Published November 21, 2008

Wednesday rout brings fear of Black Monday

There's no way to measure a bottom from where we stand: fund manager

By ANDREW MARKS
NEW YORK CORRESPONDENT
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THE plunge in US stocks on Wednesday dealt a double blow to Wall Street investors who had been hoping not only that the market had bottomed last month, but that the massive government interventions in the US and abroad had at least stabilised financial markets.

As Wednesday's sell-off took stocks sharply below the Oct 10 market lows that strategists had been calling the bottom, and sunk the major US market indexes to fresh lows not seen in nearly six years, analysts were rushing to reverse their calls for a year-end rebound.

There's a view that even if stocks don't go down sharply by Friday, there is a danger that the market dynamics may already be in place for a 'Black Monday' sort of scenario when traders come back from their weekend break.

As the closing bell sounded on Wednesday and the numbers told the tale of losses - the Dow swooned 5.1 per cent, the S&P 500 6.1 per cent and Nasdaq 6.5 per cent - all talk of a re-testing of bottoms was silenced amid panicked shouts of 'Dow 6,000'.

'We are in free fall in both the economy and the markets. There is simply no way to measure or forecast a bottom from where we stand right now,' said Jim Awad, managing director at Zephyr Capital Management shortly before trading began yesterday morning on the New York Stock Exchange.

The panic that caused blue chips to lose 400 points in the last half-hour of trading on Wednesday retained its tight grip on investors in the early going yesterday.



The Dow skidded within moments of the opening bell, driven lower by disheartening news from the Labor Department that new claims for unemployment benefits jumped last week to a 16-year high.

However, by 11am, the market had reversed course with the Dow up 53.60 points to 8,050.88 and Nasdaq up 17 points to 1,403.42.

The trigger for Wednesday's sell-off was a treacherous combination of more record-breaking economic data that surprised even the most pessimistic of economists and spiking worries of yet another huge corporate financial crisis, as Congress debated the fate of the teetering Big Three automakers and seemed to reject a quick bailout to avoid bankruptcy.

The Census Bureau reported that housing starts declined by 4.5 per cent to an annual rate of 791,000 last month, the largest one-month decline on government records dating back to 1959.

Separately, the Bureau of Labor Statistics reported that its consumer price index fell one per cent last month, due in part to falling energy prices. The CPI's decline was its largest on record. Economists were expecting a decline of 0.8 per cent.

'When you look at the data flow in the last couple weeks, the numbers are slightly worse than expected, but remain largely consistent with the serious recession that most of us are now forecasting,' said Ethan Harris, senior economist at Barclay's Capital.

'What really concerns me is the continued deterioration in the financial and capital markets, despite the government's almost socialistic measures to pry them open,' he said.

Investors, he observed, are rightly upset and fearful that credit spreads are not only not stabilising but they're widening.

'Every week we don't get that stabilisation in the credit markets puts any hope for seeing a bottoming of the economic crisis further and further off,' he added.

Underlying the resurgence of panic in the stock market is the rising sentiment that Treasury Secretary Henry Paulson is steering a rudderless course for stabilising the markets and there is little hope for much-needed additional government stimulus until President-elect Barack Obama takes office in January.

'Paulson's flip-flop with the decision not to use the US$700 billion rescue package to buy the banks' toxic loans really hurt a lot of investors, and now the feeling is we're not going to get a decisive and reassuring government response until Mr Obama takes over,' said Mr Awad.

'That's nearly two months of non-action to look forward to at precisely the time we need action. Given that situation, I won't even begin to forecast how much further stocks will fall until then,' he added, a sentiment that's unfortunately echoing throughout Wall Street.