Thursday, October 09, 2008

Bailout Not Working: Market Continues Free Fall, Dives 679 Points, Alaska Permanent Fund Has Now Lost $5.0 Billion In Value


The "experts" claimed that a taxpayer bailout of the market was absolutely essential, otherwise, no one would lend money, businesses would close, people would lose jobs, the sky would fall, etc.

Then after Congress was suckered into passing the massive pork-laden $700 billion bailout, the "experts" changed their tune. Now, they said, recovery would not be instantaneous; it would take time to unfreeze those pesky credit lines. But there was a light at the end of the tunnel.

Would that light be from an oncoming train, perhaps? On October 8th, 2008, the stock market experienced its sixth consecutive day of triple-digit losses, dropping an additional 679 points, an estimated 7.3 percent of its value. This represents the Dow's lowest point since May 21, 2003 and the third biggest one-day point-loss ever. Full stories published by CNN, the New York Times, and USA Today.

Over the last seven sessions, the Dow has lost 2,271 points, or 20.1 percent. Since hitting an all-time high of 14,164.53 one year ago today, the Dow has lost 39.4 percent. "We are in a free fall right now and fundamentals have been thrown out the window," said Phil Orlando, chief equity market strategist at Federated Investors.

In addition, the Standard & Poor's 500 (SPX) index lost 7.6% and closed at its lowest point since April 28th, 2003. The Nasdaq composite (COMP) lost 5.5% and closed at its lowest point since June 30th, 2003. The Nasdaq has never come close to its record of 5,048.62 hit on March 10th, 2000, at the end of the tech bubble. But after hitting a six-year high of 2,859.12 last Halloween, the Nasdaq had slipped 42.5%, as of Thursday's close.

Furthermore, a key measure of investor fear hit an all-time high: The CBOE Volatility (VIX) Index, or the VIX, hit nearly 64. In real-life terms, investors pulled $43.3 billion from stock mutual funds during the week ending October 8th. Investors removed a total of $7.2 billion from equity mutual funds a week earlier. But investors weren't just taking cash out of stock funds; they also pulled $8.8 billion from bond funds and $4.1 billion from hybrid funds.

Stocks continue to tumble despite a series of efforts on the part of the government to unfreeze the credit markets and get money flowing through the system again. Bank lending remained tight as nervous institutions continued to hoard cash. Treasury prices fell, raising their corresponding yields. Oil, gas, and gold prices fell. But the dollar gained versus the euro and the yen.

But despite the fact that the mortgage bailout has been spectacularly unsuccessful so far, the Treasury Department is now talking about ANOTHER bailout. Treasury is now looking to buy stakes in some banks as part of the $700 billion bank bailout law enacted last week. The main focus of the bailout remains buying bad assets from banks.

But Phil Orlando stubbornly insists that the Fed and Treasury have done many things right, but the markets realize that these programs won't have an impact on the market until six to nine months out. "[Third quarter] earnings will still be poor, [third-quarter] GDP will be a disaster," Orlando said. "Investors are trying to price in the depth of the recession now."

Experts still place the smoking gun in the hands of Lehman Bros. "The Lehman bankruptcy was really the failure that triggered this waterfall event we've been going through," said John Merrill, chief investment officer at Tanglewood Wealth Management. "Suddenly people who thought they had access to money didn't have money and they had to sell something," he said. "So it started with forced selling and it's turned into a panic."

President George W. Bush is expected to make a statement on Friday October 10th, telling investors that economic officials are doing everything they can to stabilize our financial system. However, the President may be whistling in the dark; as Friday dawned in Asia, the Asian markets were already bathing in more red ink. Japan's Nikkei Exchange was down more than 10 percent in early trading, dropping below 9,000, while the Australian Securities Exchange was down more than 6 percent and South Korea's KOSPI Index fell more than 7 percent. In addition, Hong Kong's Hang Seng index opened down more than 7.5 percent and the Shanghai stock market fell more than 5 percent.

Alaskans who were smart enough to stay out of the market, which I've considered a gigantic pyramid scheme for years now, can not necessarily take comfort in these developments. The Alaska Permanent Fund has taken a $5 billion hit since the slide began, dropping its value to $30.9 billion. And even if a recovery occurs, this blip in the market will follow us for several years, since PFD checks are based on a five-year average. That affects ALL Alaskans who draw PFD checks. Twenty-six percent of the Permanent Fund's investments are in domestic stocks.

By the way, I wonder what happened to all the cheerleaders for "privatization" of Social Security??? They've been conspicuous by their silence - and absence - from this debate. LOL!

The continuing debate over the bailout is now dominating the U.S. House race between incumbent Congressman Don Young and Democratic challenger Ethan Berkowitz. During an October 6th debate between the two, Berkowitz and Young disagreed on the bailout. Young, who voted against the package, said "it's a huge debt we're going to leave to our grandchildren," and it's not a good idea to give the treasury secretary power over $700 billion. He also claimed the current credit crisis is the result of a lack of domestic energy production, saying the nation is sending too much money overseas to buy oil. On the other hand, Berkowitz said he would have been a reluctant supporter of the package. He said the Permanent Fund has lost more than $3 billion, and that the credit crunch also endangers family investment accounts as well as the ability to start businesses in rural Alaska.

The problem is that Congress has too many Berkowitzes and not enough Youngs. And, unfortunately, the latest Ivan Moore poll indicates Alaska could supply Congress another Berkowitz in November. Berkowitz has now opened up a nine-point lead on Don Young once again. And election day is less than one month away.

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