The market is often described as panic-depressive, because it over-reacts to most everything.  Maybe, it is just a matter of degree, but I have never seen it so headline-dependent.  (Of course, everthing is different in the face of a financial crisis, which is entirely different and much worse than a standard recession.)

Fortunately, the German parliament approved the July plan for the EFSF or stabililty fund.  Yesterday, the prickly Finns also approved it.  If they had not, the market would be down, probably a thousand points.  Instead, it looks like the Dow will open up about 100 points.

Another sign that this bear market is different is that Modern Portfolio Theory is not working.  That is the “gold standard” practiced by the vast majority of investment managers.  It was developed by Harry Markowitz in 1958 (So, how modern is that?).  He won the Nobel prize in 1972 for it. 

According to this theory, investment returns can be increased, while decreasing risk (the Holy Grail) by exposing the portfolio to many asset classes, e.g., big cap growth, small cap value, commodities, cash, etc.  In other words, when one asset class is losing value, another is gaining value, maintaining the value of the overall portfolio.  However, in 2008 and again this summer, all asset classes have lost value, even gold.

Some analysts say that means we are hitting the bottom, when all asset classes move together.  While I hope so, I’m convinced that is just a coincidence and that Modern Portfolio Theory only works . . . until it doesn’t!

I’m still convinced nothing will get better here until the spectre of financial collapse is gone in Europe!