Monday, August 6, 2007

Shades of 2001

Today's rally reminded me of another time - not so long ago - in which the markets experienced volatile swings to the upside and down. It was the Summer of 2001 and the markets were being roiled by fraud scandals (Enron, WorldCom, et. al.) and weak economic numbers.

The story begins with the Dow trading to an intra-day high on June 29 of 10,729.18 and hitting an intra-day low of 9.431.07 on September 10.
Dow losses July, August, Sept., 2001
July 6 -227, July 12 +237, July 23 -152, July 24 -177, July 25 +164

Aug. 8 -165, Aug. 17 -152, Aug. 21 -146, Aug. 24 +194, Aug. 28 -160, Aug. 30 -171
Sept. 6 -193 Sept. 7 -235
On September 10, the market had one of the most volatile sessions ever, a range of more than 400 points, eventually losing 0.34. No, that is not a misprint. On September 10, the Dow Jones Industrials lost thirty-four cents.

We all remember what happened the following day. On September 11, two airliners crashed into the World Trade Center in New York City, resulting in the worst single man-made catastrophe on mainland America in our history. The financial markets were closed down for a week, and when they reopened on Monday, Sept. 17, the Dow lost another 685 points, as panicked investors scrambled to get out of positions.

Three trading sessions later, on September 20, the Dow lost another 383 points, followed by another 140 point loss the following day. The total loss for that week was a staggering 1,370 points.

Eventually, the market would bottom, though it took more than a year, with the Dow hitting a closing low of 7,286.27 on October 9, 2002. The NASDAQ fared much worse.

I mention this not because I think there is going to be another 9/11 (though history does tend to repeat itself). We may already have witnessed our planned disaster for the year - the Minnesota bridge collapse - without the nasty side effect of a tumbling stock market. I may be going overboard on a conspiracy tangent, but I wish to point out the similarities between the market of 2007 and that of 2001.

We are definitely in a bear market, and that's made all the more obvious by the conspicuous presence of rather large, late-day rallies, like Monday's. But all along, the market continues on a downward path. There is certainly more downside to come.

Dow 13,468.78 +286.87; NASDAQ 2,547.33 +36.08; S&P 500 1,467.67 +34.61; NYSE Composite 9,553.77 +183.17

Today's rally was also one of the narrowest on record. Declining issues actually outdid advancers, 3194 - 3185 and new lows swamped new highs, 1176-102. There are 6546 stocks on the NYSE and NASDAQ combined. That many lows mean that nearly 18% of all stocks hit 52-week lows. A 286-point gain on the Dow can surely hide a lot of evils.

Of the 30 Dow stocks, only one - Alcoa - showed a loss.
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Once again, somebody is playing favorites. This has to be one of the phoniest rallies ever. Get ready for another scoop from FOX News. When 18% of the market is hitting new 52-week lows, the rest of the market is usually not euphoric. There's manipulation of a massive degree being foisted upon unsuspecting investors - mostly individual traders and mutual fund holders. You see big gains on one hand, though on the other, your stocks, or your funds, are down.

One more comparison to 2001 is in order. Tomorrow the Federal Open market Committee of the Federal Reserve meets to consider any rate changes. There is a growing number of cries for a 25 basis point decrease from 5.25 to 5 percent. The August 21 FOMC meeting release reads as follows:
Release Date: August 21, 2001

The Federal Open Market Committee at its meeting today decided to lower its target for the federal funds rate by 25 basis points to 3-1/2 percent. In a related action, the Board of Governors approved a 25 basis point reduction in the discount rate to 3 percent. Today's action by the FOMC brings the decline in the target federal funds rate since the beginning of the year to 300 basis points.

Now, just as then, the Fed may be thinking that it's time to loosen credit again. Sadly, that's what got us into this mess to begin with. Further loosening will only exacerbate an already bad situation. Better to tighten rate policy and inflict some small degree of suffering than risk an overwhelming, years long, inflationary stagnation.

Meanwhile, oil was dumped in a large way, with futures falling $3.42 to $72.06. The handwriting is on the wall. The hand-wringing has yet to begin.

And just how does ExxonMobil gain 1.46 (1.76%) on that news? Somebody enlighten me to the new math and the new market dynamics because I'd say I'm confused, but I'm not. The kinds of things that occurred today are just not supposed to happen... unless, of course, somebody's tinkering with the machinery of the free market.

Gold and silver posted marginal losses. Stock up.

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