Stocks slide 311 points today

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Submitted by CAwireman on July 26, 2007 - 5:08pm

From the NYT

By FLOYD NORRIS and VIKAS BAJAJ
Published: July 26, 2007

"The credit difficulties began in the United States with investors growing worried about losses on securities that helped to finance subprime mortgages for borrowers with substandard credit, but now they have spread to highly leveraged companies as well."

http://www.nytimes.com/2007/07/26/busine...

US credit difficulties contribute to a global market correction?

Submitted by GoUSC on July 26, 2007 - 5:14pm.

Our economy impacts every other country in the world. We have been the consumption & debt machine that kept the whole thing swinging. Now it has come to an end and it is rippling through the global economy.

The market was down up to 450 at one point. You typically see a mini rally at the end of the day. The real story will be what happens tomorrow and Monday.

Submitted by capeman on July 26, 2007 - 5:33pm.

Watch the NIKKEI tonight to see what may lead into another bear pull in the US markets tomorrow. The Yen gained a lot today which now threatens to unwind the carry trade. If there is a violent reaction in the Asian markets this evening that will likely spread back to us in the morning.

Submitted by NotCranky on July 26, 2007 - 5:39pm.

I think HB's link said the worst selling in the asian markets was happening after hours.

Submitted by cashman on July 26, 2007 - 6:19pm.

I wouldn't count on any significant correction yet. The pattern has been that if you buy any dip, you will be rewarded within a few days. Why is today's drop any different? I, too, am hoping for a substantial correction of at least 20 percent, but I've come to the conclusion that this market is highly manipulated, either by PPT, or market makers.

Submitted by what_a_disasta on July 26, 2007 - 8:30pm.

It wouldnt surprise me if things stabilised tomorrow and went back up for a while. I dont think they have lured enough suckers in for the really big drop yet.

Submitted by PerryChase on July 26, 2007 - 11:17pm.

yeah, i don't think they lured enough suckers yet. They need more suckers for the previous owners to cash out at the high.

To put it in perspective, today's S&P loss is equivalent to $300 billion loss of value.

Submitted by Coronita on July 27, 2007 - 4:23am.

Vrudny,

Not to sound rude, but I wouldn't count your chickens before they hatch first. You're starting to sound like the homeowner that is saying he/she made $$$$ in 1months of equity appreciation without having cashed out to really take the gains. The stock market is really volatile these days, and its really anyone's guess where things are headed imho.

For reference, days like today (yesterday) were like $50k losses for me. But fortunately, there hasn't been many days like yesterday (yet). The real question is what happens in the markets moving forward. For me, it's going to take a reversal of 2-3 years of appreciation undoing before things are considered losses. Again, I'm not saying it's not possible, but to point I'm not counting on my sizable "appreciation" until i cash out, which is getting more enticing these days if these downward trends continue.

Anyway, I guess the point is. It doesn't really matter what direction you are in the market, provided your timing is pseudo right. I would say if you went short 2 years ago, you're probably still in the red despite the drop today, but that would be my guess. Just like if you entered long yesterday, you're probably going to be red in the near short term.

Submitted by Chris Scoreboar... on July 27, 2007 - 5:52am.

Where do you stand on the position as a whole? Are we to believe that you waited every day for 12 months to short until the day before yesterday and got the exact high? If not, you are probably at best even on your puts if not still upside down due to time erosion as well as price. Also, % gains on options are less meaningful than the gross dollars made. I know people that talk about 50% returns etc, but they only have a few thousand in, so 50% is not an appreciable amount of gross dollars even though it sounds great at cocktail parties. If we get a worldwide financial crisis, you bears will ultimately be right. I do not root or gloat, I have been doing this too long to get too carried away either way.

I am one of the bulls, and did get my ass kicked the last few days. Today will be very interesting, the rally in bonds is what I think will stablize things shortly. Also, the COT report out today I doubt will show a major shift to the short side, but if it does, I will re-evaluate my positions. We could get a very sharp rally in the near term due to these two things. Most of the things present at prior major highs, are not present here, but anything can happen.

I am buying the open today in the S&P futures, which as I type this is down about 10 points from yesterdays close in the pre-market. I also bought some futures yesterday, but was stopped out on that trade. The gloom and doomers are going to get another pleasing open, if we stay here for the next hour.

Submitted by The-Shoveler on July 27, 2007 - 6:41am.

