Tuesday, October 7, 2008

S&P 500 VS the Dow -500

Let's see the DJIA, maybe the most closely-watched stock index in the world, -even if not the most reliable- has done what?

Down FIVE days in a row
Looking backward in time:
Down by 508 points, by 369 points, by 157 points, by 348 points, and by 19 points.
an up day (+485 points)
then down day of 777 points.

That, my friends, is our recent history. No spin. No lies. No Mavericks. Just cold hard facts. No debate.

The WSJ documents 5-days and minus 13%. Over seven days the Dow is down by 15% and the S&P 500 by fewer points but by a larger percentage at -17.9%. In seven days The S&P has almost made a bear market all by itself.

What did this?

Was it the acrimony in Congress?
Was it the bailout bill that did not pass?
Was it the bailout bill that did passed (hint: can't be both)
Or was it REALITY?

Reality bites... or sometimes it sucks...

America loves reality TV but but not reality economics. When the economic data looked bad on Friday the market sold off despite that silly bail-out bill passage. Then, on Tuesday, when Bernanke said that weakness was going to be with us thorough early next year markets sold off even more.

Even the talk of a Fed rate cut being considered did not put a bid under this market. Investors are RIGHTLY afraid of weak growth and not just that but what weak growth will do to our economy.

The FACT that the Fed jumped in to lend in the new issue CP market for three months secured or unsecured suggests strongly that the FED not Ford Motor credit or GMAC will be funding your next auto loan. The Fed is worried about credit markets seizing up and it is taking the right steps. This is the FIRST time the Fed is taking steps to DELIVER credit directly to those who need it. The bail out plan merely restores bank balance sheets to health. There is no lending imperative. So the trick of turning bank lending back on remains a mystery.

All of these intercessions have spooked markets. Even the UK is now saying that its plan to inject capital into banks is on track. The plan was floated as an idea on Tuesday morning and then seemed to wither. Interestingly Barclays had said it did did not need any such help. So what happens in the UK tomorrow? Does this action restore confidence or spook markets?

There is a lot of disappointment with growth and the growth outlook in the US. You can interpret it as disappointment with the Fed, but I think that would be wrong. People are afraid and rightly afraid that things are MUCH worse than they thought and that spillover effects will be sizable. That they may be.

It is hard to disagree with that especially as the Fed is agreeing..

Certainly this weak economic data foreshadow a much weaker housing market. And that is bad for builders and for banks. Bernanke's new talked-about rate cut could even hurt banks. And that is where we are. Some of the solutions don't even look so good.

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