The Dow tanks again today to lowest level in five years.

The folks at CBS News didn’t pull any punches saying Dow Falls Off A Cliff:

(CBS/AP) The Dow Jones industrials plunged 679 points on Thursday, driving the blue chip index below the 9,000 mark for the first time since 2003. A steep decline in General Motors stock helped to fuel the decline.

The blue chip index extended its selling to a seventh straight day as investors grapple with worries about the credit markets and the economy.

[…] “The story is getting to be like that movie Groundhog Day,” said Arthur Hogan, chief market analyst at Jefferies & Co. He pointed to the still-frozen credit markets, and Libor, the bank-to-bank lending rate that remains stubbornly high despite the Fed’s recent rate cut.

“Until that starts coming down, you’ll be hard-pressed to find anyone getting excited about stocks,” Hogan said. “Everything we’re seeing his historic. The problem is historic, the solutions are historic, and unfortunately, the sell-off is historic. It’s not the kind of history you want to be making.”

At close the Dow was at 8,579 which puts it within striking distance of the last record low of 8,235.81 which occurred just after 9/11. The recent rate cut by the Feds and the $700 billion in taxpayer money that’s been promised have done nothing to stop the bloodshed. Hold onto your butts. Things are likely to get worse before they get better.

But always remember that John McCain thinks the fundamentals of our economy are still strong!

11 thoughts on “The Dow tanks again today to lowest level in five years.

  1. Things will get worse before they get better. The only question is how much worse. To add insult to injury, a pessimistic outlook leads to self-fulfilling prophecies…

    McCain isn’t entirely wrong in that it’s the botched finance sector that’s pulling down the rest of economy with it. How healthy the U.S. economy is at the best of times is a different question, though.

  2. Apparently the problem today (the markets rallied over the past few days, or at least slowed) was the temporary interdict on short-selling on Wall Street ended today.  The problem is if you stop short selling you take that step into regulating a free market, which is of course an anathema to a true free market.

    Short selling is simply selling shares you don’t own in the belief that you will be able to purchase those shares before they are due for transfer, at a cheaper price, a situation that can create a negative feedback loop and panic the market.  It has brought down banks in the UK and Europe.

    DoF- I’ll sell you 100k shares in Widgets Ltd at $10 each. Transfer 10 Oct.
    Les sees me selling Widgets shares, decides must be a good time to sell.
    There are not enough buyers at this time- This pushes the share price down.
    Elwed sees shares being dumped- thinks there must be something going on.  He dumps his, price drops further.
    Price drop spooks further investors, who get out of the Widgets game- this creates a run on the Widgets shares.

    Tomorrow I pick up 100,000 shares at $6 each- transfer them to DoF for a personal profit of $400k, and the company has ‘lost’ 40% of its value.  It still is the same company that it was Tuesday, but magically Wall St has decided it is worth less.

    What happens next depends on level heads.
    If DoF panics he may dump the shares at a loss, so depressing the market further.  Widgets Ltd starts trying to re-establish its price so undertakes restructuring (outsourcing etc). It does this as it has the bank breathing down its neck, wondering if the Company is good for its business loans.

    OR DoF holds on to the shares as a long term investment- he expects the dividends from the shares, this being the original point of shares for a pension fund, and prepared to wait 3 years while the share price recovers. Other people, seeing shares are being bought, come in on the belief the stock has bottomed out, and is now cheap.

    Now: Is what I have done wrong? 
    -I may have genuinely believed that the shares were slightly overpriced, and expected to make a buck a share.
    -I may have heard a rumour at a party- not strictly insider trading.
    -I may actually be insider trading (I have proof the new Widget is going to be 6 months late in launch)
    -I may be trying to depress the shares to do exactly what happened. Trouble is, unless I left a trail of some sort (emails to co-ordinate mass selling etc) it will be impossible to prove.

    Now imagine that isn’t a manufacturing company, with actual assets- machinery, patents etc, but a bank. As soon as one market trader gets spooked, the others follow suit. Banks now do not trust each other, so don’t lend, and set high rates.  If the money doesn’t move between banks, then it doesn’t get to proper businesses who need that money in short term loans- you have to buy the materials before you sell the product

    Unfortunately the ‘let the burn’ principle, as tempting as it is, may well cause a massive crash.  In ‘29 there were not the safeguards there were today. That is what the $700bn is doing in part- keeping banks going.  If organisation goes under the creditors have to try and get what they can from the debtors to that organisation.  With a bank that means the depositors want their money from the mortgage holders. Banks plan their business around getting 300 payments- depositors on the other hand tend to want their money in less than 25 years.  Imagine if 10% of households were given 60 days to clear the mortgage.

    In Europe the tendency has been for governments to take the banks into part ownership, as Obama was proposing making taxpayers shareholders who will benefit from any eventual rally and solution.  As far as I can tell, next time I get a letter from my bank I can phone up and say “I own you- or at least your left leg below the knee” as the Bank of England is now preferential share holder in a number of High Street banks as a pre-emptive measure.  The UK government is currently proposing to put £500 bn (Over a $1 trillion) into the market.  Not all of this is actual money- most is promises, saying ‘lend that bank the money, if it fails, we guarantee it’.  They are saying there will be terms and conditions for any help given- we wait with baited breath for the next bonus season.

  3. Fortunately I can’t really panic, because I don’t (directly) own any stocks that I could buy or sell.  All my stock investment is through intermediaries who, I hope, have the sense not to panic.

    Short selling is simply selling shares you don’t own in the belief that you will be able to purchase those shares before they are due for transfer, at a cheaper price, a situation that can create a negative feedback loop and panic the market.

    You are describing a positive feedback loop, in which the output drives the input.  In a negative feedback loop, the output, inverted, dampens the input. 

    Positive feedback loops lead to wild oscillations to the output limits of the system. Negative feedback loops are inherently stable.

  4. Relax, guys. What makes you think that most people will respond to rumors, faith, religion . . . HOLY SHIT! We’re in deep doo-doo.  tongue wink snake  excaim

  5. I saw a guy on TV talk about bringing back ‘new deal’ progams!! just where the elite want us, digging ditches…

  6. I hope, have the sense not to panic.

    You see all those people on the telly panicking- they are intermediaries. Unless of course your pension etc is invested with the one company who employs people who can accurately predict the stock future. The trouble is when they do ‘invest offs’ (like a play off) tracker funds usually beat managed funds.  On tne upside most of those causing the selling never panic- they are computers (another problem- their game plans are quite limited).

    You are describing a positive feedback loop

    May be the difference between Colloquial English and Engineering (?American). People would I understand I mean A causes B which causes C which causes A (Poor performance—>Criticism—>Worry—>poor performance).  Would Spiral be better for you?

    What makes you think that most people will respond to rumors

    Really- watch this. They quote real bankers. (These perfomances are semi improvised- they know what they are going to discuss, but the actual lines are improv.  They can do some real ‘Petet and Dud’ corpsing on some of these).

    Just today the market reacted to a rumour G7 were going to suspend trading for 3 days next week- all because of a minor comment by Berlinsconi

  7. May be the difference between Colloquial English and Engineering (?American). People would I understand I mean A causes B which causes C which causes A (Poor performance—>Criticism—>Worry—>poor performance).  Would Spiral be better for you?

    Vicious circle?

  8. Vicious circle would be a good word for a positive feedback loop.

    People use negative feedback systems all the time; the thermostat in their houses (and refrigerator and oven).  Cruise control in their cars, and anti-lock brakes.  Autopilot in the planes they fly in. 

    Positive feedback is the awful screech you get when the microphone picks up the speaker.

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