That seemed to be the reaction as U.S. indices suffered their worst weekly drop in ~5 years. Let’s go right to the numbers this week:
The Dow Jones gave back 4.2% for the week, and if that sounds ugly, it was the best performing U.S. index. The Nasdaq fared a little worse, dropping 4.7%, while the S&P500 got schmeissed for 4.9%. Two indices outright plummeted: The Russell 2000 careened 7% into the red, while the REIT index tumbled 8.8%. As you might have expected, the industry sectors which have run the furthest gave back the most (see Barron’s nearby Industry Action table).
Hold on to your hat for the next data point: The Russell is now in the red 1.7%, year-to-date. (Ouch!)
If that sounds bad, consider this: Global stocks actually fared worse. European, Global and Emerging-market stocks were off more than 5 percent (5.1%, 5.4% and 5.7% respectively). Even Gold sold off 3.5%. Sandra Ward named it "the American Flu."
Yields plummeted in a flight to quality, as Treasuries gained nearly a percentage point. The only other asset winner was Crude Oil, which rose 1.9% on supply concerns.
Is this the end of the sell off, or is it only beginning? Barron’s Trader column asks:
"Was the panic extreme enough to suggest the worst selling is behind? Investors puked up stocks violently enough, but the puking was more ferocious in late February. The market’s "fear gauge," as measured by the Chicago Board Options Exchange VIX volatility index, spiked slightly above levels reached in June 2006. Interestingly, option prices suggest traders expect the S&P 500 to gyrate even more than the historically volatile Nasdaq 100 — a sign the financial stocks that populate the S&P 500 are a source of worry."
Because our review looks backward (duh), this week’s version is especially nasty. Those unusually genteel souls who are easily disturbed by this sort of thing (Lordy! I nearly got the vapors!) should wait for tomorrow’s preview, which reads decidedly less ominous.
Enough chatter . . . On to the linkage:
INVESTING & TRADING
• Flood of cheap cash turns market toxic: A little over four years ago, as the US economy struggled to pick itself up after the dotcom crash, Alan Greenspan cut US interest rates to 1%. It was the first time in 50 years that the cost of borrowing had been so low, but the US Federal Reserve argued that nothing else would do. The struggling economy needed a crutch to get itself back on its feet and the Fed maintained that such a drastic step was the only way to return to growth.It worked, but at a price that investors are only now having to pay. (UK Telegraph)
• Up in Canada, the Financial Post smartly advises At times like these, ask yourself: why are you selling? "At times like these, you need to give yourself a shake and ask yourself — why you are selling? Often, the answer is "because others are." This is how fear and negative momentum accelerate in the market, as we saw yesterday. To me, though, that reason for selling is just about the dumbest answer you can give yourself. As an investor you own a piece of a company. In my view, it is better to make a sell decision based on what the company does, not the market."
• Treasuries Rise Most Since September Amid Credit Market Rout: Treasuries posted the biggest weekly advance in 10 months as the rout in mortgage and corporate debt and equities drove investors from riskier assets.The risk of owning corporate bonds soared to a record on concern that banks and hedge funds face widening losses on subprime mortgages and leveraged buyouts. Investors may pare bets the economy is slowing before the government’s monthly jobs report may show unemployment held near a six-year low. (Bloomberg)
• In This Mess, Finger Pointing Is in Style Who is to blame for the credit mess? The New York Time’s
Floyd Norris says there is plenty of blame to go around, but many roads
lead to former Fed Chair Alan Greenspan. Indeed, by the time the Easy
Al’s "The Age of Turbulence" arrives on September 17th, his legacy could be seriously impacted by current events.
• Stocks Drop Revealed Peak of ‘LBO Boom,’ Mark Faber Says: The LBO was a function of loose monetary policies and
excessive credit growth, an environment where borrowing was very
easy,” said Faber, managing director of Marc Faber Ltd. and
publisher of The Gloom, Boom & Doom Report. "The LBO bubble has
dispersed. The peak of the LBO boom has been reached. It was long
overdue that the market would go down.” (Bloomberg)
• Technically,The stock market was acting tired.
