MLK Postpones Black Monday: Int'l Stocks Plunge

Posted by urbandigs

Mon Jan 21st, 2008 10:03 AM

A: Well, the credit crisis that wreaked havoc on our financial system, is sending International stock markets plunging! Fears that the US is already in a recession, expectations of corporate defaults, continuing credit crisis, continuing housing slump, and toxic waste on the books of financials is trumping everything right now; nothing else matters. If our stock markets were open today, it appears that the DOW would open -350 or so and the NAZ would open -65 or so. After a 15% selloff over the past 4 weeks, that is more painful than it appears! Get ready for capitulation, hopefully, and for fear to start fueling these down days ahead; we need this to happen so we can price it in and get through it later on. Its going to be a wild ride!

global-stocks-plunge.jpgAccording to Bloomberg:

Stocks plunged in Germany, Hong Kong, India and Brazil, and U.S. index futures dropped on mounting speculation that the global economy is slowing and company defaults will rise. Hong Kong's Hang Seng Index had its biggest drop in six years after BNP Paribas said Bank of China Ltd. may write down overseas securities by $4.8 billion because of losses from U.S. subprime mortgages.

"It's the worst I've ever seen," said Johan Stein, who helps manage the equivalent of about $14 billion at Nordea Asset Management in Stockholm. "The financial system is in terrible shape, and no one knows where this will end."
But Noah, corporate earnings are still good, its a global economy, the weak dollar bulks profits, and I own stocks; this can't happen!!! Well, you need to wake up! The credit crisis is powered by a complete debt problem, not just subprime, and that was powered by a slumping housing market following years of reckless lending practices, speculative activity, and easy monetary policy. Consumers are now tapped out and mired in debt, home equity is contracting, defaults/deliniquencies are rising, financials' books are in complete turmoil and still hold plenty of toxic holdings, and it's starting to spread internationally. It really doesn't matter what corporate earnings were, it only matters what they will be in the future! As the slowdown hits, so will spending and corporate profits will slide; that means the all important value indicator of PE ratio (price/earnings ratio) will rise making the stock price seem too expensive! Hence the ongoing correction.

This environment is so complex and the credit crisis has so many tentacles that it really is impossible to gauge how bad it will ultimately be or what the next big catalyst will be. One thing is for sure, there is so much uncertainty right now that this ride will not only be wild, but will be painful too as we don't see what hits us until after it happens! At some point, there will be some great entry points for both stocks and housing, its a question of when that is the tough part!

Lets go back 6 long months ago to my July, 2007 article "MuBIS, Credit Fears, & Housing Woes" -
There is a flight to quality going on right now into bonds sending bond prices higher and yields lower out of fear for growing problems in the RMBS (residential mortgage backed securities) markets, credit markets, and housing industry. Is it warranted? Sure. However, as time goes on it seems the problems get more and more real and that is what is causing uncertainty to take over. And the tradable stock markets HATE uncertainty causing a flight to quality in the bond markets.

So far it has not happened and even a few down days on wall street is not a trend make as we are only off record highs of the Dow by a few hundred points. However, where we will be in 6 months is another question. If you see stocks get killed, chances are that will start a chain reaction of events that would directly impact our housing market that has been so strong in the face of multiple adversities happening outside our city!
Well, its 6 months later and...

a) DOW dropped from 13,473 to 12,100 on Friday and looks to open MUCH lower tomorrow
b) Countrywide avoids bankruptcy by being bought out by BAC; deal in question?
c) Financials Killed; billions and billions in losses and more to come as bank's books are still holding tons of toxic asset backed securities that can't be sold off in current environment
d) Subprime sparks fire; Whats next? HELOC's, Option ARMS, Alt-A, Prime, Credit Cards, Auto Loans, Corporate Defaults, etc...
e) US infects Global Equity markets; Int'l markets plunging

Four and a half months ago I put my latest update on the two biggest threats I see to housing; I have not changed that since:

1. Global Growth Slowdown Amid Credit/Liquidity Crisis
2. Insolvency Crisis - Inability to pay back debts; assets no longer exceed liabilities

My biggest fear now is that a slowdown is here in the US economy and even worse, it will SPREAD TO GLOBAL ECONOMIES! Globalalization has been such a major factor in the growth of US corporate profits and ultimately stocks for the past few years. If we remove that equation, we will be entering a period of stock market corrections, more layoffs, negative wealth effect, change in consumer psychology, and big cutbacks in bonuses and salaries. This has NOT happened yet!
Fast forward to right now. Facts people. This is reality. It appears we are headed for a -3% opening tomorrow and the more our stock indices fall, the more it starts to hit home as the media amplifies the problems in the minds of consumers. The chain reaction ending with consumer confidence begins. Everything is intertwined and all this so far has been due to a little thing we call subprime! What if it goes deeper than that?