The world’s major stock markets are down over 5% in trading this morning. The loss of confidence in the credit markets is increasing. Investors are selling in droves and running for safety. Now is not the time to be a hero. Capitulation is coming to fore. The bottom is nearing but nobody knows when with certainty. A development to look for is when the markets gap down to the bottom, exhausting all selling pressure, and the buyers come in.
Asset prices are quickly dropping. Energy and food prices likely peaked this summer. Slumping global demand and investors cashing out of their positions are creating rapid price drops in commodities. Instead of dealing with inflation, central banks are more likely dealing with deflation. As a result, expect more money to be pumped into the credit markets. The Fed will probably cut the key discount rate by 50 points. Other central banks are likley to follow suit.
The sky is not falling. With the world’s smartest investor, Warren Buffet, making two multi-billion dollar deals is signalling that there are bargains surfacing in the markets. Yes, the economic situation is dire but not without hope. Other well financed entities such as JP Morgan and Wells Fargo are doing like wise. Once the worse has passed and the economy starts growing again, holders of these stocks will do well. We just need the bailout to pass today in order to calm the capital markets.
In all this turmoil happening in the financial markets, JP Morgan’s stock is on the cusp of breaking its 52 week high. Yesterday, the stock closed up $0.60 to $49.85. The 52 week high is $50. JPM was one of the better run banks in that it largely avoided the financial mess that took down its big competitors. In fact, JPM used the opportunity to snap up its hapless rivals. The market is saying that once the credit crisis is behind us, JPM will do indeed well.
Trust these days are at a premium. The credit markets are freezing up. Nobody is lending for fear that the counter party might not be around tomorrow. Just look at the LIBOR rates and the lack of activity in the commercial paper market. What is bad for Wall Street is bad for Main Street. If businesses and consumers can’t get financing for their activities, the economy will drastically slow down. A first step would be the passing of the bailout package. It won’t solve the current ills but a good though flawed start.
According to the U.S. short-term interest rate futures, investors are pricing in that the Fed will cut interest rates by at least a quarter percentage point at its policy meeting in late October. The implied chance of a 50 point rate cut to 1.5 percent is now seen at 60 percent. Recent data is showing that the economy is shrinking fast. Auto sales are dropping to 17 year lows. Even if the bailout package passes, the Fed needs shock and awe measures to turn the markets and the economy around.
Even a soldi drug retailer such as WAG is not spared from the weakness hitting the US consumer. Looking at the charts, the stock is in a downward trend. There is evidence suggesting that the consumer is even cutting back on basic goods. Short term, the bias is still on the downside. At $24, the stock should have support. On the plus side, competitors such as Rite Aid are struggling. For now, keep a watch on this stock. It is not a defensive play.
The credit squeeze is getting worse. Companies are hoarding cash where they can. Bamks aren’t lending and the capital markets are in a deep freeze. Some big name corporations such as GE are slashing dividends to conserve cash. The most effective way to get the economy going again is to make credit readily availalbe for individuals and businesses. It will take time and massive efforts on part of the world’s central banks and governments.
With the consumer no longer in a spending mood, many weak and over-leveraged retailers will be at risk of folding. Names circulating include Circuit City, Eddie Bauer, Claire’s Stores and Krispy Kreme Doughnuts. These retailers offer non-essential items and have high levels of debt. If the holiday season turns out to be weak and the economy continues to struggle, some of these retailers might no longer be around. The de-leveraging of the US economy continues.
According to an interesting article in BusinessWeek, two-thirds of Congress’ most vulnerable members, both Republicans and Democrats, choosed to protect their seats on Election Day rather than follow their party leaders and vote for the very unpopular $700 billion economic bailout package. This group would rather protect their jobs than do what is right for the economy. It is no wonder that people have lost faith in politicians to do the right thing.
