Tuesday, September 30, 2008

Time to clean House -- or, $1.2 Trillion lost in yesterday's Stock Market Crash

“This is really a failure, at a massive level, of the political system,” said Mark Gertler, an economics professor at New York University.

In an MSNBC article by Allison Linn, "Brian Bethune, U.S. economist with Global Insight, faults government officials for using opaque terms like “downside risk to growth” to explain the problems, instead of using blunter, more obvious terms that people can understand, like “recession.” He also thinks the government hasn’t been forthright enough about how other problems, such as high oil prices, are adding to the country’s financial woes."

“They’re not communicating clearly … and as a result people don’t understand why this is a crisis and why we need emergency legislation,” Bethune said.

On Monday, the S&P and Nasdaq saw the biggest percentage drop since the 1987 crash. Stocks plunged when investors were thrown by the House decision to reject a bank bailout plan amid the worst financial crisis in years. http://money.cnn.com/2008/09/29/markets/markets_newyork/index.htm?postversion=2008092921

According to analysts, that sharp slide continued in Asian markets Tuesday, although most of the indexes closed off their low of the day. Still Japan's Nikkei lost 483 points, or 4%, while Australia's markets fell 4.3% and Taiwan's stocks retreated 3.6%."

Hong Kong's Hang Seng index closed narrowly higher. And Europe's major indexes were mixed in afternoon trading, with Germany's Dax and the Paris CAC 40 both lower while London's FTSE inched higher.

However, numerous market analysts agreed the gains in the market Tuesday were likely to be modest.

"What we're seeing here today is a little bit of bargain hunting or short covering, at least for the moment," said Peter Cardillo, chief market economist at Avalon Partners. "But this is a very tough situation. Major declines like yesterday generally don't end up reversing the next day."

Art Hogan, chief market analyst at Jefferies & Co., said that there is growing hope among traders that enough House members will reconsider their vote to pass it later this week, and that early gains Tuesday are likely a reaction to the perception that the market overreacted to Monday's vote..

"We were taking the rescue plan for granted, and when it didn't pass, there had to be a reaction," said Hogan.

But he said that even if the bill does pass later this week, there's enough bad news still out there to keep downward pressure on stocks. For example, economists are forecasting that the Labor Department will report a loss of 105,000 jobs in September in its monthly reading this Friday, which would be the biggest job drop in more than five years.

"The market is going to be under pressure when we start to focus on fundamentals and fundamentals aren't going to look good for a while," said Hogan. "The market was down 200 points Monday morning even with the assumption of the passage of the bailout."

Congressional leaders are talking about trying to bring the legislation back, although Thursday now appears to be the earliest date for a new vote. David Kelly, chief market strategist at JPMorgan Funds, said that even if leadership announces a new deal, it's unlikely to prompt much of a rally.

"It'll be very hard for traders to put their firm's money at risk based on their perception of body language of leadership, given they hadn't properly counted the votes last time around," said Kelly.

He said there's enough risk of more bad news, such as another distressed bank sale or bank failure, that could spook markets ahead of the vote."

* The article above is compiled from information I recieved by e-mail from peers in the financial industry. I cite all sources that I could locate.

The CNN article and additional information can be found here:

MSNBC -- Allison Linn's entire article can be found here: http://www.msnbc.msn.com/id/26948627/?GT1=43001

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