Friday, November 21, 2008

Five Year Lows are Bad, Eleven Year Lows are Worse

The 'Helicopter Economics Investing Guide' is meant to help educate people on how to make profitable investing choices in the current economic environment. In addition to the term helicopter economics, we have also coined the term, helicopternomics, to describe the current monetary and fiscal policies of the U.S. government and to update the old-fashioned term wheelbarrow economics.

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On Wednesday the Dow hit a five year low. Yesterday the S&P500 broke its key long term support around 775 to hit an eleven year low. The import of this event should not be underestimated. The market sell off that began in the spring of 2000 and which first ended after two and a half years has now been extended to eight and a half years - at least for the S&P500. The Dow and Nasdaq have still not broken their 2002 lows, but the Dow is close to doing so and this would represent another violation of key support that would have ugly implicatons for future stock prices. The Nasdaq is holding well above this support level, but this provides scant comfort considering that that this represents an approximately 78% drop from its 2000 high.

The market statistics for this year alone are already devastating enough. After Thursday's drop the Dow Jones is down 43%, the S&P 500 49% and the Nasdaq 50% in less than eleven months. The S&P's drop matches the one that took two entire years in the crushing market sell off in 1973/74. As of now, it is worse than the 47% drop in 1931 - the year with the biggest drop in stock prices during the Great Depression. All the U.S. indicies had crash level drops once again yesterday, but in an unusal pattern the S&P fell the most with a 6.7% loss and the Nasdaq the least with a 5.1% drop. For the record the closing prices were 7552 on the Dow, 752 on the S&P 500, 1316 on the Nasdaq and 385 on the Russell 2000.

Financial stocks bore the brunt of the selling with Citigroup losing 24% after a 23% loss the day before. Citi closed at 4.71 even after (or possibly because) Saudi prince Al-Waleed said he would raise his stake in the bank back to 5% (this was the amount he has held for many years and if he has to buy to get back to this level, he has obviously been selling recently). Citi announced this morning that it was considering auctioning off the firm in parts or selling itself wholesale. It also requested the SEC ban short selling on its stock again. JP Morgan was damaged almost as much as Citi, with a 18% decline and Bank America did a little better dropping only 14%. GE was down 11%. Morgan Stanley and Goldman fell 10% and 6% respectively. While Goldman did a little better at the close, its intraday low at 49.00 was a much bigger drop. Morgan Stanley fell back into the single digits. So much for TARP, the Wall Street welfare bill, that was supposed to save the financial system from a meltdown.

Wiffs of panic in the financial system were palpable yesterday. The VIX (the volatility index) closed over 80. Interest rates on 3-month T-bills fell to 0.1% in flight to safety buying. A little better than the brief negative interest rate on the 1-month T-bill reached awhile ago, but not by much. Oil continued its relentless decline, falling to $49.42 a barrell. Weekly jobless claims spiked to a 16 year high of 542,000, with continuing claims the highest since 1982 (less than half of employed workers in the U.S. are eligible for unemployment by the way, so you may want to double all numbers to get a more realistic picture of the U.S. employment situation). One market commentator ventured that the current slowdown could be the "worse since the Great Depression". Perhaps he should have used the word than.

NEXT: The Citi that Should be Put to Sleep

Daryl Montgomery
Organizer, New York Investing meetup

This posting is editorial opinion. Like all other postings for this blog, there is no intention to endorse the purchase or sale of any security.

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