Ugly

If you thought that the sudden sell-off from yesterday afternoon would reverse itself in morning trade, think again: This is looking increasingly like a secular down market rather than simply a case of high volatility. Citi's (C) down further this morning, a vote of confidence from one of its largest shareholders notwithstanding; Berkshire Hathway's (BRK.A)  tumbling too; and Americans are now being laid off at the rate of more than half a million a week. Oh, and the market cap of the entire New York Times Company (NYT) is now less than $1 billion, which is less than it paid for the Boston Globe in 1993.

Finally, a large chunk of the stock market is trading at the kind of distressed levels which have been implied by the bond market for a good year now. The problem is that the bond market is falling just as fast, which means that the disconnect between the two is still there: If you think that shareholders are bleeding, just look at the state of bondholders. Given that the bond market has been a good leading indicator of where the stock market is going to go, I can't get bullish about stocks right here -- especially in light of Andy Kessler's reasons why stocks are likely to fall further over the next couple of months. And I don't think the market has necessarily priced in the full repercussions of GM going into Chapter 7, which is increasingly likely, let alone the costs of a Citigroup bailout.

The problem is that falls of this magnitude become self-fulfilling: There's a vicious cycle of deleveraging causing price drops which in turn cause more deleveraging, and even unlimited central bank liquidity doesn't seem able to stop it. Paulson and Bernanke really do seem to have run out of ammunition at this point: An extra 50bp in rate cuts would barely be noticed, and the second half of Paulson's TARP funds won't be spent until 2009. The markets have to shake out on their own, and it's not going to be pretty.

Comments

[Roger Knights:]

I agree with your comment about de-leveraging. It outweighs the fact that stocks are "cheap." But, similarly, there is enough money on the sidelines now to power sharp upward moves in selected oversold stocks by years' end.

2008 Nov 20 02:00 PM

[DonSuper:]

"The problem is that falls of this magnitude become self-fulfilling"

Maybe that would be a good reason for journalists to be more responsible with what they wite, dont you think?

Enough of great depression predictions...and giving camera time to loonies like Roubini...

2008 Nov 20 02:58 PM

[Tony Petroski:]

I'm setting up my tent in Obamaville. Anybody have any stones for soup?

2008 Nov 20 03:47 PM

[JLM:]

Roubini is a truly competent fellow! Loonies are Canadian dollars.

2008 Nov 20 06:07 PM

[oldlures1:]

I said it once, and I 'll say it again, I believe that the following steps would eliminate half (at least!) of the volitility in the market today:
1) reinstate the uptick rule
(it worked as intended since 1929, but some well-lobbied SEC knuckleheads erased it last year).
2) aggressively enforce the prohibition of "naked" short selling
(you should never be allowed to short stocks that don't exist - can you say "fraud"?)
3) disallow the purchase of CDS/credit default swaps by investors who do NOT have an insurable interest in the company
(I can't purchase hazard insurance on your home; that's illegal, so why should it be okay to buy default insurance in a company of which I have NO insurance interest? It shouldn't!)

If the current market was a bucking bronco, hedge funds would be the rider, and they'd be well past 8-second bell....with no grips....holding a trophy in one hand and a big bag-o-money in the other....just hoping this "ride" will go on forever!

2008 Nov 20 06:19 PM

[jadziasman:]

The drop in stock prices since September 29 has been breathtaking. It either means a huge number of investors have seriously miscalculated the state of the economy and financial system or that the economy is really going to hell.

Confidence has been lost on a massive scale. Oil consumption has not dropped enough in the US in just 4 months to justify a 60% correction in its price. Just as the crude oil price bubble inflated too rapidly, it has burst even more quickly.

Stating the obvious - the financial crisis has spread to the real economy. The Detroit 3 are on the ropes and many are cheering for their demise. Thousands are being terminated from their jobs (in the US anyway) - many of them college graduates. Many are being foreclosed on - some not due to taking on too much debt either.

I work for a multi-national company. My company has not reduced head count yet but soon will and I might be one of these heads. Hopefully the new adminstration in D.C. will find a way to restore confidence. If it happens later than sooner, so be it.

I have lived a safe, pampered life the past 51 years and you won't find me complaining if I must endure some hardships.

