Posted October 19, 2008
The stock markets continued their downward freefall yesterday raising more fears the end is still not in sight. The continued slumping of the financial markets is now extending beyond the banking systems.
Their head in their hands while slumped in a chair has become the typical trader pictures you see on front pages around the world. The only way to describe the continued decline in the financial markets is as sickening. Traders are making it clear they do not have faith in the government bailouts of the banking systems taking place around the world.
The words describing the market best are “sickening slide”. Dow Jones Industrial Average sunk to $8,579.19 at the close of business on 10/October/2008. The S&P 500 closed at $909.92 and the NASDAQ at $1,645.2. These lows are breaking records in terms of when markets last saw these levels. It is the 7th day of slides in a row.
On the currency markets, the euro in equivalent US dollars stood at $1.3659. The Great Britain pound is now at $1.7203. The Australian dollar came out of the fray at $.6961.
The new concern facing the markets now is the fact that the stocks of healthy companies are now dropping for no apparent reason. Companies still reporting earnings meeting expectations are watching with disbelief as their stock values drop by up to 40%. This indicates that traders have gone into a panic mode. The financial markets normally act rationally, but that cannot be claimed with complete assurance right now.
In the US, there are fears the credit freeze is now going to impact automakers, insurers and energy companies. It’s like lining up the next victims to be shot down. Investors are worried about saving their investments, of course, and are continuing to seek safe havens. The stock futures indicate no faith in the ability of government to turn this situation around for quite a while.
Despite interest rate cuts around the world, the credit markets remain locked up tight. The Libor rate rose to 4.75 percent which means the banks are still reluctant to make loans. There is simply very little cash flowing in the financial systems, and what they have, they are hanging on to with tight fists. The credit market has been called a morass which is a pretty good description. You can imagine being stuck in quicksand and trying to slowly work your way out of the quagmire.
Part of the problem has been the lack of European unified response to the crisis. Germany has been particularly difficult by refusing to be a team player. This lack of unity among the 15 nation euro participants has played a large role in keeping investors nervous. The governments have promised to continue to shore up the banking systems as necessary to prevent their collapse. But as the downward trend continues to gobble up other financially healthy segments, the question becomes: How much cash is it going to take?
It is just simply bad news all around. Asian stocks slumped yesterday while the Asian money market raised rates. Iceland announced their banking system had to be bailed out by the government in order to avoid collapse. The Japanese yen saw its biggest increase against the US dollar in ten years. On and on and on the bad news continues to be reported.
Some financial advisors are saying the continued reporting of bad news is fueling the panic. But the fact is that if there is no credit and cash crunches, traders will do what they need to do to protect their investments.
So the question is: Rational or Irrational?