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I was 5 and half in October 1987, so apparently the only thing I know about the event is from reading other traders and investors’ stories. Nevertheless, all I need to see is the chart from the period.

1) The tape gave plenty of warning signs to decrease substantially your equity exposure. $SPX made lower low below its 50dma a week before the event. Market volatility measured in daily ATR (average true range) had increased substantially in the weeks before the event. Any time this happens, it is a sign of change of trend and $SPX was in an uptrend for the most part of 1987. Pay attention to price action. It tells you everything you need to know.

2) Any quick pullbacks of 20% or more in the general stock market are usually a good buying opportunity for long-term investors. The market took its sweet time to recover from that flash crash and I am sure that buying the right stocks made a big difference in returns.

The FED induced zero interest rate environment is affecting our lives in more ways than you can probably imagine. One of the most affected industries is insurance:

The fundamental business of insurance is to collect premiums, invest them for a period of time, and then pay out a portion of the money in claims, while earning a small profit margin along the way. Yet when interest rates are so low, insurance companies are forced to collect more in premiums to fund future benefits (since they can’t bridge the gap with investment growth), and in some cases the prospective return on premiums is so low there isn’t even room left for the company to retain a margin for both risk and profits; the end result is that insurers are changing or eliminating many lines of insurance.

As noted previously in this blog, the low interest rate environment has already helped to drive a number of long-term care insurance companies out of the marketplace entirely, and all of the remaining companies now charge dramatically more to offer what coverage they do. Estimates from the AALTCI suggest that every 1% decline in interest rates has driven up the cost of long-term care insurance premiums by 10%-15% over the past decade. Various policy options have been curtailed as well; it is likely that by the end of the year, lifetime benefits and limited-pay policies will no longer be available at all.

Higher premium will boost insurance companies’ short-term earnings substantially. The market realized that 6-9 months ago, when many of the insurance stocks started to break out to new 52 week highs from good technical bases. Rising expectations for U.S. housing market recovery have also been a factor in this re-pricing process.

You could sit and complain about the increase of your insurance rate or you could pay attention to the 52-week high list to figure out where else the market thinks there will be changes in the economy. There is one basic law in business – one company’s rising costs are another company’s rising revenue and more often than not, the market does a very good job of identifying which the winners and the losers are, long before they become mainstream news.

This is not to say that the market is flawless forecasting indicator. It is not and there are times when it is very wrong and driven by animal instincts, but it is one of the best discounting mechanisms we have.

QE1, QE2, QE3 and all other garden variety monetizing efforts have certainly left their mark on the U.S. dollar, which has lost 20% of its value since March 2009 lows. But why is gold underperforming equities then? It turns out that Buffett is right again:

My own choice: Investment in productive assets, whether businesses, farms, or real estate. Ideally, these assets should have the ability in inflationary times to deliver output that will retain its purchasing-power value while requiring a minimum of new capital investment.

Whether the currency a century from now is based on gold, seashells, shark teeth, or a piece of paper (as today), people will be willing to exchange a couple of minutes of their daily labor for a Coca-Cola or some See’s peanut brittle. In the future the U.S. population will move more goods, consume more food, and require more living space than it does now. People will forever exchange what they produce for what others produce.