Tuesday Outlook: Everything But the Kitchen Sink

Yeah, they’re tossing everything they’ve we’ve got at markets. Lloyd Bridges' line from the movie Airplane may be what we all need right now, eh?

With markets deeply oversold, we rallied mightily on the backs of coordinated efforts from global monetary authorities. So that’s the bottom then, right? Well, one day doesn’t make a trend. But it’s enough to get out of their way. There’s no sense rope-a-doping unless you’re really stubborn. We’re flat, thankfully, but then tomorrow’s another day.

From the headline you might think this was a 90/10 positive day as shorts were squeezed, but I can’t confirm that based on the data I’m seeing. The only flaw is that volume isn’t as heavy as previous sell-offs. But, no matter how you slice it an 11% plus up day is spectacular and that will be the headline. I believe the day after Black Monday 1929 was up 12.24% and the next day up 5.82%. But it’s different this time, right? The media will headline the points gained, which is understandable.

















On all the following “weekly” charts please note that the RSI [Relative Strength Index] had been below 30, which is just one indication of the severity of oversold conditions. But, as of today anyway, that condition has been relieved in most market sectors. Now why didn’t I highlight that? I forgot and am not going to redo them all because I’m lazy.

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Comments

[David White:]

I keep hearing people compare this crash to the1929 crash. I am embarassed that there are so many people running scared. Certainly there were the bad mortgages. Then there was the complete drying up of the commercial paper market. Everyone was scared all the banks would fail. Some have. Some were saved by buyouts. The $700 billion dollar bailout should rescue us from that fate. Apparently the U.S. government is going to invest $250 billion in U.S. banks. This should provide at least the big ones with enough capital to tide them over through this tough period. The Fed is now buying commercial paper. This is already helping the commercial paper market. The housing market even had good news last week, when the number of houses sold went up for a change (even though they sold at lower prices). The Wells Fargo buyout of Wachovia is going through. Mitsubishi is buying into Morgan Stanley. Everything is turning rosy. The market bounced off a strong support point last week. There is strong support at $82 and $85 on the SPY. After that there are no strong support points until the $42 to $45 range in the SPY. The SPY hit $83 and change last week intraday. It bounced upward. There is every indication that this is at least a near term bottom. It may turn out to be the longer term market bottom we have all been hoping for. Only time will tell that. However, it does look like a strong bounce for the moment. The immediate big bank failure fear is gone. The belief is that the government and the Fed are slowly bringing the commercial paper market back. The government has promised several actions to shore up the housing market. This is starting to be a little bit less worrisome, especially if there are further programs enacted to further shore it up. In normal market bounces, the market goes up in zig zag lines for about a month or more. It appears we should be able to expect this again. Perhaps it will be better than that. Perhaps we have hit bottom. Only time will tell that.

Still this is not another coming of the great depression. How do I know that? I look at history. Look at the changes in the laws. Look at the improvement in the Fed and the Treasury. In the 1920's the market just kept going up, unreasonably so. People were so happy with it they invested as much as they could, so they could get richer faster. This meant that many people were heavily margined. In those days the laws allowed up to 90% margin (i.e. you only had to have 10% of the stock value to buy it). When the margin calls started coming in the great crash, everyone had to sell. Those that were not as heavily margined had to sell to avoid losing all they had because a lot of people were heavily margined. The result was that almost all investment in stocks ended. With no money from the stock market to feed their expansion, etc., virtually all businesses shrank. They could do nothing else. The housing market collapsed then too. A lot of people lost everything. This is why the margin requirements law was changed. This is why many people today have no margin at all. They just own stocks through mutual funds. People like Jim Cramer did not help the situation. There was some severe panic. That should be lessening.

