Global Financial Carnage

When US stock markets opened on Wednesday, with fresh news that insurer AIG would receive an $85 billion loan from the Federal Reserve in exchange for an 80% equity stake in the company, there was hope that Wall Street could manage to display at least a modicum of confidence that a major economic calamity had been avoided.

What occurred was exactly the opposite.

Fear that more highly-leveraged companies would soon fall victim to the worsening global recession spread through the trading floors and brokerages around the world. All of the major US indices were off sharply at the open and continued to spend the rest of the session underwater. By noon, all had reached their lows of the day, with the Dow off a startling 390 points. By the end of the day the Dow was off 449 points and the other indices ending with even larger losses.

Not a single one of the 30 stocks on the Dow finished with gains. The biggest losers were AIG, JP Morgan Chase (JPM) and Citigroup (C).

Stocks remain in a worldwide tailspin. For the week, major indices are showing the following losses: Mexico's Bolsa (-7.4%), Brazil's Bovespa (-11.1%), London's FTSE 100 (-9.3%), Germany's DAX (-6.0%), France's CAC 40 (-7.7%), Russia's RTS (-21.1%), India's Sensex (-5.3%) China's CSI 300 (-7.2%), Hong Kong's Hang Seng (-8.9%).

Once again, financial stocks led the parade down into the bottomless pit of a financial system loose from its moorings. Investment houses Morgan Stanley and Goldman Sachs fell by 24 and 14% respectively, though both were considerably lower during the session. There's beginning to be a sense that the investment banking model is badly broken and that the remaining two should seek mergers with consumer banking interests.

A series of negative economic reports have been flowing into the markets as well, feeding into the swirling vortex.

Capacity Utilization for August fell to 78.7%, down from July's 79.7%. Industrial Production for August was down 1.1% after showing a meager 0.1 increase the prior month. Building Permits fell to 854K down sharply from the 925K in July. Housing Starts were also down, to 895K, form 954K in July.

Perhaps even more frightening to those who dread deflation more than inflation, the Consumer Price Index showed a -0.1% decline with Core CPI up 0.2%. Generally a good sign, continued price weakness should occur naturally as assets are wiped from the face of the earth, as is occurring. In that regard, the CPI is a lagging indicator, but signs of pricing pressure are appearing everywhere as money conditions tighten.

Dow 10,609.66 -449.36; NASDAQ 2,098.85 -109.05; S&P 500 1,156.39 -57.20; NYSE Composite 7,440.38 -352.75

Gold was a particularly bright spot, rising a phenomenal $70, to $850.50. as wealth preservationists imagined the worst-case scenario being carried out right before their eyes. Silver gained by an even-greater percentage, adding $1.16 to $11.68. Not to be outdone, crude oil rose $5.94 to $96.96.

The percentage gains for the metals were all-time, one-day records.

Market internals were horrific, to say the least. Declining issues subsumed gainers by a better-than 7-1 ratio, 5737-748. There were only 46 new highs, but an incredible 1530 new 52-week lows. More than 1 in 5 listed securities made new lows.

The Dow Jones Industrial Average is now down 25% from its October, 2007 all-time high (14,280.00); the NASDAQ, 27%. The S&P 500 has shed 26% while the NYSE Composite, the broadest index of stocks, with 3300 equities represented, is now down 28% from less than a year ago. All of these are multi-year lows, most coinciding with early 2005 levels.

Volume was substantial, noting that some major players have been and are still being sent to the sidelines. Trade volume is a relative consideration. With fewer and fewer participants, volume should decline. Today's volumes, though not historically high, may be at the high end of a new, lower regimen.

NYSE Volume 2,154,158,000
NASDAQ Volume 3,139,135,000