If you follow at all the stock market, this week by all measures has been a terrible week. Unless things drastically change in the next two days, I expect my net worth to take a major hit for this month. I have another 15-18 days before I take another snapshot of financial health, so there’s some time for the markets to recover. Unlike some other personal finance people, I’m not exhaustive budgeter. I don’t track my spending to the dime. The one thing I do is to take a snapshot of where I stand financially every month at mid month. The stock market has treated me well since I’ve started logging this information in October of 2003. The S&P 500 has returned 45% overall in that period or about 10% annualized – a very solid return.

While it’s certainly disappointing to have my net worth decrease by a few thousand in the matter of days, it’s in the end not all the meaningful.  Nothing has changed since last week and today.  The companies in which I hold shares are still the same.  They are as good or bad as they were before. In general I’m not trying to speculate with my equity holdings. I hold them because I believe in the long run health of the economy and the long term prospects of a specific company.

Right now, I believe there are indeed reasons to be concerned with the state of the U.S. Economy and equities market.  I’ve been leaning bearish for the last 9 months or so. I believe the Housing market still has further to fall. The state of the credit market is in state of flux – it looks like the financial markets are ready to ask for higher risk premiums once again. Just as mortgage lenders have made it to easy for unqualified borrowers to borrow too much money, larger financial players have made it too easy for corporate borrowers to borrow too much money at too low a rate. These two things are very much related given that most mortgages end up being repackaged securitized as MBS (Mortgage Backed Securities) and CDO (Collateralized Debt Obligations). Personally I’m not sure what real difference between MBSs and a CDOs are. I would think MBSs would merely be a subset of CDOs. In addition credit derivatives have allowed financial institutions to trade the credit risk associated with any debt separately further lowering the risk premium.

Personally, I don’t feel that financial innovations such as CDOs and Credit Derivatives are a bad thing, but Wall Street like a kid in candy store probably ate a little too much. It will take time for things to shake out, but in the long run I do believe the economy will come out OK, and these derivatives with have a proper place in institutional portfolios. This may take a year or two, but I don’t see anything like a repeat of the 70s. And, I like Bill Miller am happier when the market is down . Let the buying begin.