MLK Postpones Black Monday: Int'l Stocks Plunge
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!
According 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.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."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."
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.Well, its 6 months later and...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!
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?
Comments (11)
Holy!!! DOW futures pointing to a drop of 450 points! Asian/Euro markets easily down 5%... even 7% in France. India went as far as 11% down before recovering.
We are in for a very, VERY rough ride on Tuesday. In fact, I wouldn't be surprised to see the market halted. Really. Things are getting that bad.. the average Joe is starting to hear and listen, and when they start pulling out of equities from their 401k's, look out.
Things haven't been this bad since 9/11. As far as Wall St. goes, we're in 9/11 mode. That should give some of your readers a simple perspective to what's going on.
Good luck and keep up the good work!
Posted by sang | January 21, 2008 1:40 PM
why did I buy more longs on Thursday & Friday! UGH!!! At least I have some EEV, so Im short the emerging markets thanks to my very good girl friend..you know who you are!
Posted by Noah | January 21, 2008 2:48 PM
I believe it goes deeper, and we have only seen the tip of the iceberg. I think many people in the larger and more affluent metro areas see either the forest or the trees but not both. And those that do see both sometimes have trouble putting it into perspective. I work in a small southern market that has traditionally seen too many trees and no forests. That being said, I dont think anyone has given enough weight to the huge losses we are going to incur in the job sector. The lack of savings to see the average American through these instabilities is going to have a profound impact on every aspect of the economy. I am starting to see an alarming number of foreclosures in the top 10% pricing range of my market. I am also starting to see large employers cut jobs and worker hours. This seems to be happening in several areas of the country. If this becomes a nationwide or even global trend...then no one has fully evaluated the fallout. This will add more fuel to the foreclosure fire thats raging and possibly cause some other troubled "bubbles" and sectors, and especially the stock market, more issues. Not to say there wont be pockets that are not affected or not as badly affected...I think wealthier areas, and those with investments not tied into this fiasco will take a much softer blow. In a global economy one must wonder how many investments are truly insulated. I think we not only need to be looking at all the pieces of the puzzle, we need to be focusing on how to put the puzzle back together. I see some steps in the right direction, but they are not from the gov or the traditional mainstream leaders. They are individuals in different sectors of the market who have become successful, and through different mediums are making their voices heard. They have unique perspectives and are motivated by more than just personal profit. I look forward to seeing progressive thinkers such as I find here tackling these problems and leading the fight in advocating effective changes in policy and business models. It will take time and cooperation, innovation and perserverence. But, IMHO, I think that is the only way we win this thing with any hope of lasting success.
Posted by Christina Robinson | January 21, 2008 3:10 PM
wow. Thanks for the comment Christina..What market are you in, if you dont mind me asking?
I share your concerns
Posted by Noah | January 21, 2008 3:54 PM
I'm the owner/broker of a small RE company started 8/07 SW Alabama. Think present-day Maycomb; struggling to cope with 21st century globalism, having never fully integrated itself into the 20th century, where the gaping disparity between wealth and poverty boggles the mind. I see so much that needs addressing and changing. For years I've had a local view and I have worked to that end with some small success. Through technology I now have a window to the world that was not possible when I first got into this business 10 years ago. I hope that this continues and more people begin to have a "bigger picture" sort of mentality and we become more proactive and less reactive and start responding to some of the root issues to most of this mess. To my simple mind greed, poverty, lack of broadscale acceptable education leading to apathy, rigid outdated mindsets by government, business, and social leaders are predominantly to blame for most of the issues we are facing. I'm tired of the status quo and if these leaders wont listen to new ideas that are working and fix things, what do we do? I think people are starting to wake up and smell the roses...and they smell like raw manure. Unless we get involved we will drown in it. To save it is going to mean lots of shoveling.
Posted by Christina Robinson | January 21, 2008 4:29 PM
Just a lighter note to ponder tomorrow as we watch what happens when the plunger is out of the drain....has anyone considered that Bush's last State of the Union address is 1/29? I mean, all those who voted for Gore and had to watch this buffoon and Dick "Deficits don't matter" Cheney steal the election, start a war over nothing on one GIANT credit card, well ....hey, what's he going to say? "OK, i screwed up a little?" Who is writing that fiction and what the hell are they going to be doing tomorrow?
Posted by jennifer | January 21, 2008 9:01 PM
It troubles me that less then 3% of defaulted subprime loans can destroy the economy. Place blame where it needs to be blamed in the mortgage market. When Bank of America couldn't compete in the subprime market in Kansas City, they closed up shop. When Countrywide couldn't compete, they lowered their standards and lowered their loan terms. This led borrowers into further stretching their purchasing power.
This is a great real estate market. Why sit back and watch . . . their are bargains everywhere here in Kansas City.
I think there will be bargains at the end of the week to the end of the month in the stock market also.
Posted by Chris Dowell | January 21, 2008 10:27 PM
Markets have never dropped before. They have never recovered from previous drops. The world is going to end, so buy some canned food and a can opener now before it is too late. Have you seen I Am Legend? That is what NYC real estate will be worth very soon.
(Please note the sarcasm.)
Posted by Buyer | January 22, 2008 12:06 AM
OK, so the Fed just cut interest rates by a whopping 3/4 of a percent, talk about panic. Should we hold off and wait to see how the dust settles? Or is this the time to jump in?
Incidentally, I don't work on Wall Street and don't depend on a bonus to buy property...
Thanks for your advice!
Posted by looking to buy | January 22, 2008 9:05 AM
Careful-
Your headlines are starting to look like the melodramatic, attention getting headlines of the NYT, Marketwatch, etc. I need you for strategies around my real estate business and investments, not for hand-wringing.
Posted by Michael | January 22, 2008 9:16 AM
well Ive discussed the macro problems for months. Cant stop now. RE is going to get hit Michael. No way around it.
If stocks are pricing in a recession, and a recession brings jobs losses and negative wealth effect, what do you think will happen to buyer confidence and buyer pool and inventory? You know my opinions on this chain of events.
Up to you to fine tune your strategy
Posted by Noah | January 22, 2008 9:24 AM