Thursday started off with mixed news: Jobs dropped a bit, the Philly Fed moved up a bit, and the Leading Economic Indicators became positive. Other news was more negative.  China is tightening bank standards to slow down its growth rates as inflation accelerated (FXI dropped 3.7%) . Obama moved to limit proprietary trading by investment banks (XLF dropped 2.85%). GOOG announced lower profits on weak advertising revenues (GOOG dropped 4.3% AMC).Earnings were good. American Express the biggest U.S. credit-card issuer by purchases, said fourth-quarter profit more than doubled amid a surge in customer spending and lower expenses for future defaults (AXP dropped 1.9%). 

We’re not sure that this news by itself explains the 213-point drop on Thursday. The most surprising news to U.S. investors may be the China actions. If we add the fact that many traders think there should be a correction, there is probably enough fear out there to create a sentiment shift. The VIX popped from 18 to 22. in apparent confirmation. Possibly the Massachusetts news, which “revealed” that Americans are pessimistic, according to the pundits, has aided in the shift.

Our portfolio suffered broad losses on our loose stops. We did buy a few stocks that sharply declined and a put on our IWM holding. One holding, KRE (Regional banks) soared 3.10%, possibly because they were not affected by Obama’s plan. Regional banks are nevertheless threatened by mortgage losses, so we need to be watchful.

Capital preservation is paramount; while we expect bounce soon, even if it’s only in reaction to two sharply down days, we will sell or protect our holdings from further losses, while looking for bargains.