Sep

30

Chair1. It was symmetric with the previous week where it opened limit up on the news. They had reached a compromise, and then it went limit down, indeed 100 down when they didn't reach an agreement. Amazing that the time horizon is so short. As soon as they voted the agreement down, it was clear that they'd come up with an agreement shortly. The stock market took care of that. "It's amazing how a 900 point drop in Dow can get their attention" with all the lobbyists involved, and the power increases, but yet the leverage of traders is so great that they automatically get exited from their positions on bad news even if it's going to be reversed the next day at the open.  

2. This crash and the Oct 19, 1987 both were symmetric in that the Secretary of the Treasury caused it. In the first one, Jim Baker said, "The Europeans have to strengthen the currencies." In this case, there was revulsion against a political plan to feather the nest of both parties. The bonds in both cases had their biggest up moves in history, but in 1987 they stayed up for the next week, and in this case they reversed the next day. Commodities had one of their worst days in history showing that all markets are interrelated and when wealth goes down, all spending is reduced.

3. This crash brought all markets to many year lows, and was the final revulsion, the final throwing the frog into hot water that cleared the decks as the move the next day, one of biggest in history, showed. The discount rate is always ready to be lowered when the market goes down by more than 4% in a day as it did on Jan 21, and in Aug 2007.

4. The European markets were down a few percent more than the US at the open, as were Japan and Israel, foretelling what was going to happen. 

Steve Leslie notes:

We tend to remember October '29 and October '87 — but since 1990 October has been the best month of the year on average for performance. November and December rank #2 and #3. Also, the Dow has been down four straight quarters — extremely rare.


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4 Comments so far

  1. Daniel on October 1, 2008 10:34 am

    We haven't crashed yet my friend, that was just clearing out stops for the real deal. "Fade the Senate Pop"

  2. nik on October 1, 2008 3:06 pm

    The VIX is the best indicator; VIX stayed constant for the whole session before jumping up 20%.

  3. steve leslie on October 2, 2008 10:00 am

    I have never been through a stock market like this in my lifetime now spanning a half a century. The most discouraging part of this is that every day another sector gets fed to the lions. Financials, then autos, then fertilizer then seeds then materials then this then that. The cleanest of the cleans are being dismantled each day.

    One of the big problems as I see it is that with respect to equities there is no floor to stocks falling. In other words, nobody wants to get in front of a runaway freight train at the risk of being run over. Some of the damage was seen last week when the specialists tried to get in front of Friday's -777 number and they ate $165 Million or so in losses.

    This does remind me in a sense of the mid 1980's when the junk bond market broke down completely with the destruction of Drexel and subsequent falling out of Merrill. As you remember, liquidity was non-existent after Drexel went bankrupt as they had an oligarchy on junk bonds. which was magically crafted by Milkin. When Drexel disappeared then so did bids for bonds.

    So until some stability is seen in

    A) the overall market
    B) financial markets
    c) individual sectors

    Then unfortunately there will be more dramatic moves to the downside to follow. If there ever was a scenario to describe capitulation selling then I hope this is it.

    There is so much confusion. I spoke to a colleague at Wachovia securities and he said he does not even know who he works for. Whether it is a bank or a broker or Wachovia or Citigroup or Smith Barney or AG Edwards. He said he was told just last week that stay calm Wachovia is well capitalized no need to worry and then BAM another lightning bolt hits. It is mind stretching.

    The House vote on Monday is indicative as to how violent the American People are becoming. Their outrage in the bailout package was so pervasive and negative that even the House speaker could not get a bill passed that she sponsored. This is generally unthinkable. They hate all politicians, Wall Street elitists fat cats, bankers, lawyers and everybody in between. If this was France in the late 1700 they would be literally calling for the heads of state.

    Looking at the worst stock market since the Depression was 2000-2003 in 2002 the market went down six straight months. This market has been going down for a straight year.

    So in summary: Unfortunately there is no magic bullet out their and John Wayne will not be riding in with the cavalry to save Maureen O'Hara. Psychological confidence has been destroyed on multiple levels. Systemic liquidity problems will be observed at mutual funds in anticipation of liquidations by individual investors.

    There are a few bright spots out their. Regional Banks who did not go to massive lending excesses are doing well. Oil in retreating fast and hedge funds have liquified. As I mentioned, Microsoft for example is awash in cash and sitting safely. Drugs are probably OK and foods.

    sl.

  4. Sasha Shavit on October 9, 2008 7:53 pm

    Ineteresting that you mentioned our irseali index and that you watch it. Tel Aviv 25 indeed fortells sometimes whats going to happen in US the same day.

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