Is This the Real Interim Correction? 

• For a moment on May 6, 2010, the stock price of Exxon Mobile (XOM), the world's most valuable corporation, was zero, as algorithmic trading programs searching for liquidity in any available market ran amok and processed trades at quotes human beings would immediately see were completely ludicrous. Welcome to the world of high frequency trading. This is ridiculous. Regulators and market makers urgently need to get better controls/circuit breakers in place, or run amok computer programs will control the markets, driving away "real" investors.
• Events of last week (i.e., the relentless pounding of the Euro, Euro-denominated investments) only underscore the structural flaws that we believe will eventually undo the Euro. The question then is, how do governments and central bankers engineer an orderly regime change? Throwing more money after bad is not the solution.
• In our February 8, 2010 Market Letter, we (prematurely) declared the excess liquidity-driven phase of the emerging bull market to be over, and described a scenario where the S&P 500 traded somewhere between 1,200 and 1,400 after an interim consolidation, as the main driver of stock prices shifted from excess liquidity to economic and earnings growth. After a brief melt-up in stock prices, we are back where we were in February, i.e., facing an extended correction and a period of general risk avoidance.
• In contrast to the sharp downward moves in Shanghai, Euro markets and the S&P 500, the Japanese indices are off only 2.9%--because Japan lagged the rally and has almost no speculation in current prices. Sectors more closely linked to global demand trends, such as the China/emerging market-related stocks we had favored, are now consolidating along with global equities, as are the Japanese financials, which have largely been left out of the big rally in US financials. Conversely, the best sector over the past four weeks and a top performer from March 2009 lows has been real estate stocks, despite continued declines in Japanese property values, falling rents and rising office vacancy rates as well as a dearth of non-recourse financing. 

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