Boy, that was short lived. The massive EU and US rescue efforts to pump equity into banks, the TARP, the increase in the Term Auction Facility (from $150 billion to $900 billion), the Fed offering unlimited dollar swaps to foreign central banks, and those monetary authorities themselves engaging in liquidity operations, appears to have come to naught, or at least very little, as far as equity investors are concerned.
We had expected the market to revert to its old lows, because the economic bad news has only just started. Even with these unprecedented efforts, a successful fix to the banking system does not mean lending will resume on its former terms. Indeed, that would be a singularly bad idea, since overly generous lending created dud assets, which is at the core of this mess. But even if things were to normalize, lending standards will be tighter than before, which means deleveraging regardless, as debt is reduced to a sustainable level. But we never thought we’d see a reversal this fast.
However, we had pointed to this chart earlier from Paul Kedrosky (without previously reproducing it in this blog). Most readers and investors have seen the recent equity markets as representing reasonable value, forgetting that Alan Greenspan made his famous “irrational exuberance” remark in 1996, and that one can make a case that thanks to low interest rates (due to Greenspan failing to allow for the impact of cheap imports on prices in his interest rate policies) that equity prices were distorted for more than a decade. Thus what me may be getting is a nasty combo plate: a reversion of valuations to historic norms when fundmentals are taking a dive:
The Wall Street Journal gives an overview of the carnage (even that word is becoming commonplace):
Dire economic data knocked stocks sharply lower Wednesday as investors braced themselves for an ugly recession unlike the relatively brief, shallow downturns the U.S. has sometimes suffered over the last two decades…
“I don’t just think we’re going to test the lows. I think we’re going to violate them and break lower in a big way,” said Kent Engelke, managing director at the brokerage Capitol Securities Management, in Richmond, Va. Referring to the possible fallout in the broader economy from the credit crisis, he added: “We don’t yet know what that is, because this situation is so unprecedented. Every road sign has been obliterated.”
The Dow’s losses accelerated as the closing bell approached, leaving the blue-chip measure down 733.08 points for the day, off 7.9%, at 8577.91, hurt by losses in twenty-nine of its 30 components. The only exception was Coca-Cola, which climbed 1.1% after posting a strong profit report.
Further detail from Bloomberg:
The VIX, as the Chicago Board Options Exchange Volatility Index is known, jumped 26 percent to 69.25 for the biggest gain in three weeks….
Stocks in Europe and Asia fell for the first time in three days, helping push the MSCI World Index, a benchmark for 23 developed countries, to a 7.3 percent decline. Brazilian stock trading was briefly halted after the Bovespa index plunged 10 percent. The index closed down 13 percent after trading resumed.
Exxon Mobil, Chevron and ConocoPhillips, the three biggest U.S. oil companies, helped lead energy companies to the biggest retreat among 10 S&P 500 industries as crude fell below $75 a barrel for the first time in more than a year. The Organization of Petroleum Exporting Countries cut its 2009 demand forecast for a second month.
Some specific triggers for worry. Retail sales fell, which means our consumer driven economy is going into reverse (although the 1.2 percent decline in a month is far lower than analyst Gary Shilling forecast, who has called for a 4-5% fall). From Bloomberg:
The eroding U.S. economy drove retail sales into their longest sluhttp://www.blogger.com/img/gl.quote.gifmp in at least 16 years, even before this month’s market collapse signaled a deepening recession.
Consumer purchases fell 1.2 percent in September, extending the decline to three straight months, the first time that’s happened since comparable records began in 1992, Commerce Department figures showed today. In another sign of weakening demand, prices paid to U.S. producers fell last month on lower fuel costs.
Sales are slowing just as merchants prepare for the holiday selling season, on which they depend for the largest share of their revenue.
The Wall Street Journal’s MarketBeat blog noted that conditions in interbank lending markets have shown only marginal improvement:
Three-month LIBOR rates have started to decline — hitting 4.55% overnight — but the three-month Treasury bill was of late trading at 0.21%, putting the TED spread, a key indicator of market stress, at 3.34 percentage points, not much better than at the beginning of the week. Meanwhile, due to the need for safe credit, the repo markets have become strained — some participants reported not being able to find enough Treasurys in the repo market.
The Fed’s so called Beige Book report was less than cheery,as the Wall Street Journal tells us:
As problems in global financial markets intensified last month, economic activity weakened across all 12 Federal Reserve districts.
The gloomy report, prepared ahead of the Fed’s October policy-setting meeting and known as the “beige book,” shows that regions across the U.S. have taken on a more pessimistic view about the economic outlook. Most of the Fed’s 12 regional banks reported that manufacturing has slowed and consumer spending has decreased.
“Credit conditions were characterized as being tight across the 12 districts, with several reporting reduced credit availability for both financial and nonfinancial institutions,” the beige book said.
And some telling details from the Journal report citied initially:
A report on New York factory activity was grim, and core wholesale prices surged, suggesting corporate earnings could be pressured by still-high expenses and declining demand.
Morgan Stanley was taking a beating before the slide accelerated. From Clusterstock (hat tip reader Dwight) in the early PM:
Uh oh. The plan to rescue troubled banks doesn’t seem to be working. Despite government promises to back bank debt and inject capital, the credit default swaps are flashing “red alert” signs for Morgan Stanley. Stock is trading off more than 16 percent right now.