I Fear We Are Heading Toward a Global Depression
Oct 9, 2008
Posted by Jody Eisenman | Filed under crisis
This is from Bloomberg:
U.S. stocks slid and the Dow Jones Industrial Average fell below 9,000 for the first time since 2003 as higher borrowing costs and slower consumer spending spurred concern carmakers, insurers and energy companies will be the next victims of the credit crisis…
“People have lost faith in everything,” said Philip Orlando, who helps manage $350 billion as chief equity market strategist at Federated Investors Inc. in New York. “We’re dealing with an investment community of atheists right now. Valuations no longer matter.”
The Standard & Poor’s 500 Index retreated for a seventh day, losing 75.02 points, or 7.6 percent, to 909.92 to cap its longest streak of daily declines since 1996. The Dow Jones Industrial Average declined 678.91, or 7.3 percent, to 8,579.19. The Nasdaq Composite Index decreased 5.5 percent to 1,645.12. Twenty stocks fell for each that rose on the New York Stock Exchange.
The S&P 500 extended its 2008 tumble to 38 percent, poised for its worst yearly performance since 1937, even as its valuation compared with estimated earnings is the cheapest versus reported earnings since 1985. The Dow’s 35 percent slide in 2008 puts it on course for its worst year since 1931.
“This is what happens when the contagion of fear spreads,” said Quincy Krosby, who helps manage about $380 billion as chief investment strategist at the Hartford in Hartford, Connecticut. “No one is paying attention to fundamentals. People are very, very scared. Ultimately investors decide to sell.”
All 10 industry groups in the S&P 500 tumbled at least 3.4 percent. Technology companies fell the least and led the market higher in early trading after International Business Machines Corp. posted higher-than-estimated profit and said the financial crisis will not hold up earnings. IBM rose as much as 5.3 percent in the morning before following the market lower and closing down 1.7 percent at $89.
Almost $900 billion was wiped off the value of U.S. equities today. About 2 billion shares changed hands on the NYSE, 42 percent more than the same time last week.
Bottom Line: Valuations no longer matter. We are in the midst of a massive de-leveraging in the financial markets. It should be obvious to everyone by now that there are no real buyers at any price. The markets overseas are plunging again. The credit markets are getting even worse. The TED spread, which set a record yesterday at 391, is now at 422. LIBOR continues to rise. The rise in LIBOR means that hedge funds, which manage trillions in capital and are usually quite leveraged, are now getting hit in three ways: exploding costs to borrow, massive losses, and redemptions. There can be little doubt that you are going to see an accelerated pace of liquidations from these vehicles. In addition, mutual funds are also getting hit with record redemptions, which will lead to further selling.
As bad as this is, I believe that it can get a lot worse very quickly. Here’s why:
1. Tomorrow is the settlement for much of the credit default swaps on bankrupt Lehman. If, for whatever reason, these do not settle properly (meaning investors do not collect on their insurance), you will see massive fear. While I hope this doesn’t happen, this could be the final straw in a complete global meltdown.
2. Due to the tightening of the credit markets, municipalities have found it all but impossible to borrow money. Is the Fed does not step in, we could see a rash of municipal defaults. If that were to happen, be prepared for severe cutbacks in essential services as well as possible pension defaults.
I sincerely hope we don’t come to this, but as I stated yesterday, the Fed has virtually lost control of the ability to manage this crisis.
October 9th, 2008 at 11:25 pm
It’s all so unbelievable, isn’t it? I would like to seek refuge in another country, but what country is not spiraling into oblivion right now?