MISTER MARKET’S WILD RIDE
Oct 12, 2008
Posted by Jody Eisenman | Filed under crisis
In an unprecedented trading day Friday, the Dow Jones shot up and down like a bungee cord. In the end, the Dow closed down 128 points after going through a 1000 point spread. Lehman’s CDS auction was set at 8.625, meaning that over 91% of the face value must be paid out. Whether or not all these can be settled is an open question that will be decided later this month. Despite all the Federal Reserve’s efforts, including a $700 billion bailout, the guaranteeing of commercial paper, and the increase in FDIC insurance, the credit markets have not improved. In fact, they have gotten significantly worse. In addition, we are witnessing a de-leveraging of financial assets at a dramatic pace. Simply put, you are seeing massive margin calls taking place that are leading to forced selling. This is due to both over leveraging and significant redemptions coming from investors in hedge and mutual funds. As these redemption notices come in, these funds are forced to sell into very weak markets. Of course, this leads to lower prices, which in turn begets more redemptions.
This is from Bloomberg:
“I don’t wish to spread alarm on the line people but the big issue confronting the market is I’m afraid the health and sustainability of Morgan Stanley and Goldman Sachs, Hugh Hendry, Partner and CIO at Eclectica, told CNBC early Friday. “It is unimaginable that they can be allowed to go, I suspect that they will be nationalized at some point today or over the weekend,” he added.
Last Friday, Paulson announced his new initiative, which is to use part of the 700 billion in TARP to actually buy equity stakes in these banks. One must realize at this point that the Fed is grasping at straws. Clearly, they have used up an amazing array of measures in an incredibly short period of time. Yet, this far, none have appeared to have any calming effect at all. I view this as a much needed positive sign.
If not, the crisis will actually get worse, as more and more companies and municipalities are forced to roll over debt in a credit market where there are very few buyers. Early indications on Dow futures show a decline of over 200 points going into Monday.
We are in an extremely precarious situation right now. The risks of a complete global depression cannot be ruled out. Hopefully, this can be averted. We are running out of time.
