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Markets Don't Care About "Fair"


If you risk, you may lose.


Out with a whimper is how the week ended after beginning with so much promise. It was kind of funny but not at all out of character to listen to the bears say "I told you so," as if the market corrected after a hefty rally.

If this were a bull market an occasional retracement would be warranted but this isn't a bull market. Instead the market has been climbing out of an abyss driven by a lethal combination of real fundamental challenges and angst. Those emotions and concerns linger for a long time: I would even say that such feelings were attached to the rally that saw the market stage an almost five-year rally into mid 2007. Like heavy barnacles these feelings didn't stop the rally but I think limited the upside, especially in technology stocks, which did the most to turn would-be investors off from equity investing than any other niche.

With that in mind, this is a bear market so once any upside move runs out of steam, everyone ducks for cover. Yet, I didn't sense anyone threatening or even contemplating jumping out of a window.

However, there was a lot more to be concerned about by the time the closing bell rang on Friday than there was on Monday, when the Dow was up 150 points midway through the session. It's been all downhill from there with the biggest blow coming from a weird Producer Price Index report that saw the core surge while the headline number was somewhat benign. I'm still trying to figure it out and I've listened to the explanations from several smart economists.

Be that as it may, prices sans food and energy moved higher in April. Interestingly, I think there is something in this report that wasn't articulated in the media.

Flying the (Un) Friendly Skies Of Business 101

Consumers are so focused on the stuff that dominates headlines, namely gas and food prices, that I wonder if producers of all the other stuff we spend money on will try to slip in subtle price increases. I've never seen a person on the news standing outside a supermarket complaining about the soaring cost of shampoo. Heck, if the shampoo is new and improved and "greener" people would gladly pay more. (I continue to say the so-called Green Movement is the biggest boon to business that I've seen in my lifetime.)

Still, consumer prices have held pretty well, as businesses are finding ways to contain or mitigate costs rather than attempt to pass them. Ironically the one industry that has been steadily raising its rates is the airlines. Of course, the airlines are so far behind the curve their price increases are deemed too little too late but everyone including most airline industry executives.

Of course, ham-fisted attempts to counter oil like charging for checked baggage are not only minuscule with respect to countering higher jet fuel but have been a public relations nightmare. In fact, if this past weekend's travel by car wasn't a complete disaster it's only because airlines have so angered folks they opted to jump in the car or SUV to go to grandma's house.

I think the way the airlines are heading will prove to be an interesting study into the theory of creative destruction. If the forces of capitalism are allowed to work on their own (read: if there are no bailouts and subsides) then more than likely there will be a couple of big time bankruptcies in the space, particularly if proposed merges continue to drag along. The lesson for other industries is to not wait too long to address issues that impede profitability. Also, have some dignity and respect for the customer, which makes price increases easier all the time. That is Business 101.

Business 101 Part II

I remain perplexed by the fact some members of Congress are holding up the free trade agreement with Colombia, with similar agreements with Panama and South Korea looming large. The notion that we should not do business with Colombia until fewer labor organizers are killed actually helps those forces in Colombia that oppose free trade, prosperity and opportunity. Perhaps it's misguided and innocuous in some shape or form but it's a tough pill to swallow. Trade is the linchpin of the world economy. Throughout history mortal enemies have even traded with one another so it makes sense that we support trade with a friend, a lone friend in a region that is growing increasingly hostile towards the United States. With Venezuela yearning to become a Latin superpower there is a real physical and ideology threat to Colombia and the rest of that continent.

My background makes me a proponent of free trade, although I bought into the anti-trade circus when I was a young adult. It is an easy sell; American workers are losing jobs to cheap labor overseas. It has been a big mistake for American to try to hold onto jobs that once commanded larger salary but are now done overseas at much lower prices. If those skills are not unique then the income from them will diminish: This is business evolution, plain and simple. It hurts those caught in the middle, to be sure, and we all feel sympathy. Yet, trying to go against the forces of capitalism only delays inevitable changes. So, while America or any nation props up an industry or a job that is destined to evaporate or lose its clout the real crime and larger swath of damage is to those folks that never get the training in new, high-paying skills.

I feel for autoworkers in Detroit, but while we've spent the last two decades watching unions and car company executives fight each other tooth and nail, creativity faltered, innovation died and now the entire industry is on the cusp of falling into the sea. The auto companies are the poster child for fighting the forces of business evolution. When I was a kid I used to engage in free trade. My friends and I would swap baseball cards and trade marbles all the time. It was efficient and even fun. There were regrets and some people got the best of the deal like the kid that got my Reggie Jackson rookie card for a couple of cat-eyed marbles. Somehow the word "fair" has seeped into the everyday conscience and lexicon of our lives to the point where children in school no longer play games where there is a winner or loser, because it's said There is no winner because it would be unfair to the loser. Folks, the world keeps turning and we can't get off nor can we change the fact that unfairness is part of life.

There are some things that can be called unfair that I love and think make life exhilarating, like competition, and there are some things that are unfair that I abhor, like racism, which yet exist and must be considered in the game plan of life. If you are saying that murders in Colombia are the reason not to do trade then that line of logic also means Americans should buy cars made in Detroit. It's a farce. These are the kind of movements that happen not when a nation is weak but when it begins to lose its way and its willingness to do the (right) things to stay strong. Getting to number one is tough and staying at number one is even more difficult. There is a lot of stuff that may or may not seem fair but they are hurdles that must be cleared.

If life doesn't seem fair to you half the time or less then count yourself as lucky.

Luck, however, will play no role in keeping the country competitive. The world is getting richer: Let's sell them stuff and let them sell us stuff. It's only beginning with Colombia, but at some point could be the official position of the country. Let's not abandon a friend and please let's not abandon the formula that got us here especially now that the rest of the world is in the mix. It is only fair to not protect jobs that are doom and to focus our attentions on the future and there will be no future without free trade. I can only hope Nancy Pelosi is playing a game, albeit a dangerous game, and the nation that perfected free trade doesn't pack it in. Lets not forget that the Great Depression only became so after the powers that be over-reacted to a recession with higher taxes and trade barriers.

Epilog on Fairness

In my book Be Smart Act Fast Get Rich, Your Game Plan for getting it right in the Stock Market, I talk about the concept of fairness in the stock market. On page 110 in the "Avoiding the Madness of Captain Ahab" chapter I used a bit of history and my own experiences in listening to the public.

"Everybody plays the fool sometimes; there is no exception to the rule…" You know the song. The late 1990s stock market meltdown from the crashing of technology and telecommunications companies along with the overall market resulted in incredible losses for the public. There are some reports that the losses exceeded $8.0 trillion. I'm not sure if the actual amount has been or could ever be accurately calculated. It is safe to say just about everyone got waxed, pure and simple.

However, losing money in investments isn't new, and usually the massive losses come from those too-good-to-be-true schemes that have the ability to suck us all in. One of my favorite books is Extraordinary Popular Delusions and the Madness of Crowds, by Charles Mackay. In the book, the author reviews three of the most incredible financial manias of all time, and also examines alchemists, modern prophecies, fortune telling, the Crusades and witch mania.

The book is a great reminder that schemes and scams have been around from day one and also that everyone can become a victim. When these investment manias blow up, and they always do, small investors like to think they were the intended victim from the very beginning, but the truth is, the emotion of greed knows no economic boundary, and everyone gets wiped out.

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