Dow Falls Below 10,000

[aerius]

Looks like someone knows the results of the Lehman's auctions already, as the Dow just tanked 200 points in the last half hour and briefly broke 8000 again.

[Kodiak]

I seriously hope you people are wrong about the breadline predictions, but just in case I've bought about 60 kilos of pasta, rice, 3 gallons of honey and about 300 cans with assorted vacuumpacked foods in the past week.

That's one of the wisest reactions I've seen to this so far.

[aerius]

Volatility index at 75 as I type this. Normally, anything over 30 is considered high.
And you wonder why the markets are moving so violently.

[CaptainChewbacca]

Volatility index at 75 as I type this. Normally, anything over 30 is considered high.
And you wonder why the markets are moving so violently.

Its like a sympathetic vibration. Day traders are trying to get ahead of the swings to make money, and every pass it gets stronger as more people pile on.

[CJvR]

LOL!

Iceland is for sale on E-Bay...

[Admiral Valdemar]

So I see. No Bjork? No deal.

[General Zod]

LOL!

Iceland is for sale on E-Bay...

Again? Or was that another European country I'm thinking of?

[Kodiak]

LOL!

Iceland is for sale on E-Bay...

Surely the least you could do is provide a link?

[Kodiak]

ghetto edit: The link got posted before I made mine.

[Saxtonite]

Again? Or was that another European country I'm thinking of?

you're thinking of the Principality of Sealand that was put up for sale early last year.

[Broomstick]

I seriously hope you people are wrong about the breadline predictions, but just in case I've bought about 60 kilos of pasta, rice, 3 gallons of honey and about 300 cans with assorted vacuumpacked foods in the past week.

That's one of the wisest reactions I've seen to this so far.

I may not be a Mormon, but I've got about 6-8 weeks of food in the home, including about 15 kilos of flour. When I go to Aldi's I usually pick up a few extra cans or bags of stuff that will keep long term. While the garden was still producing I let that lapse a bit, as the backyard was serving as a food source, but for winter I'll probably stock up a bit more.

Part of the problem, as mentioned is storage. For food in particular you have to make sure vermin don't get into it, whether bugs or rodents. Another problem is funds - I can't sink all my money into food, as I still have to pay rent and other bills (including the new one for health insurance - but we are actually GETTING health insurance! Yay!)

Meanwhile, my Other Half is doing some serious research into stocks that stand a good chance of weathering the storm. He's thinking about putting some money into buying stock at firesale prices and reaping the profits when prices rebound. Because some stocks WILL rebound - even in a bad economy there are still opportunities, and we're looking for them.

[General Zod]

Again? Or was that another European country I'm thinking of?

you're thinking of the Principality of Sealand that was put up for sale early last year.

Nope, found it. It was Belgium last year.

[The Duchess of Zeon]

The volatility is rather impressive; the market is back up to 8,788.98 currently, +209.79 from where they started.

[CaptainChewbacca]

The volatility is rather impressive; the market is back up to 8,788.98 currently, +209.79 from where they started.

How bad is it if the market is swinging over 1,000 points in a day?

[Ace Pace]

The volatility is rather impressive; the market is back up to 8,788.98 currently, +209.79 from where they started.

How bad is it if the market is swinging over 1,000 points in a day?

From my basic understanding, it's saying that the market trend is a complete unknown. As someone said earlier in this thread or another one, if you're not a day trader, putting money into the market is straight out gambling.

[Fingolfin_Noldor]

I think it's quite safe to say that swinging that much like a chaotic pendulum is something one very very rarely sees. Was it like this back in the crashes in the 80s and 70s?

[Uraniun235]

Article which suggests that the Dow has been severely over-valued for years, and that 7800 is more in line with GDP growth since 1995:

Friday, October 10th, 2008

In the Long Run, the Dow’s 40% Nosedive May Actually Turn Into a Safe Landing

By Martin Hutchinson
Contributing Editor
Money Morning

With the near-record 678-point plunge yesterday (Thursday), the Dow Jones Industrial Average has plunged from its all-time-record high of 14,280 to below 8,600 in just one year’s time. To those accustomed to a five-figure Dow, this 40% freefall represents the unexpected descent of the stock market into a gigantic pit that signifies the dawn of the second Great Depression and an end to the free market system.

However, for those of us who believe in fundamental stock-market valuation, the outlook isn’t dire at all – indeed, the stock market’s long-term outlook is as upbeat as it’s been for some time. This painful stretch actually represents a very necessary descent from a turbulent balloon journey through multiple thunderstorms to a relatively safe landing – with only a moderate amount of damage to the actual balloon, itself.

