Wow! The last two days have been real character builders. If you never heard "What the market giveth, the market taketh away", you heard it now pal.

The first three days this week, small cap' stocks made their best showing in months. Even though today was rough on them, I think the worst is over for secondary and tertiary issues, and that things should be looking up for "value" investors. That doesn't mean you should jump in with both feet, unless you want your head handed to you. It does mean that you may begin to take initial positions when you have the stomach for it, and then only acquire up to 1/3 of your ultimate position objective. And if you can't stand the volatility, just wait for year-end tax selling for your buying opportunity.

Today was a great lesson on the negative aspect of leverage. Even the high and mighty get the living crap kicked out of them when they live on borrowed funds. A large domestic hedge fund, whose participants supposedly included some of the sharpest guys in the country, including a former Vice Chairman of the Federal Reserve, took gigantic losses. Well they thought they knew how to borrow big money and make big profits. Surprise! As general Custer learned, it's hard to look dignified with a tomahawk in your forehead. They lost 90% of their money, and it took $3 ½ billion to bail them out. Rumor has it that the Fed encouraged banks and investment bankers to rescue them, and some 15 of them did.

When the market got wind of this massacre, they dumped stocks in the fear of how many more of these situations are there? The institutions involved in the rescue were probably the major lenders in the first place, and are really just "protecting" their original loans. So when you saw some of your favorite financial stocks taking a big hit today, you know that investors wonder how many loans to hedge funds are on their books? We have always advised our readers to avoid margin, because it undermines your staying power. When you own your stocks outright and the market goes to hell, you can play sitting bull and just wait it out. You can play golf or travel or whatever, and ignore the market for a while. Believe me, you'll live longer for it. But when you owe money and get margin calls, you have to unload and sometimes take horrific losses, selling stocks you love at giveaway prices.

The market's fickleness is sure shown over the last two days. Wednesday, the market thought Greenspan was indicating the Fed would lower rates when they meet on the 29th, and the Dow soared 258 points, Today the Dow fell 152 points on the hedge fund debacle. Now I think the Fed is likely to lower rates 1/4 point, but the market has the financial shakes, so even with a rate lowering, the bigger stocks will have a tough going. Remember - cash is king!

The Market Pro - September 24, 1998