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.

Individual Investors?

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.

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  • VennData October 8, 2008  

    …don’t forget strong market participants going after the weak hands, where ever they may be. Story lines about official’s speaking times and who-nationalized-what-on-what-terms obscures the bullying going on process.

  • Mike C October 9, 2008  

    “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.”
    I’d be curious what your stance/thoughts are now in terms of overall market valuation looking out 5-10 years from the current index level?
    How undervalued are we?

  • Jeff October 9, 2008  

    Mike – I’ll have an article on that topic soon. Most people looking at this have a “top down” method, which often means they have no method — just a guess, or a simple equation.

  • Commodity Trader October 9, 2008  

    Well written! you are so right…the media loves this and this is their “food”!
    Markets always move both ways in an extreme manner. We might look back in a few years and realize that might have been an opportunity to buy assets in really deflated prices.

  • mawa October 9, 2008  

    Mike’s analysis, and this other blogger I came across via DB (see comment below from DB) contain some reinforcing thoughts about the market.
    The financialblogger has called today for a fed action, and ALSO a bottom and/or a move up tomorrow Friday 10-10-2008.
    One nugget he mentions is remark on volume. Detaile below.
    Financialtraders Blogger pushes for Treasury department to announce a plan in which they would indicate that they would take a position in the stock market as a whole.
    Market should move big tomorrow 10-10-2008.

  • adam October 9, 2008  

    good stuff.
    I think part of it is the Program of the Day and/or Rule Change of the Day. In a sense I think they slowed it down with the daily announcements. Which I think in hindsight is a good goal in that you expect to catch a real bid at some point. In practice though, it seems to have just delayed it.