In that respect, the future is bright. It’s a future where stocks are sensibly valued, abundant with bargains, and where investors can confidently look forward to the annual real rates of return of 8% to 9% that have been the stock market’s average over the past century.

As many readers know, I ascribe many of our current economic difficulties to a change in U.S. Federal Reserve policy that took place in the spring of 1995. From 1979 to 1995, the Federal Reserve followed a policy of monetarism, by which it did not allow the broad money supply to grow significantly faster than the economy as a whole.

That policy prevented inflation from taking off; it also allowed money to be a more or less constant measure in the economy, whose value and availability did not vary much from year to year. That had the enormous advantage of giving borrowers, lenders, buyers and sellers a reliable unit to depend upon, thereby allowing the free market system to work on an undistorted basis.

Beginning in 1995, monetary policy was changed. Since then, broad money supply has increased at an annual rate of almost 9%, compared with an annual growth rate of only 5.3% in nominal gross domestic product (GDP).

That may not sound like much of a differential, but over a long period, it changes everything. With money supply that’s advancing at a rate that’s two-thirds faster than GDP, purchasing and investment decisions get skewed – particularly over the long term.

Normally, this would cause inflation to soar. But in the 1990s, this didn’t happen – primarily because this shift in monetary policy, but in the 1990s it didn’t, because it coincided with the arrival of the Internet and cheap cell-phone technology. These technological paradigm shifts actually did make it possible for manufacturing to be easily outsourced all over the world, suppressing price increases, and inflationary pressures.


Even though this shift in Fed policy hasn’t caused much inflation (though that may be changing), the excess money sloshing around our financial system has nurtured big increases in asset prices – at a rate much faster than GDP itself was advancing – first hitting stocks and then, after 2000, real estate (and U.S. home prices, specifically).

After 2000, other countries followed the Fed’s lead and loosened monetary policy. As a result, asset prices have soared worldwide. The only exceptions: Stocks and houses in Japan (which both suffered through a decade-long bubble that ended as the 1990s began), and housing in Germany.

Now, we’ve hit a financial crunch and housing and stock prices are falling rapidly. To see where they might end up, you have to look at their long-run averages, compared to the factors that determine them. In the case of housing, you should look at average earnings of potential homebuyers to determine where prices should be. In the case of stocks, nominal GDP gives a good benchmark for stock prices.

Fed monetary policy was changed in February 1995; on the Fed’s own Website there is testimony by former Fed Chairman Alan Greenspan to the Senate that Feb. 23, explaining that he was about to turn to a more-expansionary policy (though he gave no indication that he, and his successor, would continue expanding for more than a decade). Money supply, as measured by the Federal Reserve Bank of St. Louis’s Money Zero Maturity (MZM), the nearest we can get today to the old M3 (which the Fed stopped reporting in March 2006), is up 205% since then.

GDP for the first quarter of 1995 was $7.298 trillion. In the second quarter of 2008, the latest data we have available, it was $14.294 trillion. Third-quarter figures will be published at the end of this month; we can reasonably estimate that third-quarter GDP will be $14.450 trillion. That’s a 98% increase in nominal GDP since 1995, so if shares have increased by 98% since then, we can regard them as being at the same relative valuation as they were in the first quarter of 1995, when this monetary misstep was taken.

On the last Friday of February 1995, the Dow Jones Industrial Average closed at 3,953.54 – it had touched 4,000 for the first time just two days earlier – ironically, the very day that Greenspan testified to Congress. That wasn’t a “bear market” value; it was 45% above the peak reached in 1987, before the record one-day crash, and up from first passing 3,000 just 4 years earlier. The US economy was expanding, four years after the trough of the 1991 recession. In other words, 3,953.54 can be regarded as a “reasonable” level for the stock market in February 1995, maybe a little high.

If the Dow had increased in line with nominal GDP since February 1995, it would today be trading at 7,829. In other words, in the entire period since Greenspan announced that change in monetary policy, the stock market has been in a bubble, floating like a balloon far above where it should have been. Even in 2003, it never got down to its 1995-equivalent value. Indeed, the bottom in February 2003 – at Dow 7,800 – still was about 30% above its 1995-equivalent value, which, at that time, would have been around 6,000.

The accompanying chart demonstrates this very well: The gap between the Dow and GDP illustrates the extent to which the stock market is overvalued. Only in the past few weeks has it started to descend towards its 1995-equivalent value of 7,829. [The Dow closed yesterday at 8,579.19, meaning that blue-chip index remains about 750 points, or roughly 10%, overvalued, according to this particular market-value analysis.]

