New Month, Same ol' Trade, Futures at New Lows

Monday, July 05, 2010

Equities cannot find bids, continue dropping

Two days into July and the market is already down 0.79% for the month as of Friday's close. Equities tried to reverse and close strong on Thursday, the first day of the month but the turnaround attempt has now been crushed with S&P futures currently trading at new lows for the year tracking early selling in Tokyo with the Nikkei opening down 1.4%. The S&P is down 8.3% year-to-date as of Friday's close.

Finished Mean Markets and Lizard Brains, I give it a B+

I just finished up Terry Burnham's Mean Markets and Lizard Brains: How to Profit from the New Science of Irrationality amid New York City's sweltering heat this weekend with temperatures sitting in the high 90s. The book was short of spectacular but pretty good overall and worth the read.

Burnham's chief purpose is to highlight the impacts of what he dubs the "lizard brain", namely the portion of our brain that is not the prefrontal cortex. Our lizard brains developed early on and contain our emotional fight or flight mechanisms and pattern-dependent thinking. This portion of our brain, he argues, is highly detrimental to our financial success as it clouds our ability to reason correctly.

His writing reminds me of Malcolm Gladwell in its frequent use of anecdotal stories to support his points. This style makes for a quick read and very intuitive arguments. The final portion of the book contains the real meat of his advice for dealing with our lizard brain in the long-term and his advice in the current state of our economy.

Burnham argues that after three decades of rewarding risk-taking behavior, market participants should not expect financial markets to continue offering these winning scenarios. He advises people to allocate the smallest portion of their capital that they can stomach to stocks, buy a house smaller than they eventually want to own and lock in a fixed mortgage rate. Written in the mid-00s, I'd say Burnham was spot on; although, I believe he was speaking much more towards a longer-term timeframe and not just a few years hence.

He believes, and I agree, that our only way out of the current mess with budget debts and deficits as well as trade imbalances (which were not nearly as bad when he was writing) is increasing productivity. Only with higher productivity we will be able to meet our future obligations and adjust our economy without major pain and dislocation. Given the three back-to-back quarters of 7% jumps in 2009, we are on the right track!

Disclosure: No relevant positions.
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