Friday, October 10, 2008

Capitulation Anyone?

The events we are witnessing during this financial meltdown will definitely be considered a historic event, as the stock markets around the world unwind in a whirlwind of panic selling. The close on October 9, 2008 has the major US indices firmly in bear market territory and the market is bordering on being absurdly oversold, which usually marks the capitulation and bottom of a bear market. It would be quite ironic if this level held as the bottom, especially since the all time highs for the DJIA and S&P 500 were set a year ago to the day. At this juncture, the DJIA is 39.4% off the October 9, 2007 high, while the S&P 500 is 41.9% below its peak. As is usually the case during market downturns, the NASDAQ is now 42.5% below its high water mark, which was set on October 31, 2007.

At the time of this writing, futures are indicating a drop at the open of the US markets, while Asian and European markets are 7% - 10% lower. A large part of the selling is due to deleveraging by hedge funds and others who overextended during the credit bubble. Margin calls cause investors to come up with more cash or sell assets. It looks like asset sales are the order of the day. I'm sure there are many smaller investors who are also selling, following the herd and fueling the panic.

Just as irrational exuberance has faded and illogical pessimism has become the mantra for the day, the trepidation investors are feeling now will elapse and calm will be restored. Real damage has been done to the portfolios of millions of investors around the world, and bailing out at this point, especially if you don't need the cash today, is foolhardy at best. Besides, if the market were to drop over 50% and the government went bankrupt, which was a rumor in the trading pits yesterday, what would the cash under your mattress be worth anyway? Of course, you could always buy gold at over $900.00 dollars an ounce, because doesn't that just ALWAYS keep going up? You know, like stocks, housing, oil, commodities and of course, tulips!

John H. Kaighn

Jersey Benefits Advisors

The Kaighn Report