Another Massacre on Wall Street
Aug 5, 2011
Posted by Jody Eisenman | Filed under Uncategorized
The stock market has been falling since July 21. However, this was just a prelude to todays’ action, where the DJIA fell over 500 points, and the S & P 500 fell an incredible 60 points. This was the worst showing in equities since December 2008, when the financial crisis was in full swing. All told, the Dow has now fallen 10.5% in the last 10 days, with the volume increasing as the selling accelerated. All major indices are now negative for the year. The VIX has now soared to 31.66, a move of 35% today alone. Meanwhile, interest rates plunged, as investors flew into the safety of treasuries. The yield on the benchmark 10 year treasury has now dropped to 2.4% from 3% last week.
Why is this happening? The truth is, no one is quite sure. I believe it is a combination of several events. First off, we have the debt situation. Virtually every industrialized nation is in debt up to their eyeballs. Everyone is looking for a quick fix, which is why almost every country is trying to devalue its’ own currency. Despite the European Central Banks’ efforts, it has become apparent that so many countries are in such bad shape that a default or two may be inevitable. Although Greece narrowly avoided default (at least for the present), Italy and Spain may not be far behind. The fear on everyone’s mind is contagion. Meanwhile, money is believed to be flying out of Europe. This has led to the unprecedented situation where BNY-Mellon has announced that they will actually charge depositors 13 basis points for large deposits. Seems like shades of the banker in the movie Scarface.
Pretty much everything got hit today, but a surprising addition was gold and silver. Gold soared to almost $1700/ounce earlier today, only to reverse course and drop for the day. It is rumored that several hedge funds may be liquidating due to margin calls. Meanwhile, the US deficit soared to over 100% of GDP, something that last happened in 1947. Not a pretty picture.
Where do we go from here? The S & P closed right at the 1200 mark, which could be a key technical level. Investors are looking at very low growth, high unemployment, and the current prospect of no Fed intervention. This is not a very bullish scenario for stocks. On the other hand, the massive selloff today may be a capitulation day, and as rates continue to drop with stock prices, equities will eventually become an attractive option.
