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After Shocks from the October MeltdownGary Dorsch October is famous for stock markets crashes, - the Crash of 1929, "Black Monday" 1987, the Asian Contagion crash in October 1997, and the Sub-Prime crash of October 2008. US Treasury chief Henry Paulson's ill-fated decision on Sept 14th, to pull the plug on the 158-year old brokerage firm of Lehman Brothers, set in motion a horrific chain of events that unleashed a torrent of panic selling on commodity and global stock markets, froze the European and US banking systems, and changed the direction American politics for years to come. At its lowest point in October 2008, the meltdown in equities around the world erased $12 trillion of market value for the month and $31 trillion from a year earlier. Lehman's bankruptcy left sellers of credit default swaps with liabilities of $270 billion, and hedge-funds scrambled to raise cash by selling anything they could get their hands on, including commodities and stocks. The Reuters/Jefferies Commodity Index plunged -23% in October, its steepest monthly decline since 1956. Investment grade corporate bonds lost -7.4% in October, their worst month since 1976. At the same time, US-home prices continued their unrelenting slide for a 20th straight month, to stand -222% below their peak in July 2006. Falling US-home prices have reduced homeowner wealth by about $3 trillion, and stock market losses add-up to an additional $8-trillion. This reduced household wealth could force US-households to cut aggregate spending by $300-billion a year or more. Historically, September is the cruelest month for the US-stock market, but residual selling often spills over into October.The Dow's loss of -18% in October-2008 was the biggest since the crash of October-1987. Paper losses totaled $2.5 trillion. But for Republican nominee John "Maverick" McCain, a late October to Nov 4th rally, boosting the market by 15%, was too-little, too-late. The tide of opinion among the investor class whose 401k's and IRA's had plummeted, tilted against the Republicans, and was made worse by the unrelenting slide in home prices.
In mid-September, Republican nominee John "Maverick" McCain understood the fatal impact of a stock market meltdown on his presidential bid. He frantically suspended his campaign in order to persuade rebellious House Republicans to quickly agree to a $700-billion rescue plan for US-banks, and prevent a meltdown in the market. But House Republicans decried it as a "bailout" and helped to kill its first version, sending the Dow into a tailspin of 777-points. But Obama stayed quiet and above the fray. The Treasury's bail-out, - purchasing toxic mortgage-backed securities from banks was badly flawed and utterly rejected by the marketplace. Even after the House finally passed the bill on October 3rd, the Dow Jones Industrials plunged another 3,000-points and free-falling to a five-year low. It was not until the British and Euro-zone governments moved aggressively to inject capital directly into their banks, and the US Treasury followed suit, did some measure of calm and stability return to the global stock markets. But for "Maverick" McCain, the collateral damage from the October market meltdown torpedoed his long-shot bid for the presidency. The Dow Jones Industrials rallied 15% in the week prior to Nov 4th election results, a move that has surprised many traders. Barack Obama's higher tax policies combined with far-left Democratic control of Congress defied the conventional wisdom that markets like lower taxes and at least some gridlock on Capitol Hill. However, soon after Obama's victory speech in Chicago, the stock market rally fizzled out, and the Dow began melting down 800-points over the next 36-hours of trading.
McCain had a steep uphill climb, tied to an expensive war in Iraq, linked to an deeply unpopular Republican president, 760,000-jobs lost this year before the stock market crash began in mid-September, roughly 90% of Americans saying the economy is on the wrong track, and his selection of Sarah Palin as his running mate, turned off 60% of independent voters. The Arizona senator was also handicapped by his confessions that economics wasn't his strongest suit, which showed during the debates, while the Main Stream Media elite gave its blessings to Barack Obama. Americans are naturally eager for fresh start, - a "New Deal," as is typical during periods of economic hardship. And a majority of voters turned to Obama in a giant leap-of-faith, - a man who many Americans know little about, and with no executive experience, after less than four-years out of the Illinois Senate. McCain tried to paint Obama as a tax-raising Socialist, who will "spread the wealth around," a fear that resonates with the biggest and most powerful traders in the financial markets. Uncertainty over how Obama and the far-left Social Democrats in Congress would alter tax policies for US-multinationals listed on the NYSE, and capital gains taxes on wealthy investors, intensified the stock market's meltdown in October. On corporate taxes, Obama proposes to tax world-wide income earned by American multi-nationals at the 35% US-corporate rate, the world's second highest. Obama is also promising a windfall profits tax on oil companies, and in his stump speeches, talked about lifting the capital gains tax on wealthy investors to 20% next year.
The volatility on Wall Street was unprecedented in October, with gut-wrenching swings of 500-points or more per day. The CBoE's Volatility Index (VIX), which measures how much traders are willing to pay for stock options, typically at-the-money S&P-500 index put-options, soared to a high of 89.5 on October 24th. Even in the biggest panics this decade, the VIX did not move above 48. The VIX tends to go up during sharp market declines, and falls during sideways or rising markets. Most importantly, the VIX is regarded as a contrarian indicator. Historically super-high VIX readings signal extreme fear and panic, and have coincided with significant bottoms in the stock market. On October 25th, contrarians lifted the Dow nearly 900-points higher, betting the fourth worst bear-market in history had run its course. The 2000-2002 bear market fell -49% before finding a bottom and the 1973-1974 bear market lost -48-percent.After the 2007-2008 bear-market tumbled -46% from the October 2007 high, contrarians figured that the trading patterns of the past would once again, serve as a reliable guide for the future. The "Group of Seven" cartel of central bankers and the Bank of Japan played a key role in engineering the late October stock market surge, by capping the rise of the Japanese yen against other major foreign currencies. On Oct 26th, the G-7 central bankers issued a veiled threat to intervene in the marketplace if necessary, to block the yen's advance, "We are concerned about the recent excessive volatility in the exchange rate of the yen and its possible adverse implications for economic and financial stability," the G-7 finance officials said. To read the rest of this article, please click on the link below http://www.sirchartsalot.com/article.php?id=97 Nov 7, 2008 321gold Ltd |
