Not a Rollercoaster Ride

Posted October 21, 2008

Though the currency and stock markets appeared to be stabilizing two days ago, the US stock market plunged on 15/October/2008. One of the reasons this happened is because the US September retail figures were released and they were bad news all around.


It would not be appropriate to call what happened to the US stock market yesterday, 15/October/2008, a rollercoaster ride.  On a rollercoaster you can see the high and low points even if it is scary reaching either one of them.  When you talk about the US stock market right now, it would have to be compared to one of those horror movie rides where you cannot see the top or bottom….you just ride along and hope you survive with minimal damage.

The US stock market once again surprised everyone by taking another plunge that almost wiped out the 13/October/2008 gains.  Plunging by 733 points yesterday, the decline is going down in the record books as the 2nd worst loss in the history of the stock market.  The Dow Jones Industrial Average (DJIA) closed at 8,577.91.  Once the shock of the market decline began to ease, the analysis began. 

This major decline was a response to a couple of factors.  The US government reported retail sales are down 1.2% for September and this was the third drop in a row.  The market began to admit they can stop whispering the “r” word and go ahead and say the US is in a recession.  The definition of a recession is 2 straight quarters of economic decline, but in this case admitting a recession exists is anticipatory that the 3rd and 4th quarters of retail sales and manufacturing production will be dismal. 

But there is something else contributing to the DJIA decline.  Traders are reassessing the situation now that the federal government has virtually forced 9 major US financial lenders to accept $250 billion of equity.  Yes…forced…because there were one or two who did not want to participate, but were told by Treasury Secretary Paulsen to accept the deal now or forever hold their peace.  That is not the kind of meeting that really inspires the most confidence in traders that the implementation of the bailout will work.  You have free market capitalists turning down government backing because they believed their companies were strong enough to handle the economic downturn.

Traders are looking at what has been implemented to date and now have questions about how deep and long the recession will actually be.  The banks have been rescued so it is time to look at the real economy which is made up of clothes and cars and durable goods.  That leads right back to the retail and manufacturing figures that were released.

And so it goes full circle.  Up and down…and full circle.  No wonder traders are feeling a bit dizzy.

So where did this leave the currency market?  Federal Reserve Chairman Bernanke said on 15/October/2008 that “all the tools at our disposal” will be used.  That means there is a chance the benchmark interest rate will be cut again.  If that happens, the stock market will look more attractive.  Until then, traders are responding to Bernanke by turning even faster to risk aversion investments.  When traders decide to avoid risk, they back out of the stock market and turn to currency markets which were used to fund the stock market purchases.

The yen and dollar are seen as two of the safest currencies at this moment, so the result is that all currencies fell against the US dollar except for the yen.  On 15/October/2008 the currency rates stood at $1.3520 euro against the dollar.  The Great Britain pound was $1.7311; the Canadian dollar was $.8426; the Australian dollar was $.6741; the Japanese yen was $.0099; and the New Zealand dollar was $.6071.

The traders are seeking safe haven in the currency markets, because this horror movie roller coaster called a recession may have a tunnel along the way.  When Bernanke had no new information to add to the picture concerning the economy, the recession tunnel looked long and dark.  A global recession is in the making and Europe’s many economies are deteriorating fast.  As result, the prediction is the euro will continue to fall against the dollar.  How far?

Welcome to the “Horror Express”…