“We simply attempt to be fearful when others are greedy and to be greedy only when others are fearful”-- Warren Buffet.  These words couldn’t be more accurate.   Fear and greed are the most powerful emotions driving human behavior.  Although these two emotions can cause an emotional roller coaster for the gut wrenched investor, it also drives “abnormal” investment decisions, thus causing drastic market swings.   In other words, when one emotion is dominating the market, watch out. It is vital for investors to be vigilant when markets are driven by emotion, especially fear. When fear is sparked, it spreads like a wildfire-- bad things happen and can happen in a hurry. Over the last few weeks, the US market has had positive news and yet the good is being overshadowed by the turmoil ignited by fear in the marketplace. U.S. investors are so consumed with fears of inflation, anxiety towards the European debt crisis, and the uncertainty about crude oil that despite positive news about the state of the economy, we have seen consistent market drops.

 I can’t emphasize enough the psychological component of fear, which tends to drive our markets. FEAR has a GREATER IMPACT than GREED. Human behavior is based on emotional factors.  And right now, investors are fearful and our investment behavior is influenced by this emotional drive.

 Fear is perhaps the strongest of the primal instincts a person can experience.  Our very physiology reacts to fear stimuli in an involuntary way.  When something triggers a fear response, the pulse quickens as adrenaline courses through the bloodstream.  The “fight or flight” reflex dictates each subsequent move.  This sweaty-palmed reaction is a throwback to primeval times.  Our distant ancestors were faced with grim realities of survival.  Even the seemingly mundane task of obtaining a meal entailed strenuous and dangerous hunting and foraging in the wild. 

 Today most people are not engaged in hunting for survival.  Today people are not tracking, chasing and trapping actual, real-live bears and bulls for sustenance and other resources.  Rather, the metaphoric bear and bull of the investment market spurs their anxieties.  Survival hasn’t grown any easier.  It has simply taken on characteristics more in line with modern life.  Yet, the same careful planning primeval man employed to track and trap his quarry is still necessary for modern man if he wishes to amass and retain adequate reserves for retirement.   The ancients worried about falling victim to the bear with his powerful claws. Modern man worries about the bear eliminating his hard won and meticulously planned retirement savings.  It is a real and palpable fear. 

 When fear is a major investing factor, people sell stock and put their money into whatever they consider “safe”. The present state of the market has proven this to be true. Positive news—yet negative market results. Volatility continues to dominate the daily market action.  Hundred point swings are the norm, as 19 of 26 sessions have seen triple digit moves (as of June 3, 2010).  To further emphasize my point, according to Bloomberg.com, we have seen 9 months of positive growth, (aka: an improvement in the economic condition of the United States), but this positive growth hasn’t extinguished Wall Street’s ill condition.

 I don’t believe these negative swings have anything to do with long-term, big-picture, rational investing approaches. It isn’t about being objective and practicing basic investment strategies; instead decisions are being made out of fear and potential uncertainty.   We are experiencing a disconnect between the market and fundamentals and are encountering a correlation between market movement and emotional responses.

 Historically, we have seen the affects of markets driven by either greed or fear. The first real greed/fear driven bubble occurred in the Netherlands during the 1600s.  As we discussed in previous article (see Cash-flow investing strategy goes mainstream, May 2003),  it is recorded that prices reached such extreme highs that at one point—12 acres of land was purchased with a Tulip Bulb. Tulip Bulb Contracts, a currency of the Netherlands at the time, were in high demand. Some historians reported that one reason the high prices for the tulip bulb contract was because people thought parliament would make a decree that would void out smaller contracts, which would limit the risk of buyers and would also influence demand. It is told that a sailor mistakenly took a bite out of a tulip bulb, thinking it was an onion, and subsequently was arrested. Greed to hold the contracts grew (fear of not jumping on the Tulip Mania bandwagon), until people began to overweigh the supply and demand logic. Eventually during this 17th century frenzy, greed drove up the prices of tulips, until prices plummeted as there were more sellers than buyers. This is where we are now with our current economic state.

Why is this important?

 It is this emotional tug of war between fear and greed that is currently driving the market's volitility and it is this fear that is causing VCAM's Seven G’s to be immensely magnified: Gold, Greenbacks, Goldman Sachs, GM, GE, Greece and the Gulf.

 I invested in Krugerrands in the 1980s. In 1980, the Krugerrand accounted for 90% of the gold coin market (New York Magazine, "Crazy as a Gold Bug" by Tom Bethall).  The success of Krugerrand investing in the 1980s was very profitable for some. In fact, Krugerrands were so successful many other gold-producing nations began minting their own coins. By January 1980, the price of Gold “peaked at a historic daily high of $850 per ounce” (U.S. Bureau of Mines.) However, as interest rates fell during this time, money moved from the gold markets and into the stock market.  In fact, in 1983 Gold actually fell from $505 to $400 per ounce in just five trading days. I am glad I sold mine.

 Today, we are once again living in a golden world. Gold has seen gains for ten consecutive years (goldprices.org).  Over the last few months, Gold has been regaining popularity as a monetary alternative as many global currencies fall.  Although Gold doesn’t offer a dividend or interest payout, many investors see Gold as an tangible investment alternative, a safe choice to protect their money and an asset that generally retains its value. Another plus is that Gold investing hedges against inflation. But long term “saving” of our economy will not result from Gold investing. It is all about supply and demand. Normally, when a commodity is in high demand, supply is accelerated and holders of that commodity often take profits, if prices rise.  But since Gold is a natural mineral and supply has increased, one must realize that there will come a point where resources are unavailable to supply the demand. Over the last 10 years or so, Gold demand has slowly increased to its current all time high, but this has also caused a stress in the mining of the material. Gold production will begin to become more difficult.

