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Mark's Market Blog

10-6-08: Tarp Fails, Panic Ensues

By Mark Lawrence

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I've been asked my opinion on what happened today. Well, the world is about to end. Time to abandon all earthly hope and find Jesus. Um, if you work on Wall Street, anyway. . .

"Today," meaning starting at about 10pm PST sunday, there was a massive world-wide sell off of stocks. It started in Asia, where markets opened down and continued dropping. Asia has serious problems: China has 9% or more inflation, their milk products have made something like 65,000 infants sick and killed several dozen so no real country is accepting any products from China that contain any milk; they're facing a moderate recession in the US and Europe, their biggest markets; and the government has been artificially propping up their stock market for a few weeks. I expect further substantial drops in the Asian markets. They have not bottomed, imho.

10 hours later or so, Europe also sold off on the Asian panic, and the news that there will be no European bail out. Instead, a release was issued by the economic ministers, "We'll continue to coordinate closely as we each take care of our problems in accordance with our own policies and standards." If you understand what that means, you're ahead of me, and apparently most of the share holders in Europe. They don't want to commit big money, they hope to be able to handle this one bank at a time. It's not widely believed by European investors that this will work. Personally, I think there will be a European bailout, they just need to be a bit more motivated.

4 hours or so after that, the sun and the panic hit New York. There was an immediate sell-off of pretty much everything, prices on stocks dropping about 8.5% at the bottom, which was just after noon. Somewhere in there just a flicker of sanity emerged, and prices recovered substantially leaving the US markets down about 3.8% on the day.

Personally, I think the economy is basically ok - there's a bunch of people laid off, I understand it's very difficult for them and uncertain for many others, but the US is not a big exporting country and our internal demand seems to be mostly holding up at levels that reflect a very mild recession. The car industry is getting a bigger hit due to the unavailability of loans, and this is also slowing sales on durables like washing machines. Wall street of course is being dismantled, however I don't know of anyone who lives more than 50 miles from Manhattan who gives a fly's butt about that. I think housing prices have bottomed in much of the country, not much further to fall in the rest, now we just need to clear the markets. My house has apparently gone up in value since I bought it six months ago, and Sacramento was one of the top ten over heated markets. In an informal poll of my three truck drivers (UPS, FedEx, DHL) all three said they were very busy, lotsa boxes are moving around.

In typical recessions, the market drops about 22% to perhaps as low as 35% off the previous highs. Today at the worst we were off about 37% from the highs a year ago. This makes no sense to me, I think this is just instantaneous emotions. I expect a market bottom will be found this week, perhaps just after noon today (Monday). I expect the US stock market to rebound off this low for at least several weeks. Perhaps there will be more bad news in the holiday season leading to another sell-off, I can't see that far into the future, but right now I think this panic is simply not supportable by the state of the US economy. As to Wall Street, I don't give a fly's behind - today it was revealed that Lehman was trying to pay three retired executives something like $18M in bonuses at the same time that they were begging for a bail out from the Fed. As far as I'm concerned, the Masters of the Universe can all stand in soup lines for the next decade.

On a completely unrelated note, except that it's all related - historically Democrats do about 4-5% better in the polls than in elections. There's also the "Bradley effect:" Tom Bradley, the first black to run for governor, was projected to win by 5% over Deukmejian, but as we all know lost - and this in a solidly democrat state. Obama is currently about 5% to 7% ahead of McCain in the polls. I take this to mean that on election day this is currently too close to call. If Obama were 4% or less ahead of McCain I would call McCain for the election. Personally, I think we're entering a period of continuing economic uncertainty, and continued problems in the middle east. I think we should be able to come up with some candidates that are a little higher-powered than a "community organizer" who has never seen a Chicago crook that he felt he needed to turn away, and an angry PTSD sufferer who has alienated half of his own party and most of the other one. Oh well, we always muddle through somehow, I suppose we will again somehow.

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