Thursday, October 9, 2008

When will the waves of selling stop?

Every day people on Wall Street come into their offices and the market gives them hope and then it just pounds on them to the point that they begin to question if is it really the beginning of the next Great Depression. The whipsaw effect is devastating and makes it hard to keep there head above water.They look back and start playing the “What If” game. What if only I had done this or that, would we be better off than we are at this moment? Brokers start thinking about whether the markets could go to zero. Could the government run out of money? We will get a new president in less than a month, is either of the candidates capable of dealing with a crisis of this magnitude? For that, matter is anybody capable of solving the problem?

These are the questions professionals are asking myself included. even more dire questions about what Americans are askingwill happened to not only their investments but their lives. Do not throw stones at me if I ask “could all of this be signs of a bottom of the market?” People have moved away from thinking they will sell half of their position and build some cash and then buy more at a lower price later. Now they are selling everything thinking they cannot deal with this market situation anymore. The loss of any rational process is also a sign of a bottom. I was a new broker in 1973 and that Bear market felt a lot like this Bear Market today with one very significant difference; if we move away from the financial stocks, we find that the rest of American business has in excess of $1 trillion in cash and cash equivalents on their balance sheets.

I want to make it clear that we have serious problems that need to be solved. We will not solve them overnight, even though Americans historically want quick fixes to their problems, there is no quick fix to this liquidity problem.

I do not think that in the last 30 days we have found a cure for AIDS, yet the company that is the leader in developing AIDS drugs is off 30% in market value. Another example is a company that manages $60 billion dollars of US Government guaranteed bonds which is off 30% in the same period.This is an investment that the timely payment of principal and interest is guaranteed by the US Government and it was off 16% just today. Why? People are selling everything at any price out of fear and panic.

Based on my life experience, for whatever that is worth, we may well be close to a bottom. I am not saying this is or is not the bottom for we will not know for sure until we get a rally and then come back and retest the level. How close are we to a bottom? The worst Bear Market was down about 40%. We are close to that level now. I want to give you something to watch that will be an indicator of the turn in the market. Watch the 30 and 90-day LIBOR interest rate.

As of today, the 90-day LIBOR rate was 4.75% compared to 1.55% for the Fed Funds rate. If we see the spread begin to narrow that will be a sign the money is starting to flow. If money flows, the stock market will begin to rally. You can follow LIBOR at www.bloomberg.com. Look for the markets header and go to Rates and Bonds then look left to see Key Rates. Click on Key Rates and you will find 3 month LIBOR.

Dan Perkins

1 comment:

wildnis said...

The wave image above is a copyright protected images and used without permission.
If you do that you should at least give the photographer credit for and a link to his/her website.
The wave picture above is copyrighted by Rolf Hicker Photography.
Here you can find more of Rolf's wave pictures.