We have just seen two horrific trading days in a row for stocks as the market put in multi-year lows. This is on top of four quarters of selling. We all know what the reasoning and rationale are. The method of "instant pricing discovery" is not how markets work, but it is evidence that equilibrium and efficient market theories are as far from reality as it gets.
Banks and financials were over-leveraged. Consumers were over-leveraged and still are. Assets were not worthanywhere near what everyone was buying them for the past several years. Our homes in America are worth much less than what we thought. Credit is tight at best and deemed non-existent by muchof the country. We are at a crossroads over what the tax situationwill look like after the election in November. You know the rest. It’sall bad news. Consumers are stretched and jobs are getting worse. Borrowers duped creditors, and creditors went along with no checks and balances. Everyone bought too much house or used their house as a personal checking account. Banks won’t even lend to each other. These are all the culprits we know.
But what no one knows is where the market bottom lies. We have takenout 10,000 on the DJIA and even closed below 9,500 yesterday. The S&Pclosed under 1,000 to levels not seen since late 2003. The NASDAQ inthe 1,750’s was the lowest since August 2004. Right now technicalanalysis is flawed as there is little rationale in the selling otherthan that it is everywhere and it is broad-based. Calling forvaluation analysis right now is also impossible. What is cheap can getcheaper, as we are witnessing daily.
Look at what has been tried so far. Forced closures of Bear Stearns,Lehman, Wachovia, and WaMu have all led to mandated takeovers. The Fed hasestablished an "in-crowd" of banks that it will let survive and it will force the closure of the weak banks to be scoopedup. We’ve seen an AIG bailout. We have seen a government seizure ofFannie Mae and Freddie Mac. We have seen the deposit insurance limitraised to $250,000 from $100,000 per depository account. We have seenthe Fed buy assets from institutions in swaps. We have seen a $700billion rescue package go through Congress faster than thePatriot Act. And we have seen the Fed get into the business ofcommercial paper guarantees. And they have banned the practice ofshort selling in a test mode for financial stocks.
Now, this morning we have seen a global effort of coordinated rate cutsto add more liquidity. Rate cuts take time to work their way into theeconomy. So traders aren’t using what is done only in extremeemergencies, which was not even seen after 9/11, as an opportunity to buy as stocks are now mixed after initially showing rather large gainson the rate cut announcements.
The public is getting to the point that it just can’t take it anymore.As many have lost 30%, 40% and more in their retirement and investmentaccounts, it is time to ask the investing public to stomach one moremajor hit. Let’s ask the NYSE and NASDAQ to come together and open allof these stocks at much lower prices to see if there is a real bottomin place. Let’s go for DJIA 5,000, S&P 500 at 500.00, and NASDAQat 1,000.00. Get the FOMC to step in again and take Fed Funds to themagic 1.00% and ask the Treasury to take the 10-year treasury yielddown to 3.00%. Ask NYMEX to open oil at $70.00 per barrel.
This won’t happen, at least not in the manner proposed here. It just isn’t how things work. But the government and media keep talking about the search for "pricediscovery" in many of these esoteric assets lurking on the books ofevery financial institution. This is merely a new idea of "instant pricediscovery" will never happen and is somewhat a tongue-in-cheek measureof the pain going on.
There is good news when you start reading things like this. Whensentiment reaches levels this horrible you have generally speaking seenthe worst of the selling. But now we are only entering the officialrecession (actually still not even in recession under classicdefinition) and economic numbers are going to get worse before they getbetter.
The markets are now in positive territory after the globallycoordinated rate cuts from central banks. But the DJIA was down asmuch as 200 points to nearly 9,200.00 before recovering. We could seea rise of 1,000 points or a drop of 1,000 points in the DJIA and thereare none who would be surprised by either move at this point.
Jon C. Ogg
October 8, 2008