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Money Lost on Malaysia Airlines

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The stock market. What is it, really?

This question came up for me during a meeting Friday with my financial advisor. We ranged far afield from my midyear report, the discussion inspired by the morning’s headline on the downing of the Malaysia Airlines plane. By the way, I have been very happy with my financial advisor and will give him a plug: Dominic Chavez of the Mutual Fund Store, which has a national reputation.

Perhaps as a result of my recent blog on the subject of bad news, we got into a discussion of the effect of this tragedy. As a result, I learned something very interesting. Dominic said that he was aware that something important had happened before it appeared in the news. This was the result of  his hourly monitoring of the stock market.

Malaysia Airlines

Malaysia Airlines

As the conversation continued, I realized that the big institutional investors have connections all over the world that affect their daily transactions. The “big board” is kind of like a very sophisticated medical device that registers the effect of important changes in the world’s physiology.

The day that the Malaysia Airline plane was shot down, the Dow Jones Industrial Average (DJIA) fell 161.39 points, or almost 1%. This is not huge in the grand scheme of things, but it does illustrate the cost of bad news. As a comparison, the first day the stock market opened after 9/11, the DJIA fell 684 points or 7.1%.

The thinking behind the selling after 9/11 is obvious. A devastating attack had occurred, and the ramifications would be huge. In the case of Malaysia Airlines–and this was its second tragedy in a few months–there was a large sell-off of its stock, which makes sense. Interestingly enough, however, other airline stocks (American, Delta, and United) also dropped about 4%, as investors moved into gold and bonds. I wonder what the specific take was on the vulnerability of these airlines.

Going back to 9/11, Dominic spoke of a mysterious movement in airline stocks prior to the tragedy. This time, a “put” was involved.  This is an option that is basically a bet that the price of a particular stock will fall. On September 6, 2001, the put options on United Airlines stock were 100 times above  normal.

Apparently there was speculation that the terrorists themselves had made these investments, from which they could have profited by as much as $2.5 million. I did a little research on the subject and discovered that the 9/11 Commission eventually dismissed this as a possibility. However, it does make one realize that sophisticated terrorists could well be in the markets relative to attack strategy and also manipulating the markets through targeted communications.

Very complicated. However, Dominic said that it is the day traders who are most likely to tack their sails in response to the winds of rumor, manipulation, and media drama, as in the offside reaction to the downing of the Malaysian aircraft. The huge institutional investors are much more sophisticated. They are capable, in fact, of  profiting from misfortune, and Dominic gave an example.

Sometimes for a complex set of reasons, investors may begin to sell off a sound stock. Institutional investors will quickly pick up on this and might begin to sell as well to intensify the slide. Dominic raised his hand high and then began to drop it to show the effect on the stock price. When the stock reaches a significant low, then institutional investors will buy in, anticipating a big profit later on. Unsettling, but that’s the way things are.

Very complicated, as I said, and one can see how vulnerable the individual investor might be to the alarms of the moment. I’m glad to have an expert managing my small eggs in many baskets. From now on, however, I will be more aware of how the DJIA responds in terms of specific sell-offs relative to the bad news for which we seem to have such an appetite. But do we really?

Something to think about. No telling what would happen if we got really sick of bad news altogether.

 

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