Nor_LA-Temcu-SD-Guy

The thing that breeds the most instability is stability ,,, If that make any sense.

Anyway the point of this post is, in my mind the worst thing that can happen is that we don’t get a recession.. Why ???

You need recessions to purge the excesses, How many of your colleagues have their grown kids and grand kids living at home because they cannot afford rent even though they have reasonably good jobs !!!

Submitted by cr on July 27, 2007 - 10:21am.

This is telling:

"The benchmark index has gained more than 2,700 points since the beginning of 2006, and went from 13,000 to 14,000 in only 58 days. Before that, it only took 126 days for the Dow to move from 12,000 to 13,000, which happened on April 25.

In contrast, it took seven years for the index to make the 1,000-point jump from 11,000 to 12,000."

Submitted by CAwireman on July 27, 2007 - 11:40am.

And at the time of this writing, Friday 7/27/07, 11:30 am, Stocks are down an addtional 112 points from Thursday....

HiggyBaby

Submitted by what_a_disasta on July 27, 2007 - 1:05pm.

Nasty fade at the finish!

Submitted by Ozzie on July 27, 2007 - 1:24pm.

Friday saw another 200 point downturn, but I think we'll see 14,500 by the end of 2007 or Q1 08 . Earnings have been good in general and even the CAT disappointment was not due to revenue slippage but instead to one time capital expenditures that promise to increase earnings in the future. Tech seems strong. GDP was an uspide surprise and even consumer confidence was up. Just saw a report that the inflows into hedge funds in Q2 2007 set a record. How is that money going to be deployed? Surely not into risky bonds. Also saw an article in Barron's last week that confirmed the "little guy" (the retail investor) has by and large sat out this Bull market run so there is not anywhere near the speculation of the late 90's.

I try to buy USDA Prime steak when it's on sale and the same goes for great stocks. I'll spend a few hours this weekend hopefully finding some nice cuts to choose from.

Submitted by PerryChase on July 27, 2007 - 1:42pm.

http://www.washingtonpost.com/wp-dyn/con...

Eat too much steak and your arteries will clog up. You'll die before you get to enjoy all your money.

Personally, I'm not predicting gloom and doom. But then again, Dow 11,000 will not surprise me. It's always possible. Your wealth is only relative to others. If I loose 20% and other loose 50%, then I'm still relatively better off.

We should not fixate on a certain percent. We just need to maintain and improve our purchasing power relative to others.

That's especially true when it comes to Real Estate. If you can move up when others are moving down, then you did something right.

Submitted by HereWeGo on July 27, 2007 - 2:44pm.

Chris-
How concerned are you at this point? Much like you, my back side is awfully red at this point.

This is a slide that's not based on an event, not based on a loss, not based on an economic downturn, it's merely based on one word:

subprime

I swear, Europeans wet their undies every time that word is mentioned, even if they can't explain the size of the subprime market or the losses in the subprime market, or why subprime lending issues are so radically differnt from corporate lending issues.

Amazing. GDP surprises to the upside, inflation surprises to the downside, the Treasury Secretary tells every one to calm down, and no effect. The one bright side is that the Mexicans actually decided to stop playing the role of lap dog to the NYSE and focused on their own market for the day (the Brazilians, to my regret, found the leash and collar too comforting to resist for the entire day.)

Submitted by Ozzie on July 27, 2007 - 4:04pm.

I work out like a fiend so my arteries should be very clean, and supposedly the Wagyu/Kobe beef (which is excellent BTW) contains the "good" fat. Just bought some at Seaside market in Cardiff the other day.

Barring a recession, a Dow at 11,000 would offer some screaming deals. 95% of my equity positions are for the long haul, but I have some cash waiting on the sidelines if things really get out of control. Heck, the PE of the SP 500 is barely above historical averages.

As for this debt bubble, I am more and more wary of the financials because I just don't know what earnings are real anymore. If they can't even figure out what the products they are selling to insitutional investors are worth how can we value the company? Smells like Enron. I'd like to hear Warren Buffet's take on the credit markets. A few years ago I woke up (literally at night I had an epiphany)and asked myself "why am I trying to pick stocks when BRK offers you what is essentially the best mutual fund of all time?" I bought BRK the next day. Hopefully he'll live until he's 100 and BRK's performance will stay steady as she goes.

I think the rest of the market is being thrown out with the bathwater until this credit situation improves. The Wall St. guys number one objective is to make money for themselves so if they are feeling pinched they'll find a way to pinch the rest of the market.

