I am going to start and finish my column today with a quote. I couldn’t find a source for this quote but it is a good one in light of the continuing volatility of the stock market. “If you’re gonna panic, panic first.”

The essence of this comment is that if you are going to sell out, sell out before everyone else sells. Of course, this is nearly impossible to do. No one could have predicted the events of the last week.

The corporations that have faced such serious problems are venerable old names on Wall Street. Lehman Brothers, Merrill Lynch, AIG, Bear Stearns and others have been mainstays for decades, if not a century.

So what is going on? Some call it “investor capitulation.” This means that investors have hit the point where they have given up. They can’t stand the risk or volatility. They are throwing in the towel.

Most of the bad news is coming from the financial sector. For instance, the 500-point drop in the Dow Jones Industrial Average last Monday came mostly from the drop in AIG’s stock. It alone accounted for 400 of the 500-point drop.

On Thursday, it was announced that AIG is being dropped from the Dow Jones Industrial Average. Remember that the Dow is a terrible index to follow, since it represents only 30 stocks. AIG is being replaced by Kraft Foods. That should help the Dow, since we all have to eat.

At the core of the problem are the poorly structured mortgage securities offered by many of these “so-called” Wall Street geniuses. The underlying assumption was that real estate prices would always rise, but nothing dealing with money always rises. They fell and these poorly packaged loans started to bleed. The bleeding is still finding its way into the stock market.

One expert I read said that if you take the housing element out of the economic indicators, the economy is chugging along nicely. The GDP without housing is up +2.2 percent over last year and projected to be +3.2 percent when projecting the second quarter performance over the next year.

The economy is not taking down these financial institutions. Bad loans are doing it, and they should be held accountable. Someone needs to have their feet held to the fire.

Is there anything good going on? Absolutely! Oil prices have plummeted. The price for a barrel of oil is in the low $90 range, off from $147 just a few months ago. Eventually, this will convert to lower gasoline prices, which will help everyone.

Mortgage rates for those who can qualify have dropped dramatically, into the high 5 percent range. Of course, the pendulum has swung opposite on the qualification process. Before, if you could breathe you could get a loan. Now the banks have learned. Let’s hope they don’t make it too hard. Mortgages are essential to a rebound in housing.

The dollar is strengthening. This fact has helped with oil prices and overall confidence in the U. S. economy overseas.

The Fed did not lower the discount rate. How is that good? Well, it is good, because they realize the economy is doing OK and doesn’t need an artificial stimulus.

Can you make money in this stock market? Yes, but you have to have some courage to buy now.

This brings me to my second quote. Sir John Templeton said, “Investors should buy at the point of maximum pessimism.” Consumer sentiment is currently at an all-time low.  Every time consumer sentiment hits this point, the stock markets start a long term rally. Will they this time? Are we at the bottom of the market? Good questions — to which no one knows the answers for certain. I can tell you that you cannot benefit from any type of rebound if you are out of the market. Be cautious, be diversified, but be invested.

Notable quote: “If you don’t know where you are going, you will wind up somewhere else.” — Yogi Berra

Mills is a registered investment adviser and certified financial planner. If you have questions or topics, call or write him at 1030 Seminary St. Suite D, Napa, CA 94559, 254-0155 or suntrm@aol.com.