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The Markets' Malaise Is Not Over By WSS Research Team

Carlos Guillen

After a rather crazy trading session yesterday, spurred by a glitch at Google, today markets seemed serene but are trading lower in pre-market activity.

Yes, during the first half of yesterday's trading session, equities were making small gains fuel by bits of positive economic data points from the Philadelphia Fed manufacturing index and from the Conference Board Leading Economic Indicators index. However, markets suddenly took a turn for the worst as Google mistakenly released earning results about four hours earlier than originally planned. Certainly, reporting a 20% decline in profits during the trading session is never a good strategy for mitigating the resulting volatility. Nonetheless, the result was terrible, and independent of when the news would have been released, investors would have still punished the stock.

Today, we saw another bit of good economic data that, perhaps, is not a market mover but is still encouraging. The Rural Main Street survey of rural bankers, which is an index of economic conditions in 10 Midwest and Western states, rose to 56.6 for October from 48.3 in September. It was the first time since June that the index rose above the 50 threshold that divides growth and contraction. The survey revealed that the effects of the drought are being more than offset by high incomes from high agriculture and energy prices.

According to official figures released yesterday, the Chinese economy expanded 7.4% year over year in the third quarter of 2012, slowing from 7.6% growth in the second quarter and from 8.1% in the first quarter. These results were well below the country's average of nearly 10% annual growth for the past three decades, and it shows that China is not immune from the breakdown gripping the world economy. However, other data suggests the growth may be slower than stated. In its most recent monthly electricity consumption statistics report, the Chinese National Energy Administration stated that in September, electricity use grew at an annual rate of just 2.9%, the lowest rise in two years. The average growth rate last year was 11.7%. This sharp fall is a barometer of slowing industrial production, which accounts for 70% of power consumption.

At the moment, activity in the pre-market is showing stocks slipping further with the Dow Jones Industrial Average futures down over 30 points, not encouraging at all for the session that is about to begin.

Bustle in Brussels
David Urani

So EU leaders are once again at it in the conference rooms in Brussels for a summit meeting that began yesterday. Judging by the market action in Europe today that sees Spain's IBEX 35 down 1.6% and the Italian FTSE MIB down 1.3%, investors haven't been impressed so far. Heading into the event yesterday, a number of leaders actually played down the summit hype, so it hasn't been looking like we'll get a big comprehensive plan as we've gotten before from the summit. That being said, the bailout mechanisms have already been negotiated and still have yet to be implemented; now it comes down to ironing out the details and getting the likes of Greece and Spain in compliance with the terms.

One thing that does look to have been completed today is a commitment to establish a euro-area banking supervisor. Presumably, the ECB would oversee all European banks, and have the ability to give out aid payments to those needing it.

Nevertheless, I think what the Street wants is to finally see emergency money physically get into the hands of some banks, which has yet to happen.

25 Years Later
David Silver

Imagine this: a slowing economy, the threat of higher taxes, relations with Iran at a tipping point, and investors are concerned about a rigged Wall Street. No, I am not talking about today; I am talking this date back in 1987. Today is the 25th anniversary of Black Monday, the largest percentage drop in history, as the Dow plunged 22.6%. At the time, the 508 point drop was the largest in history, but is now not even in the top ten for daily point declines; that is held by September 29, 2008, where the Dow dropped 778 points.

Wall Street had a much different feel back then. Instead of being a few weeks from a five year high, the market was a two months removed from an all-time high. The stock market rose significantly during 1987, gaining more than 44% to its peak in August from the beginning of the year. On October 14, the Dow dropped 95.46 points (a then record) to 2,412.70, and fell another 58 points the next day. On Friday, October 16, the Dow closed down another 108.35 points to close at 2,246.74 on record volume. That's an 11% move in just three days, but the markets weren't done yet. The epic crash began in the Asian markets followed by two U.S. warships shelling an Iranian oil platform in the Persian Gulf in response to Iran's Silkworm missile attack on the U.S. flagged ship MV Sea Isle City. Europe was next and then was followed by the US. People blame the crash on program trading (sound familiar?), overvaluation, and illiquidity. Could the crash of 1987 be the first "fat finger" incident? Probably not, but remember the craziness of the Flash Crash back in May of 2010? Most of the 348 point loss occurred between 2:30 and 3:00. Imagine that type of selling going on for an entire day.

Today's investors have pulled $440 billion from U.S. equity mutual funds since 2008 and sent trading to the lowest levels in at least four years. Valuations for the Dow remain 23 percent below the level at the market peak in October 2007, and exchanges installed safeguards following the so-called flash crash in 2010.

U.S. stocks are in the 44th month of a bull market that has restored $9 trillion in share value. Average daily volume for U.S. equities was 6 billion shares in the third quarter, the lowest level since at least 2008 and about half the 10.9 billion average in the first three months of 2009. The total has decreased for 12 of the last 13 quarters as investors pulled money from American stock mutual funds for a record fifth year.

In 1987 panic spread on Wall Street by phone and ticker tape, Al Gore hadn't invented the internet yet. About $1 trillion in stock-market value was erased in four days. It took more than a year to restore it, compared with a week following the retreat on May 6, 2010. Not really the type of anniversary you want to have to celebrate, but it is a time to reminisce about how far we have (or haven't) come.

https://www.wstreet.com/user/register.asp?source=3