It’s tried on several occasions in recent trading sessions to convincingly climb above the 14,000 level, and failed. The stock market’s buying climax (MarketWatch)
• Slate’s Dan Gross gives us a chuckle with this analysis: Private Equity’s Next Takeover Target? Blackstone could buy itself
out: "Private equity buyers seek companies with certain distinguishing characteristics. These include (but are by no means limited to) the following: a stock that has been beaten down recently, allowing the buyer to get the deal done on the cheap; an underlying business with healthy margins that generates lots of cash, which will be needed to service the debt incurred in a buyout; a valuable brand and a long operating history that serve as ballast; little or no existing debt so that the new owners can borrow heavily to pay themselves dividends or to pay down the debt raised to acquire the company. Finally, the company should be one that finds being a public company more of a liability than an asset and thus would benefit from escaping the frequently harsh glare of public ownership." All this perfectly describes Blackstone itself!
• To those of you who asked about last week’s sojourn, here is Kansas City Shadow Fed / Maine Fishing Trip Recap
The Wall of Worry now bigger than the Great Wall of China:
• Minimum Wage Rose July 24th: The nation’s lowest-paid workers will soon find extra money in their pockets as the minimum wage rises 70 cents to $5.85 an hour today, the first increase in a decade.It ends the longest span without a federal minimum wage increase since it was enacted in 1938. The previous increase came in September 1997, when a bill signed by President Bill Clinton raised the minimum 40 cents, to $5.15 an hour. (Washington Post)
• ‘Imported’ Inflation? Try "Made in the U.S.A.": For years globalization was touted as undisputed good news in terms of the low prices it delivered to consumers. It was unqualified bad news only if you happened to be the fellow who made the goods now being produced in China. Now the tide has turned. After more than a decade of “exporting” deflation, China has gone over to the dark side, according to U.S. government statistics. The price of Chinese imports to the U.S. has risen in the last few months, triggering predictable reactions based on faulty assumptions. (Bloomberg)
• Fears Intensify On Economy, Despite Growth: Behind the picture of strong second-quarter economic growth are new worries: Fears that the continuing housing slump, higher gasoline prices and tumbling financial markets could damp consumer spending and blunt the U.S. economy’s momentum in the second half. (free Wall Street Journal)
• Home Craze Gazumps London With Record Prices, $500,000 Parking: These days, buyers who dillydally risk getting gazumped.
That’s British slang for what happens when someone arrives on
the scene at the last minute and offers a higher price. The decade-long leap in prices has made London the most
expensive city in the world for high-end homes — costlier per
square foot than Monaco, New York, Hong Kong or Tokyo. (Bloomberg)
• New-Home Sales Decline; Housing Weighs on Economy: You don’t say? (Real Estate Journal)
• Wall Street Starts to Lean Democratic After Years of Backing Republicans, High Finance Turns to Democrats in ’08 (ABC News)
• Google Maps Is Changing the Way We See the World: This was my single favorite story in the July issue of Wired
Newspapers’ Ad Sales Show Accelerating Drop: Last fall, newspaper executives and analysts were caught by surprise by the severity of a slump that took hold last summer. Since the beginning of this year, the rate of decline in advertising revenue has accelerated. Total print and online ad revenue was down 4.8% to $10.6
billion in the first quarter from a year earlier, according to the Newspaper Association of America, compared with its full-year decline in 2006 of 0.3%. (free Wall Street Journal)
MUSIC BOOKS MOVIES TV FUN!
• I found the jazz/blues chanteuse Katie Melua thanks to her brilliant cover of The Cure’s Just Like Heaven. The Russian-born, British music school-educated singer has been called "the next Norah." Her first two CDs have sold well in the UK, but she’s relatively unknonn in the USA. Her official site is here.
• I just started reading the well-reviewed Competition: The Birth of a New Science S far, it looks intriguing.
• Statetris is a Flash-based Tetris played with falling US states. Get
’em into the right spot or the US will overflow into Canada and
everyone gets socialized medicine!
That’s all from a sticky, partly cloudy, dog day of summer in
the NorthEast. You folks best catch up on your rest, ’cause its gonna be a busy week.