Stock markets in the US declined heavily this week even as Energy Stocks roared. The tech-heavy Nasdaq declined 3.25% for the week and is down 12% for the last 6 months. So we have definitely had a correction in the Nasdaq while the S&P and Dow act as if it's not their problem. It will soon be everyone's problem as I will outline below...

Well, there are several reasons why the Nasdaq is declining none of which will ever be mentioned in the US media which I think is still too beholden to its advertisers (the major mutual funds and brokers) and hence will not talk ill of them. Those of you who think that the US media is doing a "public service" through its reporting are living in a la-la land and need to come to earth quickly. Since I am not beholden to anybody, let me walk you through the real reasons...

The first major reason that almost nobody will mention is that almost 99% of the mutual funds in America today don't have the cash on hand to make a big stand here. Many have of them have only 4% in cash and cannot meet redemptions that are coming fast and furious now. Almost all of them have been caught blindfolded by this decline just as you have been (of course they are being paid handsomely for being blindfolded while you are not). Except for about 50 mutual funds that are run by some very smart people (read the story in the WSJ about them this week) that believe strongly that they have a fiduciary duty to protect your assets and grow it in good times and bad, virtually all of the 6000 odd mutual funds out there don't do anything about down markets. You may wonder why.

Here's the dirty little secret about the mutual fund business that you should know: If they do well because the markets do well, they all act like they are geniuses and pay themselves bonus after bonus using your money. But if the markets decline and they decline with it, oh well, too bad, "it's your fault, not theirs". Why? Because apparently some of you have been telling your mutual fund managers to be "fully invested" at all times. This is a farce. But here is how they play that farce to full effect.

Apparently, mutual fund holders like yourself are paying these managers to be "fully invested" in stocks and not to be custodians of cash. But this argument falls apart when you find that 99% of mutual fund holders (like yourself) out there would rather have their portfolio managers protect your assets and grow it more than you would like it to decline. There may be some nut cases out there that think someone destroying their assets is okay. But I think any sane individual who has entrusted these managers with their money wants it to be protected in good times and in bad and would like it to grow. This is what is known as entrusting these managers with a "fiduciary duty".

But 99% of mutual fund managers hide under the thin veneer of the "fully invested" mantra and use it as a way of absolving themselves of any responsibility for managing your money in a "prudent manner" so that it will stay flat or grow, just as if it were their own money. Talking about their own money, most mutual fund managers I know (and I know a few), do not have any of their own money in the funds they manage. They like to keep it separate (mostly in cash and bonds) somewhere. And when I quizzed them why, they usually have a surreal reason for it that I won't even bother mentioning here. But my sneaky suspicion is that they are all waiting for you to give them some options on their mutual funds (just like stock options) so that they will actually work to make their mutual fund prices go up. If you want them to have some skin in the game, they are hoping you will provide them with enough options just like you have given CEO's in America with options to manage their businesses. The unbelievable salaries that they get for managing their businesses is just not good enough for them to make their stocks go up. You actually need to give them options to prod them to do their job. Also, they won't spend their own money to invest in a business that they actually like and work for. They want you to give them a stake in their own success for free. What a disgrace!

Caveat: Those of you who are reading the above description and who are good mutual fund managers and don't practice the above tactics, please stay away from defending your ilk. I know there are some good managers out there. The rest, gladly send me your vitriol. I will drink it with my coffee. :-)

The second major reason why markets are declining is that many people have started to wonder what will happen to stocks if there is a terrorist attack either in the US or in Saudi Arabia. Oil and oil stocks are already reacting as if there will almost certainly be a major terrorist attack on Saudi soil in the next few weeks and months (see the chart of LSS which is a leading energy indicator below). Most smart people I know (except for mutual fund managers) will sell some of their stock holdings and convert to cash if they think there is a chance (however small) of a major dislocation in the markets due to a terrorist event. They would rather keep some cash on the sidelines and put it to work after the elections when they know that the chances of an attack lessen. That is exactly what is happening in the hedge fund world. Many of them are raising cash massively or are sitting in large amounts of cash and not buying this decline until elections are over. Many of them are buying energy and gold stocks as terrorism insurance ahead of a possible BAD event. Notice that this behavior is very much in contrast to your average mutual fund manager's. These guys could destroy your money and blame you for it in case there is an attack somewhere that spikes oil to $50 and beyond (which is more probable than you think).

The third major reason why markets are declining is that investors are seeing signs of a major world wide slowdown (in China and the US). This would be absolutely horrendous for US stocks (due to earnings being hit) and also due to the possibility that valuations could be compressed (due to inflation going up). This is the dreaded stagflation scenario which I think is likely.

Notice how I have spilled so much ink without mentioning the favorite God of all markets, (according to US media) - Alan Greenspan and his merry pranksters at the Fed. If you think the speed at which Greenspan will be raising rates will be upsetting to markets, then you really don't understand Greenspan. I think Greenspan raising rates will have almost no impact on markets at the speed at which he is going.

That being said, here is how my holdings look this week:

Long

Gold: Gold stocks had a difficult week but I they still have gains this month. I still have only IMXPF (a silver play) in that sector though it's a big position.

Oil and Oil Services: I am long oil plays here because the energy sector is now entering the blow off stage where I think gains will be huge. I am long SLB, MVK and OIH.

Short

Financials: I think the rally in financials was a dead cat bounce that is over. I am now short FNM (again).

Autos: I haven't talked much about the Auto bubble but I think that is coming to an end. So I have begun to start shorting some auto names here (HAR is one of them).

Tech: I think tech's days are numbered as macro concerns overwhelm any positive earnings surprises.I think 2005 earnings numbers for tech are too high and as they are brought down, these stocks will be hit. I am long HYSL and short HHH.

Happy investing and researching! We'll see what next week will bring.