The Effect of Italian Bonds, Bricks Made From Stacks of Money, and the DJIA which is +ve in 2011

Yesterday the DOW Jumped Up by 259 Points
Two days ago, it fell by 300 points. Feels like a roller coaster ride. Whatever today’s news, the markets react, and react violently. Either they jump up, or cascade down.

It Used to be Greek Default That Was Important
Every day, the EU was going to advance another tranche of its support, or not advance another tranche of money because Greece was this or that.

Or the Greek Prime Minister was announcing a new austerity program, or not.

Or there was to be a referendum, or there wasn’t.

Or whatever.

DOW JONES INDUSTRIAL AVERAGE (DJIA)
With all of this turmoil, you would expect some radical changes in the average. Take a look at the average in January 2011. It was about 11,500.

In February 2011, it was about 12,200.

Yesterday the DJIA was about 12,200. In other words, a bit up from the start of the year.

Doesn’t this strike you as odd, especially now that Italian Bonds have become the centerpiece of the latest hysteria?

What the Market is Doing
In case you haven’t realized it yet, the majority of trades in the market, are a combination of program trading, short term trading, momentum traders, and trading on the news.

The cost of trading large volumes today is quite inexpensive and that is what traders do. They gamble every day on being able to judge which way the market is moving and try to beat everyone to the punch. Then they sell their positions (or buy as the case may be). All of this creates tremendous volatility in the market.

Large swings up, and large swings down. But over a length of time, little overall effect. The point is – DON’T BE MISLED.

Value Investing
We are not program traders and most readers of this blog are also value investors. We urge you to avoid being influenced by the daily news. There is a lot of value out there just now and we have discussed previously how you may recognize it. We think it is a good time to invest.

Some Observations on Current Events
The unemployment numbers in the US actually took a small positive turn this month. Housing starts actually increased marginally. The Republican Party is trying to present a reasonable face to the nation in their views as to how to control the US deficit. Consumer confidence in the US was more positive.

Generally, not bad news. The USA is starting on that slow path to recovery.

German Inflation
In Europe, the American media wants the problem of debtor nations to disappear by the stronger nations creating money out of magic, in a sort of similar fashion to what was done in the US, and giving it to the debtor nations.

But there is a problem with this that the US media is too young to realize. The German people remember what happened. The American media does not.

Bricks Made Out of Stacks of Money
I saw a cartoon recently, where cartoon characters were building a house out of bound piles of currency in Germany in the 1920’s, that were so worthless that the paper was more valuable to use as construction material, than as currency.

The US has never seen an inflation as there was in Germany between the World Wars. The creation of Hitler and the Nazi Party was one of the many tragic results of the carnage created by that inflation.

Fiscal Restraint
The German people remember that, and will vote out any politician that threatens to bring back those days by printing money, or massive loans to bail out countries that have no fiscal restraint.

There will never be a comprehensive bailout to cover all of the enormous debts of all of the EU countries.

What Will Happen in Europe
There will be much stress in Europe. There will be many headlines. There will be much disagreement.

In the end result, bondholders of EU countries that have large unmanageable deficits will wind up taking haircuts of some of these bonds, and banks and other creditors will lose a ton of money. It will take a long time for all of the abuse to work its way out of the system, but it will work its way out of the system.

An Overview
There will be volatility, and markets will react. Stocks will go up and stocks will go down, and not gently.

But the economic system in the EU will continue. Germans will continue their mastery of engineering. French will continue their mastery of food and wines. Italians will continue their style consciousness. Spaniards will ….. and so on.

This very large and diverse consuming population will still exist tomorrow and next year and the year after. And after all the disruptions, stability will return.

The views expressed in this blog are opinions only and are not investment advice. Persons investing should seek the advice of a licensed professional to guide them and should not rely on the opinions expressed herein. This blog is not a solicitation for investment and we do not accept unsolicited investment funds.

By Larry Cyna

Mr. Cyna is an accomplished investor in the Canadian public markets for over 20 years, and has managed significant portfolios. He is a financing specialist for private and public companies, and has expertise in real estate and debt obligations. He has assisted private companies accessing the public markets, has been a founding director of public companies and continues as a strategic consultant to selected clientele. He is and has been a director, a senior officer and on the Advisory Board of a number of TSX and TSXV public companies in the mining, resource, technology and telecommunications sectors, and the Founding Director of two CPC’s with qualifying transactions in mining and minerals. He was an honorary director of the Rotman School of Management MBA IMC program, has completed the Canadian Securities Institute Canadian Securities Course & Institute Conduct and Practices Handbook Course, was a former Manager under contract to an Investment Manager at BMO Nesbitt Burns, a roster mediator under the Ontario Mandatory Mediation Program, Toronto, a member of the Institute of Corporate Directors of Ontario, a member of the Upper Canada Dispute Resolution Group, and the Ontario Bar Association, Alternate Dispute Resolution section. He obtained his designation as a Chartered Accountant in Ontario in 1971 and was the recipient of the Founder’s Prize for academic achievement together with a cash reward. He became a CPA in the State of Illinois, USA in 1999 under IQEX with a grade of 92%. He is a Member of the Institute of Chartered Accountants of Ontario and the Canadian Institute of Chartered Accountants. He holds certificates in Advanced ADR & in Civil Justice in Ontario, Faculty of Law, University of Windsor, certificate in Dispute Resolution from the Ontario Institute of Chartered Accountants. Previous accomplishments are Manager of Cymor Risk Consultants LP specializing in Risk Management Assessment; CEO of Cyna & Associates specializing in mediation and ADR; Founder & Senior Partner of Cyna & Co, Chartered Accountants, a fully licensed and accredited public accountancy firm with international affiliations; and was a partner in a large public accountancy firm. Mr. Cyna is well known in the Canadian Investing community. He is invited to, and attends presentations given by public companies usually 3 or 4 times each week. These presentations are intended by the various hosting companies to present their inside story to sophisticated parties and Investment Managers for the purpose of attracting funding, or of making parties more interested in acquiring shares of those companies. Being a part of this keeps Mr. Cyna deeply involved in the current market and leads to numerous investment opportunities.

Leave a comment

Your email address will not be published. Required fields are marked *