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Dow down – what happened?

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by Peter Switzer

The only good thing you can say about Wall Street overnight is that the stock market did not end at the session lows! And given what we’re seeing, long-term investors might need a good dose of Rudyard Kipling!

You know, “If you can keep your head when all about you are losing theirs …you’ll be a long-term investor my son.”

(The italics denote my slight innovation to this classic piece of advice.)

So, what happened and why? And what are the implications?

The Dow lost 419.63 points, or 3.68 per cent, to end at 10,990.58.

The S&P lost 4.46 per cent to finish at 1140.65 while the Nasdaq gave up 5.22 per cent, not helped by reporting from Hewlett-Packard.

But the real story for the sell-off focused on the two big concerns that have explained the recent volatility — Eurozone banking problems and US double dip worries.

The US overnight

It’s interesting that HP actually did better than expected but its outlook statement spooked the market. However, most companies don’t know what the future will bring but it’s apparent that it’s weaker than what was expected six or even three months ago.

There was fear with the VIX above 40 and this was below 20 earlier in the year when investors were a lot more confident about the future.

One of the big drivers for today’s slide was the Philly Fed survey of production that came in at -30.7, which was the worst result since March 2009. This was supposed to be a small positive, so it surprised the market and when the bears are in control, negative surprises don’t go over well.

Also existing home sales fell and that did not help confidence either. And after some recent falls of jobless claims, they spiked this week.

By the way, Morgan Stanley telling us that a global recession was now more possible didn’t help share buyer enthusiasm.

Finally, the day’s slump wasn’t helped by European banks that were sold off on the talk about a transaction tax of European financial institutions. Europe had its worst one-day fall in just about three years, CNBC said.

To make matters worse, the CPI was up 0.5 per cent but against that the country’s leading indicators were up 0.5 per cent in July and while weaker than needed, they’re still not saying a recession is a certainty.

Euro-concerns

But these are all second-string spook factors compared to the new fear that Europe’s sovereign debt contagion will become a Euro-bank contagion. Today’s big share sell-off reminds France’s Sarkozy and Germany’s Merkel that they let Europe down at their Paris meeting this week.

Their half-arsed solution and the promise of a tax on banks has brought about this negative reaction.

At the moment, there are question marks over banks and that will always scare stock markets and until the fear is beaten, get used to volatility.

What will happen? Probably the European Central Bank will start to act like it knows how serious its situation is and will act accordingly. Its boss is Jean-Claude Trichet and he will never go down in history as the world’s greatest central banker.

I can think of a word that rhymes with banker but that would be going too far, even for me!

Remember the words in the first paragraph from ‘Rudyard Switzer’.

Important information:This content has been prepared without taking account of the objectives, financial situation or needs of any particular individual. It does not constitute formal advice. For this reason, any individual should, before acting, consider the appropriateness of the information, having regard to the individual’s objectives, financial situation and needs and, if necessary, seek appropriate professional advice.

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Published on: Friday, August 19, 2011

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