Sunday Morning Coffee

Barron's had a couple of potentially distressing articles this week with one about allegations that JP Morgan transferred bad loans to stable value fund it managed at above mark to market prices and this other one about naked short selling where it is alleged that Goldman Sachs and Merrill Lynch told clients it would let them fail to deliver.

Obviously I have no basis to know if any of these are true, partially true or false but if you read the articles you are likely to think it is just one thing after another and you probably are not inclined to give them the benefit of the doubt. There is kind of like a pendulum swinging and now (meaning the last few years) there seems to be a flurry of these stories.

This also coincides with more instances of malfunctions like the failed IPO of the BATS Exchange, the seemingly bungled IPO of Facebook (FB) and whatever really happened with Knight Capital this past week.

The article about the naked short selling had an interesting line of thought about penny spreads between the bid and ask turning out to be a bad idea. Penny spreads create more liquidity but in a way too much liquidity to the extent there is far more scalping going on now than when the spread increments were larger. This raises the question about whether more of the market innovation (related to market mechanics) of the last 15 years is turning out to be a net negative in the way of unforeseen consequences. Are things like dark pools, algos and the like really productive in terms of allowing markets to allocate capital and act as a weighing machine?

A few days ago I said that in the long run fundamentals still matter and I believe that without a doubt but the current state of markets in the context above increases the difficulty on an emotional level in navigating the market cycles with an investment portfolio.

It is easy to become distracted with this short term noise but whether JP Morgan did it or not, apparently the funds in question were not hurt so neither were the fund holders. This is not to condone the activity if they did it but merely to point out that we will forget about this one very quickly and it will have no impact on any properly diversified portfolios built with a long term time horizon. Should Knight meet a bad end, that story too will quickly move off the front burner; when was the last time you thought about Paine Webber?

Noisy events will come and go for the rest of your investing lifetime and it is very unlikely that any of them will impact whether or not you have enough money when you need it. The things more likely to impact whether you have enough money when you need it will be whether you have an adequate savings rate, diversify properly, maintain a suitable asset allocation for your circumstance and tolerances and that you do not panic during some crisis (real or perceived).