This is likely a bad recession. Perhaps it is comparable to the mid 1970's recession. However, there is no reason to believe it should be a great depression unless we make it into one. The way to do that is to take all of your money out of the stock market. This will mean that businesses must shrink. You may lose your job as a result. If you stop spending because you are scared, business's profits will fall drastically. People will lose there jobs. Again there will be a cascade effect. As FDR said so many years ago, we have nothing to fear but fear itself. It is this fear, this panic, that can really destroy our system. Have a little faith in the government. Have a little faith in your economic system. Spend prudently, but spend. Invest prudently, but invest. The sky is not falling. Don't make it.

My personal belief is that this is at least a rally off a near term low (which may have been an actual bottom). The big profit is to be made in the early stages of that rally. Listen to the fear mongers, and you will miss it. If you do invest, monitor the markets. If we start getting a lot more news about bank failures, or the commercial paper market drying up, or even about a lot of businesses going bankrupt, then consider selling again. However, you should not make all that a foregone conclusion by insisting on a death spiral, when it doesn't have to happen. Sometimes "fear" really is the thing we have to fear most.

2008 Oct 14 02:27 AM

[David White:]

Oh yes, at this point in time, the futures are up substantially. It is currently looking like tomorrow will be another up day. Even if that fades as the day wears on. Remmeber the markets zigzag up. When all you hear is good news about actions the government is taking, it is unlikely that the bottom will suddenly fall out of the markets. Many people are profiting (using PUTS and short sales) from the panic they are trying to instill in the average investor. Be smart. Listen to the real news, not the gloom and doom propaganda of profiteers. If fears are easing (and the VIX does seems to be going down), don't feel the need to sell out. It is unlikely the market is going down. It is more likely the market is going up. Don't contribute your money to someone else's coffers.

2008 Oct 14 02:33 AM

[Mr.G:]

over sold/ to far to fast - for now this is a correction nothing more - as for 250 billion going into banks coffers it will buy time nothing more . US banks are overleveraged by 46% the US gdp -yes the market is calming down so what does that mean for the near future slow selling off of stocks to continue -
2.3 trillion dollars(a little less than france's gdp) in europe isnt going to be enough either -
if you were still in the market now or tomorrow would be the time to sell while the perma bears go for broke

2008 Oct 14 06:53 AM

[Larry the Hunt:]

David: re recession into depression

"The way to do that is to take all of your money out of the stock market. This will mean that businesses must shrink. You may lose your job as a result"

Stock price has very little if anything to do with business contraction and expansion. Yes it can impact cap ratios in banks, leveraged buyouts, and the quantity of new capital through stock sales. It doesn't help, but I don't think that it is a determining factor in the economy - that's a tail wagging the dog story. I do agree if businesses aren't growing through natural demand and reinvestment of earnings, there will be stagnation, recession or worse.

2008 Oct 14 07:41 AM

[David White:]

Larry the Hunt: I disagree. For instance, when most investors lose money as the market goes down, wealth is destroyed. The few who profit do not spend it. The rapid declines essentially ensure that wealth is evaporating at least temporarily. Someone else is simply buying the stock for much less money. The value of that asset is listed as much less. Money effectively disappears in quick sell off's (ignoring shorts and puts for the sake of argument). The loss of capital means loss of spending power. It also means that businesses, which periodically sell stock to get money for expansion cannot get nearly as much money for the same percentage of their company. This is bad. It means that many people do not even try to bring IPO's out in a "tough" environment. It means that the market capitalization of the stocks is much less. The company is viewed as worth much less. This usually means that they have a harder time borrowing money. When people spend less because they have less due to the rapid devaluation of their stock holdings (or having sold out at low prices -- their cash). It means that they are contributing much less to the GDP. I believe about 2/3 of the GDP is due to spending. It means that people can no longer afford to buy the new house they were thinking about because their other holdings are worth less. It means that the housing market (home prices and the foreclosure rate)likely takes a further hit because fewer people buy houses. I think you can see how this death spiral works. This all may have started in the mortgage/bond market. However, it is expanding to encompass the whole economy. The more panic, the more the immediate short term losses in capitalization (in capital). The more severe these losses become, the more dominos topple. I am being a little simplistic, but it is true nonetheless.

2008 Oct 15 02:53 AM