There was a remote chance of a rebound rally (and I don’t mean anything jazzy) but the news that Bank of America, heretofore regarded as a sound institution (how with its credit card exposures and acquisition of Countrywide is beyond me) will cut its dividend by 50% and raise $10 billion to bolster its balance sheet only worsened the already dark mood among financial players. Consider the illogic of this move: the Charlotte bank’s earnings this quarter were 15 cents per share, but even with the dividend cut, the quarterly dividend, payable in December, will be 32 cents a share. So the fundraising will go in part to maintain the dividend. This passes for prudential management in the US.
Some readers saw Jim Cramer’s widely reported call to sell stocks if you will need the money in the next five years as the sign of a market bottom. The very fact that many are still eagerly looking for a bottom means more blood has to be shed. I recall the bear market of the late 1970s. Stocks, battered after the bull market of the 1960s, had come to be seen as speculative and conservative investors were leery of them. Until stocks are viewed as the risky assets that they are, I’d be leery of saying the end of this bear market is nigh.
Note that Asian markets have bounced off their early morning lows, but are still in decidedly negative territory (save Singapore, down a comparatively cheery half a percent). The Nikkei is now slightly over 10,000.
Update 1:50 AM: Thing look less grim then they did a few hours ago, thanks to an unexpectedly large interest rate cut (100 basis points, from 7% to 6%) by the Reserve Bank of Australia. Aussie stocks and the currency rallied, and a fall in the yen gave some relief to the Nikkei (stocks and the yen tend to go in reverse directions). From Bloomberg:
Asian stocks fell on concern surging credit costs will deepen a global slowdown. Shares pared losses and U.S. futures gained after an Australian interest-rate cut spurred speculation more central banks will follow…. Australia’s benchmark index rallied from an earlier loss after the central bank cut interest rates by the most since 1992…
The MSCI Asia Pacific Index fell 0.5 percent to 99.91 as of 1:33 p.m. in Tokyo, paring a 3.2 percent loss. Industrial shares and companies reliant on consumer spending contributed the most to the decline…
Japan’s Nikkei 225 Stock Average lost 1.7 percent to 10,300.59, having earlier dipped below 10,000 for the first time since December 2003. In Thailand, the SET Index sank 1.4 percent after police fired tear gas to disperse protestors at the parliament building. Hong Kong is closed for a holiday.
Update 3:00 AM: An important observation from Times Online:
Ashley Davies, currency strategist with UBS in Singapore, wrote in a note: “The key issue is coordination of policies, since individual country policies aimed at shoring up confidence of domestic institutions can actually exacerbate systemic risk by altering relative risk between countries.
“As such, a coordinated global approach by the major financial powers may be critical to containing the destructive aspects of global deleveraging.”
There is not yet any evidence that rate cuts will be coordinated, but that could change very quickly.
Back to the earlier story. From Bloomberg:
Asian stocks slumped, extending a global rout, on concern the seizure in credit markets will deepen a global economic slowdown…
“I’m shocked by the speed at which the global economy has deteriorated,” said Roger Groebli, Singapore-based head of financial market analysis at LGT Capital Management, which oversees about $20 billion. “It’s happening at a speed that I have never seen. It’s a global capitulation and everyone is throwing in the towel.”
The MSCI Asia Pacific Index fell 1.9 percent to 98.55 as of 11:09 a.m. in Tokyo, a fourth-straight decline. Nine of the gauge’s 10 industry groups dropped. The measure tumbled 22 percent in the third quarter as the credit crisis forced Lehman Brothers Holdings Inc. into bankruptcy.
Japan’s Nikkei 225 Stock Average lost 3.1 percent to 10,148.46, having earlier dipped below 10,000 for the first time since December 2003. Mitsubishi Corp., which generates more than half its profit from trading commodities, declined 4.7 percent after metals tumbled.
