief economist for the NASD brokerage firm Kaplan & Co. in Boca Raton, Fla.