Submitted by Chris Scoreboar... on July 27, 2007 - 5:33pm.

Just as so I cannot be accused of ducking out when the market is dropping, I thought I would post quickly that my timing system still says to be long, so I am staying pat. My open profit on the April stock purchase has dropped down to 6% from about 20%. Boeing is one fifth of it, and it has continued to rise, effectively saving the boat so far. Cat is another 20% of it, and although getting pounded, is still more than 10% above my entry price.

I will admit that I did not see a drop of this magnitude occuring on very little if any fundamental warning of it. Yes there are alot of opinions, but the fundamentals I watch are still heavily on the long side, so I guess I just hold on and hope for the best. My mentor is actually very bullish right now, which even I have to admit, is hard to believe looking at the chart.

For the record, my futures long is about to be stopped out for a loss, but I only have 2 contracts instead of the usual 30 due to it being a low % trade within my parameters going in. When volatility increases this much, I reduce my size way down to lower risk. This is no time to be a hero, it is time to be careful. It is probably a buy about right here, but no add ons for me, I will just ride the longer term trend, until my system says to get out, win or lose.

It would also be a good time for all those that have been short for so long, and getting killed, to cover that position even if you are still a bit upside down. A big bounce at the very least is coming.

Go back in the archives to where I posted about the years ending in 7 summer sharp correction that was ridiculed by that punk that does not seem to be around anymore. It looks like I was off by about one week on that call, a year in advance of it.

Submitted by cashman on July 27, 2007 - 5:59pm.

Ozzie, don't forget to read what Rich has to say about the valuation of the market titled "U.S. Stock Market Risks" at the top right of this page. PEs are very deceptive right now as we are at the peaks of years of great earnings. That will surely subside. If the Dow breaks 11,750, watch out below, as wave five of the great bull market will have ended.

Submitted by LookoutBelow on July 27, 2007 - 9:14pm.

This is JUST the beginning...."Here come Da Pain Train"....

If you trade next week, be DAMNED careful out there ! "Whipsaw" could be the order of the day

Submitted by HereWeGo on July 27, 2007 - 10:15pm.

Chris-
The one aspect of this whole situation that really bothers the heck out of me is the complete and utter lack of leadership from any of the world markets. The only market that has not been absolutely tied at the apron strings to the NYSE, until today's action in Mexico, is the much maligned Shanghai Exchange.

The other markets have little to no exposure to "subprime" and yet they followed the lead of the NYSE like a pack of inbred poodles. When we needed someone, anyone, to stand up and say "Dumb Yanks", no one had the cajones to do it.

Pathetic.

Submitted by Ozzie on July 28, 2007 - 8:38am.

Cashman,

As today's WSJ points out there has never been a start to a Bear market with the current fundamentals in place. Obviously all bets are off if a recession comes about, but I think the earnings for the stocks I own (oil services, infrastructure plays) will continue to benefit from the world economy. Domestic guys like homebuilders, Home Depot, Countrywide, etc will continue to see earnings tumble through 2008 and I'll add to some put positions there in the coming weeks, but it's a big world outside the US and we have some global leaders here who will continue to perform.

That's my story and I'm sticking to it.

Submitted by capeman on July 28, 2007 - 9:02am.

Where do you stand on the position as a whole? Are we to believe that you waited every day for 12 months to short until the day before yesterday and got the exact high? If not, you are probably at best even on your puts if not still upside down due to time erosion as well as price. Also, % gains on options are less meaningful than the gross dollars made. I know people that talk about 50% returns etc, but they only have a few thousand in, so 50% is not an appreciable amount of gross dollars even though it sounds great at cocktail parties.

Yep, placed my bets on the table on Monday and the CFC earnings triggered the downfall.  Half of my total portfolio is short at this point with the only long position being my company stock.  The short half of the portfolio saw 300% plus this week with about 10 different short positions.  This was one of those weeks you couldn't lose if you were short unless against AAPL or AMZN.  With that steep sell-off at the end of day Friday below many support levels on the indices Monday could be very black.  I'd even consider selling my company only to be able to buy back cheaper in the near future but I am restricted on that one. 

Submitted by capeman on July 28, 2007 - 9:13am.

