Daily Investment Interpretations

October 7, 2008

2008-10-7:   London Bridge has fallen down! The Dow dropped 508.39 additional points today to 9,447.1, bringing it roughly 78 points below yesterday's minimum. So much for an intermediate market bottom! Of course, an intermediate market bottom can still happen soon, but it didn't happen today. The Nasdaq Composite fell 108.08 points to 1,754.8, while the S&P 500 divested itself of 60.66 points, closing at 996.23. These indices are now off a little more than 1/3rd from last October's highs. (By contrast, the 1974 market debacle saw the Dow bottoming 48% off its January, 1973, peak... 15% lower than where we are now.) The VIX closed at 53.68, after hitting 54.09... a little less than yesterday's high of 58.24. Oil rose $2.25 a barrel to $90 today, while gold advanced $15.80 to $882.00 an ounce. More to the point, gold is becoming more difficult to find, and increasingly larger premiums are being charged for it. The United States mint has just announced that it will somewhat curtail its gold sales because of the run on gold.
    I've reprinted below the Kevin Depew chart that compares the 1974 bear market to the current bear market. The markets are falling much faster than they did in 1974.
    With markets off by 1/3rd from their year-ago highs, the holdings of pension funds and individual retirement accounts must be presumed to also be down by 1/3rd. What will happen if the markets fall by 2/3rds or more as they did during the 1930's Depression?
    As the economy falters, federal tax receipts also decline, leading to greater budget deficits even without federal bailouts. This looks like a vicious circle with no end in sight. Of course, a lot of what's happening is driven by perhaps-justifiable insecurity--in other words, is psychologically based. 
    Today, the Fed set up a program to deal in commercial paper... something necessary for daily business operations. Several countries have announced interest rate cuts, including a 1% rate cut in Australia. (One article tonight observes that the "Fed giveth with well-received liquidity step, taketh away with Bernanke growth fears". Fed Chairman Ben Bernanke observed today that slow growth may be a greater threat than inflation.) In the meantime, the consensus view among economists is that this is going to get worse before it gets better, and that another year or two may pass, with a further, sharp contraction of the world's economies, before a durable turnaround occurs. Normally, a consensus like this would be a contrarian signal that a market turnaround is at hand, but maybe not this time. (However, there are various predictions that an intermediate-term rally is about to happen, although the question is: from what level?)
    Asia is falling sharply again tonight by 3%-to-5% so far. Tomorrow should be another jolly day for our own  bourses.
    Here's Michael Ashbaugh's latest discussion of the current state of the stock market indices: Indexes at downside targets: Ashbaugh.