Oct. 9th - a day that will live in financial infamy
Thursday, October 9, 2008
(10-09) 19:50 PDT --
Fear turned into panic on Wall Street today as sellers indiscriminately dumped shares and potential buyers stood frozen like deer in the headlights.
Exactly one year after it hit its all-time high, the Dow Jones industrial average posted its seventh-straight loss, tumbling 678.91 points, or 7.3 percent, to close at 8,579.19. Since October began, it has fallen almost 21 percent.
Investors seem to be losing faith in the ability of the world's governments and central banks to unfreeze the credit markets and prevent a severe recession.
Also roiling the markets: The Securities and Exchange Commission today lifted its temporary ban on short-selling in almost 1,000 mostly financial companies. Short sellers, who bet against stocks they think will fall, have been blamed for contributing to the stock market collapse.
Today, however, investors abandoned stocks in all industries. Only 12 of the 500 stocks in the S&P 500 index eked out a gain.
Even IBM, which reported third-quarter earnings that were better than expected and reaffirmed its outlook for the fourth quarter, saw its shares fall 1.7 percent.
Much of the selling is believed to be coming from hedge funds and, to a lesser extent, mutual funds that need to sell stocks to pay off investors who want their money out. These funds are selling "whatever they can," says Stewart Pillette of Pillette Investment Management. Big, blue-chips stocks are often easier to sell than smaller ones, so they are getting jettisoned to raise cash.
Coincidentally, today also marked the six-year anniversary of the end of the last bear market.
During that bear market, which ended Oct. 9, 2002, the Dow fell 38 percent, the S&P 500 lost almost 50 percent and the Nasdaq composite tumbled 78 percent.
Since the current bear market started a year ago, the Dow has lost 39 percent, the S&P is off 42 percent and the Nasdaq is down 41 percent.
All three indexes, however, are still above where they were when the last bear market ended.
Capitulation?
Some analysts say the market appears to be going through capitulation, a period of heavy selling marked by pervasive gloom, when investors ignore good news and throw out the good with the bad. Many, but not all, bear markets end in a capitulation. When everyone who wants to sell has gotten out, a modest influx of buyers can lead to big gains.
The past week's selloff "absolutely" felt like capitulation, says Ed Yardeni, president of Yardeni Research. "It's total and complete revulsion. People are chucking out stocks, saying get me out of here. What we're learning is that capitulation doesn't have to happen in one day."
The problem with capitulations is that they are hard to identify, except in retrospect. A lot of selling that feels like a capitulation really isn't, while a real capitulation is not always obvious. Sometimes, though, people get it right.
On Oct. 10, 2002, the Dallas Morning News ran a story entitled "Darkest near the bottom." It started like this:
"Stocks received yet another cruel mugging Wednesday, pushing the Dow Jones industrial average to a five-year low. So is a selling climax at hand? Once again, there's a growing consensus among Wall Street pros that a day of final capitulation must be near. It had better come soon, though, or there won't be an investor left standing who cares anymore."
The story noted that "even General Electric Co., a paragon of the market, fell $1.35 to $22."
Although the day described did indeed mark the end of the bear market, it wasn't obvious until long after. At year end, news reports were still questioning whether investors had thrown in the towel. In early 2003, the stock market tumbled again, although it never got as low as it did the previous October. It wasn't until March 2003 that the market started its long upward climb.
Another problem with capitulations is that no two are alike.
"This is slow torture capitulation," Pillette says. "It's doing it in a way I've never seen before in my 45 years. Usually you get (days when the market is down 600 or 800) and then you get relief."
Pillette says his analysis of the market suggests it could fall 5 to 15 percent more. "Fear is not rampant yet," he says. "Almost everybody I talk to in the institutional world is expecting a big bounce. Because that's so pluralistic, I doubt that we are going to get it. My guess is we probably get it after the elections."
Nevertheless, Pillette says he has been buying stocks.
"Liquidity is abundant. There is more money sloshing around now than in my memory. It's not working because of a lack of confidence. The confidence is really a function of what bank is going to fail next," he says.
"I'm starting to nibble because I don't know where the bottom is," Pillette explains. "I bought a little Cisco today at $17.50. My thought is, if it goes to $13, I'll buy it on the way down. I'm doing the same with Intel, General Electric. I'm trying to find high-quality stocks that have been thrown away."
Timing it right
Meir Statman, a finance professor at Santa Clara University who studies investor behavior, says he's not going to "stick my neck out" and call this a capitulation.
"The decline in the price (of stocks) justifies the fundamentals," he says. "It's not all just panic."
Yet the odds favor a turnaround, eventually.
"What I know from my studies is that individual investors tend to extrapolate recent trends," Statman says. If stocks are going down, they think stocks will continue to go down.
"I also know that generally, those expectations turn out to be wrong. When people are most pessimistic, the likelihood is greater that the market will go up." But he adds, the odds are not necessarily high. "It's like saying there's a 53 percent chance the market will go up and a 47 percent chance it will go down."
Sometimes, he warns, "people are pessimistic and the market still goes down."
The opposite is also true. Former Fed Chairman Alan Greenspan warned of "irrational exuberance" in the market in 1996. The market continued climbing until 2000.
Many investors have been burned overestimating how soon investors will become rational.
As John Maynard Keynes supposedly said, "Markets can stay irrational longer than you can stay liquid," Statman says.
Net Worth runs Tuesdays, Thursdays and Sundays. E-mail Kathleen Pender at kpender@sfchronicle.com.
http://sfgate.com/cgi-bin/article.cgi?f=/c/a/2008/10/09/MNOI13EEI4.DTL
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