“Dear Mr. Market …”

Jason Zweig offers up a clever commentary on the extreme volatility of the market, “Getting a Frazzled Mr. Market to Settle Down,” on p. B1 of the weekend edition of The Wall Street Journal – worth going back to if you missed it. He begins:

Dear Mr. Market,

Since you refuse to take your meds, we have to get your mood swings under control.

And you really do need to calm down. …

He goes on to document that the market has been extremely volatile, by historical standards. So far in 2008, we’ve seen 20 times when the Dow jumped or dropped more than 5% in a single day – something that happened only 14 times during the entire previous decade.

Zweig, like many market observers, would like the market to settle down. He endorses an idea for a “voluntary stabilization program” in which companies would enter the market to help stabilize their own shares on days of great volatility. XYZ Co. would put up cash – maybe 1% of its market value – to buy a set number of its own shares on any day the price fell by such-and-such percent. On the other side, XYZ would commit to sell a certain number of its shares if the price jumped more than a particular percent. Hence, stabilization.

My feeling is that the market will settle down when the underlying forces driving volatility – such as uncertainty about the quality of financial-industry balance sheets, the lack of confidence of consumers and businesses in the near-term economy, and the (borrowing a word from our president-elect) erratic political posturing of virtually everyone in Washington – calm down.

Until the macro fundamentals settle down, safety-valve mechanisms may be OK as balms for people’s nerves … but not much of a solution. I’d be interested to know what CFOs or investor relations people think of the stabilization idea. After all, real companies are the heart of “Mr. Market.”

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