5/6/2010 Historical Post – The flash crash

From: Dale Beals <dpbeals@comcast.net>
Subject: Today’s market insanity … what I did and why…
Date: May 6, 2010 4:20:24 PM CDT

Dear clients and friends.  After returning from a client lunch appointment today, I saw that the US stock markets had gone from -1% (before lunch) to -4% in just an hour or two. Then the market went into free fall and I decided to begin selling most of your stocks in case this was a 1987-style one day crash (that day was -25%). There was a point when many equity or commodity markets were down 7% or more before we found a bottom for today.

The good news is that because we were well diversified, the Gold, IEF and TLT, and the TIPS (US Treasuries) were all sharply higher as people fled from stocks, so your accounts did not suffer anywhere near the market losses.  I’ll get you interim balances over the next few days, but just wanted you not to worry. Our proprietary asset allocation methodology worked very well today against the unexpected.
The bad news is that the US stock markets finished “only” down -3.2% or so, so some of the securities we sold finished today at higher prices than where we sold (of course nobody knows where they will open tomorrow morning).  One promise I made you when you became my clients, is that I would not let you take big losses if I could possibly help it, so I made a “safety first” decision today. If the market goes straight up from here, we will have missed an opportunity, but I prefer to play it safe when dealing with your money. Hey, just think about those who never heard from their traditional brokers or advisors today. Even if those brokers wanted to act for their clients, they would have been restrained by regulations because they don’t have discretionary authority to act quickly on your behalf. Also, those brokers do not have the same fiduciary responsibility to their clients that I have to mine.
Now for the future. I’ve never seen a day like the last few followed immediately by a happy return to normal. A spike in volatility usually produces more volatility. While the press may blame a “trader error” or a “technical pullback” for the selloff today, they can’t explain the last week’s decline like that, nor can they explain why so many people were sitting with their “hand on the button” to sell. People are getting scared, and I expect more volatility.Many of these scared people are professional mutual fund and hedge fund money managers. Even though many professionals have been uneasy, they felt like they “had to” stay invested as long as the markets were going up, or risk losing clients who feared “falling behind” or “missing an opportunity”. We could even see another big down day in the next 2-3 days.
Whatever happens, I’m going to take the increased market volatility into consideration when rebalancing your accounts after I have a day or two to reflect on the markets.

Safety first.
Thanks for your trust,
Dale