It’s quite possible that in this bear market stock prices will continue falling beyond a Dow of 7,829. However, when the Dow is trading below 7,829, investors will be able to draw two very important and reassuring conclusions:

* First, if the Dow is below 7,829, it is below a reasonable long-term value, so there are stock-market bargains that will prove good long-term investments
* Second, unlike investors who bought into the stock market in 1999 or in 2007, and who brought themselves losses for more than a decade, by investing when the Dow is below 7,829 you can be assured that your investments will bring you the long-term average return on stocks of the past century, which equates to an average-annual return of between 8% and 9%.

The time to lose sleep over your investments was when the Dow was at 14,000. At or below 7,829, your comfortable slumber should be wholly undisturbed.

[Editor’s Note: When it comes to investment banking and the international financial markets, Money Morning Contributing Editor Martin Hutchinson brings readers a unique brand of expertise. In February 2000, for instance, when he was working as an advisor to the Republic of Macedonia, Hutchinson figured out how to restore the life savings of 800,000 Macedonians who had been stripped of nearly $1 billion by the breakup of Yugoslavia and the Kosovo.]

He doesn't mention the credit markets, which are definitely of major concern, although on face value this article would seem to be good for fears of "oh my god the Dow is down so much we're all gonna die".

That said, I don't know whether "fundamental stock-market valuation" is a valid or quackish perspective, so maybe it's all bullshit. (or rather, moreso than most things associated with The Market)

[Big Phil]

The volatility is rather impressive; the market is back up to 8,788.98 currently, +209.79 from where they started.

How bad is it if the market is swinging over 1,000 points in a day?

Do you really need to ask that question? Everybody's completely freaked out, and clear-thinking is among the first things to go.

I took my 401k and IRA out of stocks and into straight money market accounts about six months ago. As a result, my retirement savings are worth ~3% more today than they were six months ago, while lots of people today are panicking because theirs are worth 30%-40% less.

[Tribun]

Well, looks like the last-hour rally was useless.
The Dow closed 128 points down at 8,450.

[CaptainChewbacca]

That's a very fascinating article, though I only understood about half of that. Is he saying that the 'soaring dow' of the past 13 years was due to shifting from the way things 'should' be run?

[phongn]

Well, looks like the last-hour rally was useless.
The Dow closed 128 points down at 8,450.

It wasn't entirely useless.

[RedImperator]

Well, looks like the last-hour rally was useless.
The Dow closed 128 points down at 8,450.

It wasn't entirely useless.

Seriously. The way things have gone this week, I'm ready to break out the champaign and party hats for a 128 point loss.

[apocolypse]

The volatility is rather impressive; the market is back up to 8,788.98 currently, +209.79 from where they started.

How bad is it if the market is swinging over 1,000 points in a day?

Do you really need to ask that question? Everybody's completely freaked out, and clear-thinking is among the first things to go.

I took my 401k and IRA out of stocks and into straight money market accounts about six months ago. As a result, my retirement savings are worth ~3% more today than they were six months ago, while lots of people today are panicking because theirs are worth 30%-40% less.

I went aggressive with my 401A (and I think my 457 as well) and haven't seen my statement in a while. It was looking pretty rough even before events as of late, I can only imagine what it's like now. At least I'm at the age that I can weather this storm better than others.

[Kanastrous]

This is a side question...is there any kind of commonality between the sort of fluctuations happening in the market, as the result of traders' actions, and the sort of physical movements seen in, say, an aircraft undergoing pilot-induced oscillation?

Just wondered if similar math underpins the two phenomena.

/sidetrack

[Big Phil]

I took my 401k and IRA out of stocks and into straight money market accounts about six months ago. As a result, my retirement savings are worth ~3% more today than they were six months ago, while lots of people today are panicking because theirs are worth 30%-40% less.

I went aggressive with my 401A (and I think my 457 as well) and haven't seen my statement in a while. It was looking pretty rough even before events as of late, I can only imagine what it's like now. At least I'm at the age that I can weather this storm better than others.

As much as I hate to admit it, I paid attention to what Admiral Valdemar (and some of the his more wild-eyed, END OF THE WORLD compatriots) were saying back then, did my own research, and came to the (sad) conclusion that they were probably right (at least about the economic problems - not the end of the world). I still don't think Soviet Style breadlines are coming, and I'm not planning on stockpiling years worth of food, but if you're currently working in a job that could be done cheaper overseas and have no marketable skills, or think you can live on credit forever without paying the piper, or are a dumbass who bought a $500k home on a $50k income, then this market is really going to fuck you over.