Dow down 800 – what’s happening on Wall St!?
Oct 6, 2008
Posted by Jody Eisenman | Filed under crisis
Today’s Action on Wall Street
Despite every attempt the Federal Reserve has taken to stabilize the markets, the credit markets continue to deteriorate, and the stock market’s collapse is actually accelerating. As I write this (about 1 PM), the DJIA is down over 500 points, on top of last week, where the markets fell around 10%. The reasons for this are as follows:
1. The Credit Markets: Credit is a staple of our capitalistic economic system. Essentially, companies borrow money in order to expand their operations, which leads to hiring and spending across the board. When credit contracts (meaning that is much more difficult to come by) everything slows down. Since the Fed passed their Bailout bill, the credit markets have not eased; in fact, they have gotten worse! Right now, the TED spread (the difference between inter bank loans and US t-bills) is at 385 basis points, more than triple where it was a month ago. There is very little confidence in any financial instrument other than treasuries right now. In that type of environment, why buy equities?
2. Foreign Markets: As the crisis spreads to Europe, foreign stock markets have plunged. Today, the Brazilian market was down over 15%. The French market was down 9%, the worst day in over 20 years. The English FTSE is down around 6%. Many huge financial institutions in Europe, such as Fortis and Hypo are in dire need of funds to keep their doors open. A failure of a large European financial institution could lead to a massive selling panic. Germany and Denmark guaranteed all investor deposits. My belief is that the US will be forced to expand FDIC to every deposit of every size in order to restore investor confidence.
3. Confidence: This is probably the greatest overall factor, but also the most problematic. In order to loosen credit, banks must have the confidence to lend. Many people have asked me: “Don’t banks want to lend? Isn’t this how they make money”? The answer is that when own a store and a tornado is coming, you close the store and hunker down till it passes. Right now, these banks are worried about simply surviving. When they have assured themselves of that (and this could take years) then they can think about running their businesses.
4. Leverage: From banks to hedge funds, there can be little doubt that our entire economy is over leveraged. However, because this is so widespread, it is difficult to remove all the leverage at once. As many financial institutions are forced to liquidate, prices go lower.
Update: At 3:50, the markets have rallied from down 800 to down only 400 points. Rumor has it that several hedge funds have been buying in here.
Want to know what to do with your money at this critical time? Contact Jody Eisenman by email jeisenman@phdc.com or by phone 212 269 3157.