All stock markets in the region fell. South Korea’s Kospi Index slid 1.3 percent and the won weakened to below 1,300 per dollar for the first time since 2002, on speculation investors will steer clear of emerging-market assets. In Thailand, police fired tear gas to disperse protestors at the parliament building, state television reported.
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The bottom will probably be in when the price of gold exceeds that of the DOW. This process could take years at best. This is a secular bear market, started in 2000. So could last a generation at least. Japan never recovered from it’s peak of 40,000. Global stocks atleast in real terms have not surpassed the peak reached in 2000.
Love your blog Yves, but I would stay away from market timing
Roger must still be in very short pants……
James,
I do not do market timing, The only call I have ever made on this blog was on the onset of the bear credit market, on July 11, 2007. I make calls only when I am highly certain and am explicit when I do so. I suggest you read the post.
The post in fact is arguing against market timing, that efforts to catch a stock market bottom will probably end in tears. And unless you lived through the late 1970s and early 1980s, Japan in the early 1990s or perhaps lived in one of the countries that was caught in the Asian crisis, it is unlikely that you know what the repudiation of equities looks like). It is beyond the personal experience of many readers. A whole generation has grown up with a near religion of stock ownership as safe, when 25 years of falling bond prices had much to do with their performance.
Benoit Mandelbrot has said that market are much, much riskier than the standard theories suggest. A lot of people are learning that lesson the hard way.
My father-in-law offered the following thoughts on the current financial crisis:
_____________
My thoughts for weeks now have been: How to get water out of system with least damage.
America NEEDS a recession to change consumption and savings patterns and reduce personal debt.
The talk about developing world taking up economic gap created by that recession looked doubtful to me after meeting A. in Zurich in March, when he told me of what was going on in his part of China, still the largest engine of that boom. He made a subsequent tour so to make sure just not his industry.
Taking into account PPP differences USA and Europe, Russia, etc. seemed to me at 1.55 to Euro $US undervalued at least 20%.
So my guess was US$ up 20% within 2 years, stock market to settle at 20% off top for Dow type companies, collapse of commodity bubble with oil at $100 or less by year end.
The nightmare scenario, collapse of $US, runaway inflation, commodity prices sky high in $US, sovereign funds etc. dumping $US in a panic and so on.
The most benign scenario, steady or stronger $, collapse speculation induced commodity bubble, housing settling down 20-50% depending on where rose most. This happening in second half of 2008. Spec financial time bombs finally mostly going off in same period. Much steadier situation first half 2009, and then SLOW recovery starting second half 2009.
My uneducated view is the MOST benign scenario taking place before our eyes.
Credit crunch. As other countries now also involved will be cured MORE quickly. In the end they have to lend money to make a living, not put it under the mattress. Were too easy, lost money, so first reaction too tough, but the overhead goes on. Both ups and downs OVERSHOOT.
If Obama gets in, yes another very tough few months, but no disaster.
G.
P.S., So far in my view it is the most benign scenario we are seeng, in view of lunacies of recent years.
On horizon next boom, the greening boom in America.
Ups AND downs overshoot, VERY short term. IF Obama gets in, and restores some sense of sanity, as I sit here today my view, the most realistic benign scenario is taking place.
Credit freeze. OF COURSE, too lax, lost money, now too cautious. But that is being solved. Other countries feeling effected is good news-it makes their gvts pitch in. I think this is short term the most easily solvable problem. In the end they are making a living, have huge overheads, by LENDING money, not by sitting on treasuries. Probably interest rates will now go down for a bit, and 100% safe they CANNOT AFFORD. Yes more losses to come from looney credits on cars, credit cards etc. The sooner the better.
http://ftalphaville.ft.com/blog/2008/10/07/16744/effects-of-a-uk-government-cash-injection/#comments
UK will probably have to inject £25bn to Barclays, Llloyds+HBOS, and RBS to get their Tier 1 Capital up to 7.5% from below 6
It appears that you are not sleeping, based on the time of the updates …?