This is a slide that's not based on an event, not based on a loss, not based on an economic downturn, it's merely based on one word: subprime

Don't get confused over that term.  Subprime is a catchword for the media trying to play and spin the bad data coming in.  In the last week a lot of Prime MBS has been downgraded to Subprime status.  That coupled with CFC reports stating that Prime HELOCs are beginning to go unpaid gives a glimpse that at somepoint the media will have to turn to the use of the term Prime to explain things.  When that happens the shat has hit the fan.

Don't be confused by the GDP report.  Consumer spending which is normally 70% of the GDP came in at ~1%.  It went negative in June which likely means bad things and likely a bad Q3 report will be coming.  The Q2 GDP seems snowed and fudged and will likely be revised downward. 

Submitted by HereWeGo on July 28, 2007 - 9:40am.

I'm not confused by the GDP report. It clearly indicates that the benefits of free trade and globalization outweigh the pain caused by the housing downturn.

An aggressive California lender had problems with some HELOCs? Gee, who knew? What's the next terrifying revelation, that a Florida based condo builder is having trouble making ends meet?

Corporate profits are growing at 3x the expected rate for the quarter. Credit worthiness is generally determined by assets and income, although apparently CFC disagrees. Corporate balance sheets are flush with cash.

So why is corporate lending such an issue? Because many brain-dead experts, egged on perhaps by the bear paranoia that seems to permeate the web, can't seem to differentiate between loaning 600K to purchase a depreciating asset to an individual with a BK, an overstated income, and low prospects of rapid wage increase, and lending to a corporation whose income is rising at 10%+/year, with billions in cash on the books (nevermind the assets and equity.)

It's just astoundingly stupid.

Submitted by Chris Scoreboar... on July 28, 2007 - 10:43am.

Well that is truly amazing and quite frankly ranks you as the greatest trader who has ever lived. To not have taken one short at all during this whole bull run, then loaded the boat at the exact high! I speak with many of the greats, and am aware of most of what the ones I do not talk to are doing, and none of them have been that good.

I will defer in this blog to you because you are clearly superior to me, and I always check my ego at the door.

Congrats, you have out traded me by a wide margin. BTW, this is not intended to be sarcastic, I am being serious, whoever you are, if you are really that good, we all can learn alot from you.

Submitted by LA_Renter on July 28, 2007 - 11:40am.

I thought this was good article from Barrons. This little crisis will put BB to the test and allow him to show his true colors. Right now the Fed Funds Futures are putting .25 rate by the end of this year at 100%.

Will Bernanke Bail Out This Credit Meltdown?
"THE TURNING POINT IN LEVERAGED FINANCE HAS BEEN reached," junk-bond guru Martin Fridson declared four weeks ago in the print version of Up and Down Wall Street ("Dear Lord!" July 2). Any doubters of that prophesy were disabused by Thursday's rout in the stock market that had the Dow Jones Industrial Average down by more than 400 points at its low.

Since then, the cost of credit has skyrocketed, imperiling the raft of corporate buyouts that have fueled the bull market. And Business Week's cover story of Feb. 19 -- "It's a Low, Low, Low-Rate World: Money is cheap. And some experts say it could stay that way for years" -- is looking like a worthy successor to its infamous "Death of Equities" cover of 1979.

The entire spectrum of credit was being repriced, with far greater premiums to compensate for risk that had been cavalierly accepted by lenders and investors just a few short weeks ago. The notorious ABX.HE -- the index of credit default swaps on asset-backed securities, the main hedging vehicle for subprime risk -- not surprisingly took another tumble amid unrelenting bad news from home builders and in home sales data. And junk bonds had their worst day since the collapse of WorldCom in 2002, according to KDP Investment Advisors.

But the more important indicator has been the widening of spreads on corporate loans, the lifeblood of the deal business, evident in a further deterioration in the LCDX, an index which reflects credit default swaps (derivatives based on the cost of insuring against default on loans.) The LCDX hit another new low in its young life, resulting in the cost of default insurance rising to 325.5 basis points (3.255 percentage points).

That represents a doubling in the risk premium on corporate loans since Fridson made his prescient statement at the end of June, and triple where it started in May. Wall Street firms and banks that made commitments to lend to private-equity firms at the previously narrow spreads may now be holding the bag.

As a result, the cost of insuring Wall Street firms' credit soared Thursday, Dow Jones Newswires reports. For instance, the cost of insuring $10 million of Bear Stearns debt soared to $105,000 from $83,500, a huge increase in a single day. Indeed, the credit derivatives market is pricing Bear and Lehman Brothers investment-grade debt as junk, the DJ story adds.

