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Thursday, September 22, 2011

Investors are like Children- never take their candy

Its 5am EST-- how are global markets reacting to Fed's "Operation Twist"?

Negatively it seems.  Stocks dropping world wide as investors aren't taking too kindly to Bernanke's honest assessment that basically the US economy is in trouble and there are no quick, easy fixes to improve things.

So markets are falling-- we say Good.  But let's move beyond that- why does a market usually drop?  There's two basic reasons- the first is simply a matter of profit-taking.  Investors may have bought into the market when stocks were undersold cheaply and then when the value reaches a certain point, they cash out, much like one does with chips at a casino.  This drops the market down and the investors take home nice profit at the expense of other Investors who stayed in the game a day too late.

There's also a second reason Investors leave the market and the best way to answer it, is to break down a very simple question.. What is it Investors want?  They want certainty.  That means no surprises.   They also want security-- the knowledge implied or explicit that their investments have full 100% protection of the nation they are investing in so as to never take a large loss.  Investors also want liquidity i.e. more money to be pumped into the market.  Like pouring water into a bucket, pouring money into the stock market lifts up the value of all the stocks, commodities and other investment opportunities, especially in the short term. It also helps to motivate and encourage more speculative investing.

Now usually in a normal circumstance, if you told Investors that the stock market was going to receive an injection of $400 Billion, they'd be peeing on themselves in anticipation to put their money into the market and reap the benefits.  But when you're accustomed to $1 Trillion (QE1) or even $600 Billion overlapped (QE2),  the $400 Billion kinda feels like table scraps.

Or to put it simpler, if I go to a restaurant and tip my server $100 after ordering a $10 meal and I do this a couple times, when the time comes that I tip $50 on the same $10 meal, which is still Extremely generous,  it is human nature that the server will feel disappointment and annoyance because he/she was behaviorally operant conditioned to expect to receive $100 each time I ordered a meal.

So instead of being grateful that the Fed Chair is willing to bend over backwards to accommodate their needs, the Investors globally are belly-aching because the size of the investment was Only $400 Billion.

Unless something dramatic or surprising happens today, expect the US markets to continue with the dramatic sell off today.  Because when spoiled "children" have tantrums when not getting their way, its usually not done mildly.

~ "I.. Want.. More.. MONEY!!"

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