What the Heck is Going On?
Aug 10, 2011
Posted by Jody Eisenman | Filed under Uncategorized
This afternoon, a friend of mine who trades for a hedge fund called me to talk about the market. He is quite bearish, and he told that by around 3 pm, the bids were drying up rapidly. He had to sell about $2MM worth of large cap stocks, and his execution prices were awful. Buyers were simply stepping away from the market. The last half hour of trading saw another big drop, and the DJIA wound up down another 520 points. I’ve had several traders tell me that there should be no doubt we are in a bear market. Weren’t we just in a bull market? Just what the heck is going on? Here are the biggest issues:
1) The Downgrade: As we all know, Standard and Poor’s downgraded the US debt to AA+ less than 2 weeks ago. While this has certainly fueled the fire, the truth is, the market was dropping before this happened. Which leads to…
2) France: It was widely rumored today that Societe Generale, the eighth largest bank in the EU, was close to bankruptcy. Although the CEO of the bank dismissed these fears as “rubbish”, investors are still terrified. There are 2 reasons for this: Everyone remembers the statements of Bear Stearns and Lehman Brothers that “everything is fine” right before they imploded. While this doesn’t mean Soc Gen is in the same situation, the second reason is much scarier. Soc Gen’s loans and deposits make up a huge portion of the French economy. If Soc Gen were to really fail, it would not be much of a stretch to think that France could default as well. Remember Credit Anstalt in 1931? Interestingly, France is rated AAA, and all three rating agencies affirmed that rating with a stable outlook. However, the CDS (credit default swaps) were rising, and all stock prices of Soc Gen and all other major banks were collapsing. Soc Gen stock has dropped over 50% since March, with the losses accelerating in the past few weeks.
3) The Economy: Despite the current administrations’ efforts, the economy has stagnated. There is real fear now of a double dip recession. Even the Federal Reserve stated that “economic growth so far this year has been considerably lower than the Committee had expected”. The jobless rate continues to hover above 9%, despite all the government spending. This has led the Fed to make the unprecedented decision to keep rates low at least for the next two years. Basically, the Fed has admitted that they don’t really expect much improvement for at least two years! This is not exactly encouraging to investors.
4) Technical Trading: Many investors look at charts to decide whether to buy or sell individual securities. Due to the severe decline, it is difficult to find many stocks that look good on a chart. I also don’t know too many people or institutions sitting with tons of cash that can’t wait to buy stocks. Investor confidence has shifted 180 degrees, and the wild volatility has not helped.
Is there any good news? Well, sure. Due to the Feds’ interest rate policy, two year notes currently yield .17%, and the ten year is at 2.07%. This makes high quality stocks with good dividends much more attractive. As yields continue to drop with stock prices, there will be some point where investors will find stocks to be a very good comparable value. I still expect the extreme volatility to continue.