That's set off a chain reaction throughout the markets. "Large banks, choking on LBO bridge debt that they cannot distribute, have likely tapped all their traders and risk takers to lower any and all risk positions and refrain from taking on any more, regardless of level," writes William Cunningham, head of global fixed-income research for State Street Global Markets.

Submitted by LA_Renter on July 28, 2007 - 11:43am.

(cont)

Job risk is greater than market risk in this environment," he adds pithily. In which case, discretion is the better part of valor for traders and portfolio managers.

All of which has accelerated the contraction of credit discussed ad infinitum in this space. And the evaporation of this propellant for the market's moonshot, to lift Cunningham's turn of phrase, sent the markets crashing around the globe.

"Equity investors should not ignore the message from the fixed-income markets," Richard Bernstein, Merrill Lynch's chief investment strategist, wrote in a note to clients before the market's open. "The rationing of credit means equity investors should discontinue their speculation regarding takeovers and LBOs."

As they heeded that advice, the market's slide recalled the minicrash of Oct. 13, 1989, when financing for UAL's proposed LBO fell through. That event marked the end of the junk-bond-financed takeover boom of the 1980s.

Cunningham of State Street likens Thursday's rout to the Long Term Capital Management crisis of 1998, when the collapse of that hedge fund caused the capital markets to seize up, even while the economy was in relatively good shape. At the behest of the Federal Reserve, the major banks and brokers arranged a bailout of LTCM. The Fed helped out by cutting its short-term interest rate target, even as growth was humming along.

The LTCM incident helped burnish the legend of the so-called Greenspan Put, the perceived insurance policy provided by the former Fed chairman to the markets when things got rough. After the crash of October 1987, the Maestro flooded the financial system with liquidity. And after the Tech Bubble burst, he did the same, slashing the overnight federal-funds rate all the way to 1% through 2003 into mid-2004, by which time the bull market and recovery were well along.

That's had two consequences: The cheap money inflated the housing bubble, which is now deflating with noxious effects. And it increases moral hazard -- the tendency of market participants to take on risk with impunity with the knowledge that they won't suffer the consequences if there's a bust. The expected Fed easing in reaction to any market setback is their Get Out of Jail Free card.

This episode marks Ben Bernanke's first test as Fed chairman. "Never mind foreign oil, the U.S. economy is addicted to easy credit, and an easing by the Fed in the current situation will only maintain this addiction, but it still may be necessary in the short term," asserts Cunningham. "The real test would be how quickly it was reversed, which was likely the mistake Greenspan made following LTCM," he concludes.

Or Bernanke could show he's no Gentle Ben and apply some tough love to the adolescents in the markets who don't know any limits.

So we are looking at a spectrum between Volcker and Greenspan. Who and where is BB on this??

Submitted by capeman on July 28, 2007 - 11:33pm.

Well that is truly amazing and quite frankly ranks you as the greatest trader who has ever lived. To not have taken one short at all during this whole bull run, then loaded the boat at the exact high! I speak with many of the greats, and am aware of most of what the ones I do not talk to are doing, and none of them have been that good.

Don't be confused by how I wrote that post. I had a splendid week by timing the shorts right but earlier in the year I did some losing with bad timing on the HBs and Indices. I finally put my money where my mouth was last week and got some luck to boot. It could have easily gone the other way if Mozillo-monster could have cooked the books and I would have watched my shorts evaporate. Now it's time to take that snowball and roll it down the hill with the upcoming crash.

Submitted by cashman on July 29, 2007 - 12:11am.

I thought a bear market was defined as being 20 percent off of the highs. We're only about 5 to 6 percent off as of Friday's close, aren't we?

Submitted by Chris Scoreboar... on July 29, 2007 - 12:49am.

Good work Capeman, you have a very nice trade going. I did misunderstand your post but I was not being sarcastic in my response. I truly meant that as a compliment. I have been reviewing in great detail what happened this week as I am writing my monthly newsletter right now, and I simply missed my call for a sharp drop by a week and my system did not catch it.

I do suspect the rally is going to resume, but I could have done much better exiting and re-entering so far. The question will be, where does the rally resume from. I would not have re-entered yet on this small of a pullback. If it does go back up from right here, staying put has been correct. If it is from much further below, it has been a mistake. Time will tell. The fundamentals look very good and the chart looks very bad.

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