24/7 Wall St.

The DJIA could drop 1,000 points today. Japan was down 10%. The sell-off rolled across Asia and then hit Europe. Dow futures got down almost 600 points.

There is some confusion about why this is happening. The Treasury’s plan to put $700 billion into banking was supposed to help. That is particularly true because most of the other large nations in the West and Asia did the same thing.

The American government is moving as fast as it can to put a safety net under other sectors, especially automotive and mortgages. There should be some encouragement there for traders.

The reason that the Dow is likely to go down has really only dawned on the markets in the last few days. The most deeply pessimistic economists that most of the world thought were crazy six months ago, even one month ago, are turning out to be right.

There is every reason to believe that based on retail sales, business lay-offs, and rising mortgage defaults that a recession will last at least four quarters and GDP could drop by 3% or 4% in each of those. That would likely mean unemployment rate of close to 10%, putting another five million people out of work.

At that point, it becomes a vicious cycle. Those out of work cannot buy anything. They default on mortgages, car loans, and credit card. More people are laid-off.

The stock market is collapsing and may keep doing so because traders cannot see a bottom. That may actually make shares expensive now.

Here is a primer and cheat sheet for how limit down futures and how NYSE Circuit Breakers work. 

-30-

Douglas A. McIntyre