Why the Multi-Day Market Crash?
We have experienced a market crash. It did not occur in one day, as in 1987. Instead, it took a few weeks. We would call it a slow-motion crash, but it seemed to happen quickly and relentlessly. Analysis is needed.
The Proffered Reasons
Today we were treated to two explanations about why the market had another big decline.
In his speech, Bernanke was not strong enough in indicating that a rate cut was coming. This statement would seem to have some truth, since the market declined during the Bernanke speech and questions. Some thought that he indicated that cuts were coming. Others were bothered that he even mentioned inflation, proving that he does not "get it."
Our comment? Get real. Greenspan was much more obscure in his speeches. Did traders expect Bernanke to announce a rate cut in a public speech? So he mentioned inflation, which he clearly indicated was abating. Big deal. If a little Bernanke-speak causes a 500 point decline in the Dow, something is awry.
Rescue Plan Critics
Tonight's Kudlow featured an aggressive commentary from Don Luskin [no link yet]. He felt that Treasury Secretary Paulson should have started buying distressed paper the moment that Bush signed the bill. He then went on to criticize various features of the plan.
Our comment? A totally unrealistic expectation. Paulson is putting together a team and a plan. It appears that the first intervention will be within ten days to two weeks. By normal government standards this is WARP Speed, Captain! The Treasury does not have all of the right people on staff. Putting something together would normally take months. Give it a chance. The market will be watching the first intervention, so Paulson should get it right.
These highly negative comments feed into the popular perception, since the average citizen never really understood the basis for the plan.
The investment media, with a "death watch" on stocks every night, are featuring dire warnings. The investment blogosphere and our trusted gatekeepers also are going featuring doom and gloom.
To take just one example, we wrote an important article, strictly factual. The big-time media that have trumpeted the other side for years have not even picked up the story, either from the original source or from us. It was also not mentioned by the important gatekeepers. This is a symptom of a flaw in the media and the blogosphere, where business models seem to intrude on dispassionate analysis.
Briefly put, the market is not looking at data. There is a general feeling that no data sources are accurate. This leaves everyone free to offer his own forecasts for earnings and the economy.
The Real Reasons
The actual reasons for selling are pretty simple:
- Some hedge funds that had big leverage have been forced to sell at any price;
- Money is flowing out of natural buyers, the long-only mutual funds;
- There is no sign of relief in the credit markets. That is not going to happen until we address the issue of counter-party risk. It could happen quickly, through the suspension of FAS 157 rules, or more slowly, through the Treasury auctions. It will eventually be addressed, but too late for many.
- Typical technical triggers, like a high VIX, have not worked in calling a bottom.
- No one with "long bullets" will buy aggressively until the prior conditions are addressed.
For those of us who manage long-only programs this has been a once-in-a-lifetime disaster. It is not like 1987, which we experienced. The starting point was not a wildly over-valued market.
Many of us who analyze market fundamentals for individual stocks are simply amazed by the current prices. It is as if the market has priced in a Great Depression even before we have a significantly negative quarter of GDP. We plan to revisit this topic on some individual stocks that we favor.
Most of those with money to deploy are just standing back — a "buyer's strike." The Fed action to intervene in commercial paper is an important move, but no one seems to understand the significance.
Our official posture has been bearish for weeks, so we are not yet deploying newly invested funds in our programs, but we have an exciting list of opportunities. We are also have some specific triggers that we are monitoring.