Lady Liberty has been very good to me and I will re-join the military to defend her if I am allowed the privilege to do so.

2008 Nov 20 06:55 PM

[Muzie:]

"I work for a multi-national company. My company has not reduced head count yet but soon will and I might be one of these heads. Hopefully the new adminstration in D.C. will find a way to restore confidence. If it happens later than sooner, so be it. "

Re-read your comments and yuo will know why the stock market falls endlessly.

I'd wager you really don't have any hard data to know you're going to know you're job but you're preparing for it. Everybody's doing the same thing.

Perception becomes reality, and what was a small snowball becomes an avalanche only through mass hysteria.

2008 Nov 20 07:06 PM

[Muzie:]

"I'd wager you really don't have any hard data to know you're going to know you're job but you're preparing for it. "

Gah. Let me rephase that.

I'd wager you really don't have any hard data to know you're going to get fired from you're job but you're preparing for it

2008 Nov 20 07:07 PM

[jadziasman:]

Hard data? Do they ever tell you they intend to fire you? Yeah, sometimes they do. At my last multi-national company they announced layoffs were coming (by law they were required to in that state) and I was on that list. Actually they only listed the ages of the condemned before actually swinging the hatchet.

This time, they don't have a list but it does not take a rocket scientist to figure out that if you sit around all day with nothing to do while your co-workers are doing the same nothing, it becomes obvious that there will be fewer and fewer people doing nothing until those few that are left start doing something.

Ever heard of SAP? At SAP, providing superior services and support through your solution life cycle is just ... SAP employs more than 51800 people in more than 50 countries.....blah blah blah. Every day, my "work" hours are entered into this system. Guess how long it will take before they find out something has changed? Answer- pretty damn fast.

Maybe the company is willing to ride out this storm and keep us all safe and dry. Uh huh, and maybe I work for a non-profit corporation NOT!



On Nov 20 07:07 PM Muzie wrote:

> "I'd wager you really don't have any hard data to know you're going
> to know you're job but you're preparing for it. "
>
> Gah. Let me rephase that.
>
> I'd wager you really don't have any hard data to know you're going
> to get fired from you're job but you're preparing for it

2008 Nov 20 08:07 PM

[Steven Hansen:]

"The problem is that falls of this magnitude become self-fulfilling"

the market is over-leveraged with debt and hedges. the only self fulfilling event is that history has told us before not to walk out on this limb. things are good when they are good, but an economic stumble causes a leveraged market to simply crater.

"Maybe the company is willing to ride out this storm and keep us all safe and dry. Uh huh, and maybe I work for a non-profit corporation NOT!" - jadziasman

scene early eighties, i was a group manager in london for a multi-national. the world's economy was going in the toilet and i, as a manager, am responsible for profitability. among many different solutions implemented, i elected to downsize by 1,000 in my unit. the selection of the 1,000 was excruciating. i personally did the deed over 30 weeks. layoffs were always on friday mornings. i never slept on thursday nights, and i cried in the toilets during lunch on fridays.

i refused to accept any more assignments in corporate management (worked only in project management). just reading your comments brought back the vision of the glassy eyed look of the victims of termination (same look as cattle have going to slaughter). good luck.

2008 Nov 20 11:12 PM

[swaps:]

Jadzi candidly admits he and many co workers are sitting around with nothing to do.

I briefly dated a brilliant but bipolar woman who made big bucks at Lockheed Martin. She said half of her department was disfunctional.

I have long thought what Jadzi and she said are signs that big corporations are

too big to manage.

This thinking started when the O-ring problem caused the explosion of the Challenger on the launching pad.

It was vindicated when AOL and Time Warner merged, proving no tree grows to the sky.

GE is the latest supporting evidence.

2008 Nov 21 09:48 AM

[nym:]

In Sunnyvale, Lockheed is called the Lazy-L Ranch. DoD's contracts will do that. I hope the new administration will put an end to big weapons contracts sold by fear-mongering.

2008 Nov 21 12:58 PM

[PainfullyAware:]

Over Leveraged Margin Calls Are Like Dominoes In Branching Patterns.

Once the first one is tipped it is impossible to stop them all from falling.

2008 Nov 21 04:59 PM