Is this a temporary problem for the greenback?

 Similar to Gold, a safe haven when international economies fall is the US  Greenback.  The US dollar is becoming “slightly stronger” as European and Asian currency is in limbo due to the global debt crisis facing Greece, Spain, and other European countries. But this is a far cry from the massive devaluation the dollas has witnessed since 9-11 (.827 to the euro on October 25, 2000, per the Federal Reserve website www.newyorkfed.org). According to Forex News (a foreign exchange news source), “The dollar will be strengthened by the continuing uncertainty in the Middle East, Europe, and Asia. Investors are continuing to move away from risky assets and towards safe havens, including the US Dollar and gold”. When the dollar is weak, it generally boosts US exports. In the early 2000s, a weak dollar helped equalize our import/export deficit (See article “Pluses and Deltas: The Weakening Dollar, June 2003).  For example, when the dollar was weak, US classic cars were getting sold internationally. Americans were buying new Toyotas and Nissans, but many international investors were getting a flavor for vintage Impalas, classic Camaros, and rare Corvettes.  But now that global markets are in crisis, the Greenback (US Currency) is in slightly higher demand.  Most foreign countries are manufacturing driven. A stronger US dollar and weaker foreign currency helps foreign companies trade to the US, but makes us more reliant on oversees products. A stronger dollar is a vote of confidence in our country, but will hurt US manufacturing companies because it makes our products more expensive on foreign soil. In addition, a strong dollar can be viewed as a positive because it means American citizens and businesses can consume more foreign goods and services. Americans are likely to travel to Europe because we have more buying power.

 Although Gold and the Greenback are showing promise, we can’t ignore the pros and cons affecting the American Iconic G’s: Goldman Sachs, General Motors (GM), and General Electric (GE).  Prior to a few years ago, all three of these companies were well respected and viewed as rock solid. Goldman Sach’s civil fraud indictment, GM filing for bankruptcy in June 2009, and fears that GE wouldn’t be able to survive the credit crisis put all 3 of these companies in limbo.  However despite the ill news, all three of these companies have shown to be resilient.  Goldman has settled the SEC issues and has geared up for the future by a recent increase in new hires. GM had a rise in May sales; their first profit since filing for bankruptcy in June 2009. Furthermore, they began paying a portion of its bail out back to the US government, which is a sign of good faith. GE has survived. In fact, because GE went back to its core business principals, it has experienced upward growth despite the credit crisis. Although not all press is good press, these companies took their beatings and are now moving towards greener pastures.  <We write this because global and domestic news is built into the marketplace, which is NOT a surprise to the reader, and yet it still causes fear.>

Looking beyond our backyard and looking beyond the unknown, we have to examine how the economy in Greece and the Gulf oil spill are affecting the economy both globally and domestically. Greece, as you are well aware, is suffering from excessive fiscal debt, a substantial increase in unemployment, low overall productivity, a credit crisis, and an economy that is not competitive today. According to Bloomberg reports, “Greece plans to sell stakes in railway and water companies and the postal service to raise 3 billion euros ($3.7 billion) and help reduce a budget deficit that sparked the debt crisis across southern Europe.” Global economic fears make US investors timid. Investors fear problems in Greece will spread throughout Europe and Asia, will effect international investments, and will cause a slowing of market recoveries.  No one can be sure about the scope of Europe's problems because even stronger economies, including Germany, Britain and France, are admitting they must reduce their budget deficits — an indication that the threat extends beyond the PIIGS---Portugal, Italy, Ireland, Greece, & Spain.

 The Oil Leak in the Gulf of Mexico was a human error that has turned into one of the largest environmental disasters of all time. It’s been months and millions of gallons of oil a day were deposited into the Gulf of Mexico. The long term effects of this spill on habitats, the ecosystem, local employment, the economy, deep water drilling and how the spill will affect US independence from foreign oil as a whole is unknown.

 Our office regularly visits with Chevron personal in the Gulf Coast (Pascagoula, MS and Biloxi, MS-- Mobile, AL-- Oakpoint, LA and Covington LA, just to name a few). We have witnessed firsthand and have heard about the implications of how this spill is affecting the people and environment in this region. Our prayers go out to those in the Gulf Coast. However, we have a glass is half full view point and believe the situation will provide opportunity in some manner. This disaster (like Katrina) is horrific, but will open the doors to new technology, careers, and even hope.

 Fear continues to take over the objective mind of the investor. An overwhelming and unreasonable sense of fear is what value and contrarian investors count on as they search for investment opportunities and in turn, play the volatility (VIX) of these markets. A disciplined approach is always most prudent. I believe it is time to stop allowing fear to rule, but to see the great possibilities these situations present. Sunnier days will be upon soon and it is time to look towards the new opportunities emerging from the 7G's.

 * Forecasts are subject to change at any time, based on market and other conditions and should not be construed as investment advice or a recommendation of any specific security.

 **Past performance does not guarantee future results.

 *** The forgoing information and opinions are for general informational purposes only. The Registered Representatives does not guarantee the accuracy and completeness, or resume liability if such events do not come to pass. Such information or opinions are subject to change without notice.