I've long said that end-of-day market reports are silly, since the only thing reporters can normally say with any confidence is "the market moved and we don't know why." But what we're seeing right now isn't moves so much as fully-fledged earthquakes. Even during a bear market, you don't expect three 700-point down days to come in quick succession like this: if anything, you expect big one-day rallies, followed by more grinding-yet-inexorable decline. The big one-day plunges happen at the top of bull markets, when bubbles burst. But we were already down 35% when the market opened Thursday. Now we're down 42%. Whatever that might be, it sure ain't a bull market.
In any event, I have no idea what happened in the last hour of trading Thursday. I could speculate: maybe it was that story saying that Treasury might start taking equity stakes in banks "within weeks". That might as well be next century as far as this market is concerned: I'm sure I wasn't the only person anticipating a big equity injection into Morgan Stanley this weekend.
It's not just the Morgan Stanley-MUFG deal which is rapidly being overtaken by events, either. It's also Wachovia, whose stock plunged Thursday alongside that of Citigroup and, most worryingly, Wells Fargo (down 15% on the day). The banks with the fortress balance sheets -- the safest of the safe havens -- are looking shaky: Bank of America was down 11%, and JP Morgan got off lightly with a fall of 6.7%. Remember that these are still leveraged institutions: even if their depositors and senior bondholders are safe, their equityholders aren't -- especially not when Hank "$10 is too high a purchase price for Bear Stearns" Paulson is the person in charge of new equity injections.
Was the market's fall a result of the short-selling ban coming to an end? It's possible, I suppose, that the Evil Shorts took a few hours to do their stretches and jog around the track a couple of times before unleashing their full arsenal of weaponry on the market late in the afternoon. But all stocks fell Thursday, not just the financials on the no-shorting list. On the Dow, Wal-Mart was down 5.8%, Kraft was down 7.6%, Johnson & Johnson was down 7.7%: these are defensive stocks for hard times, and they're being decimated.
Or maybe it was just nervousness over Friday's Lehman Brothers CDS auction. There's nothing this market hates more than uncertainty, and no one really has a clue what the aftershocks from that are going to be. Were there large financial institutions -- banks, or maybe hedge funds -- which had big net exposures to Lehman, writing lots of protection against it defaulting? If so, Friday could be the day when the CDS dominoes start falling. If a major counterparty can't pay up on Lehman and ends up defaulting itself, there's no knowing where it might all end.
But there is a tiny bit of good news: for the first time in many years I'm finally beginning to think that stocks aren't overpriced any more. (Although they're still overpriced in relation to the credit market, which is priced for Armageddon.) As Dean Baker points out, a low stock market is a gift to young workers. If we're saddling them with hundreds of billions of dollars in new liabilities, maybe it's just as well we're gifting them $10 trillion in upside on equities at the same time.
The stock-market plunge is good news for Barack Obama, too. I haven't done the exact calculation, but total US stock-market losses per household over the past year are now approaching the $100,000 level. There's simply no way the incumbent party can win an election in that kind of environment.
One last spooky datapoint: the S&P 500 closed down 666 points from its all-time high. Maybe it's not the terrorists doing the selling, but someone more evil still!
This article has 11 comments:
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Nikola
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91 Comments
Oct 10 03:42 AMWhy? Why not say we are gifting them $1000 trillion in upside on equities? Because that's not a fair price? And plus $10 trillion is a fair price? That was fair? Then why are we falling now?
It doesn't make any sense Salmon.
What just happened? A Ponzi scheme unwinding. It is a good thing our kids will live in a world where financial companies are going to have substance on their balance sheets.
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Joe
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17 Comments
Oct 10 04:22 AMor is there also some banking crisis unfolding? Banks from Panama
to wherever.
What sort of assets are they having in their books? What are their
balance sheets like? And considering the amount of assets under
management in those countries and those banks couldn't they have
an influence on the world markets? Just like Iceland has, tiny as it is,
and not even a tax haven with lots of assets.
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gabe borenstein
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193 Comments
My Website
Oct 10 05:00 AMThe media distorts the economic/ financial reality enhancing the "subsurface panic"
The unprecedented measures to be implemented ,are expected to have an impact while they are still a legislative measures.
The reporters who think of themselves as economists and continue to disseminate economic nonsense further enhance the level of panic.
One thing for sure ,the amount of liquidity to be provided shortly will contribute to a major economic/market rebound.
Europe appears to be behind the curve in addressing their problems.
This should accelerate dollar inflows(flight to quality) contributing to explosion in demand for the dollar denominated assets.
This includes equities and with a slight lag real estate.
Better times lie ahead for the U.S investors.
A thought.....none of this would had happened if
A) Lehman was not allowed to "liquidate"
B)If the common share holders were not subjected to a dilution or a potential dilution as a result of the "rescue".
I think the Treasury and the FED got the message.
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fabricator
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46 Comments
Oct 10 07:10 AMI have a better idea: blame the greedy bastards who created this big ugly Ponzi scheme along with the corrupt government regulators and lawmakers who allowed such a monster to flourish.
I don't think "the media" is overstating any of this. If anything, they've been mostly underreporting the dangers for years.
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fabricator
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46 Comments
Oct 10 07:11 AM-
Wefwef
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45 Comments
Oct 10 08:30 AM-
Alan von Altendorf
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354 Comments
My Website
Oct 10 08:32 AM-
anarchist
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142 Comments
Oct 10 08:44 AM-
turkeyeyes
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52 Comments
Oct 10 09:30 AMBy the time you realize you were wrong about the shorts it will be too late and more businesses will have needlessly failed....
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Smarty_Pants
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1124 Comments
My Website
Oct 10 09:37 AMI don't always agree with his analyses or conclusions, but at least he's not spouting off like he knows exactly what's happening (as most other market pundits do). He brings his lunchpail to work, writes what he's thinking and why, but usually admits that he may be wrong or just doesn't know.
His posts probably get the most informed discussions because he presents ideas that people can debate in simple terms instead of just endlessly repeating "buy for the long term" without any basis in reality.
Keep going Felix. If you can guess right 25% of the time you'll be doing as well as the talking heads on CNBC.
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rcraig
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32 Comments
Oct 10 04:02 PMfrom what I can tell, the over regulation by Congress was the cap on the ice berge that cause it to tip over. What ever rationalization Congress had behind their forcing banks and lenders to provide loans to people who couldn't afford homes in the first palce was a bad idea. The logical action would to have place a cap on real estate values and the profits that big buildres were making on the self financing and sells of homes that can't weather natural forces any better than a straw home built by the Three Little Pigs. You add the esclating cost of real estate to the transfer of responsibility for shoddy home to the insurance industry and you have the perfect financial storm without Congress forcing the banks to sell home to people who can't afford them.
After all the medium price of the average home kept going up higher and higher while the average blue colar income remained suppressed. You would have though the homes that were being built were intended for the blue colar worker. So how could hey afford them if the price kept climbing while their income stayed relativly fixed. What idiots in the industrial sectors were in charge along side Congress and their crazy regulations. Mind you I am not an economics expert, but how can anyone in any industry ignore the core basis and factors that make a company profitable and disregard the stress factors that could cause them to fail?
I guess ther is no law against collective stupidity. Let's all suffer with the morons.