Stocks Continue Global Sell-Off

Spirits were lifted slightly this morning on news of an emergency rate cut by the US Federal Reserve which was coordinated with similar rate reductions in other major countries.

The Fed funds rates was cut from 2% to 1.5%. The Bank of England cut its rate from 5% to 4.5% and the European Central Bank ordered a 0.5% cut in its key rate to 3.75%.

Central banks around the globe responded by cutting the rates in concert with the US. China, Canada, Sweden, and Switzerland lowered their key interest rates, while the Bank of Japan issued a statement in support of the actions, though it did not immediately cut.

US indices zig-zagged across the break-even line finally capitulating in the final hour to finish with another in a series of heavy losses. Volume was high, especially in the tech-laden NASDAQ.

Dow 9,258.10 -189.01; NASDAQ 1,740.33 -14.55; S&P 500 984.94 -11.29; NYSE Composite 6,306.35 -82.03

The Dow Jones Industrials took the brunt of the decline, losing another 2% in value. The NASDAQ and S&P took minor losses, about half that of the Dow on a percentage basis.

By comparison, the US losses were minor. Euro-zone indices in France, Germany, Spain and Great Britain were pounded down anywhere from 5-8%. In the Asian nations, the carnage was even worse in some cases. Japan's major index, the Nikkei 225, took its worst one-day loss ever, careening downward 952 points, more than a 9% loss.

Still panicked, investors drove issues to new lows around the world though many commentators and analysts thought the onslaught was getting a bit overdone. Credit markets are still largely frozen, but damage has been fairly confined to the financial sectors. Governments are scrambling for a solution, only to find that this is an ordinary and proper course of events for the unwinding of an unprecedented global credit expansion. Now that it is contracting - the normal response - everybody seems to believe the sky is falling.

It's not. In the US, there have been no major failures outside of banks and hybrid financial companies. Smaller, regional and local banks report business as usual, as most of them were smart enough to shy away from exotic investments, 100% mortgage commitments, Alt-A loans, bundled derivatives and credit default swaps.

The real concern is over the enormous multi-trillion dollar derivatives market, which is nearly completely free of regulation, with parties and counter-parties spread around the globe. Nobody is really sure who holds contracts to whom, thus the reluctance for banks to lend to each other or extend credit to all but the cleanest, most secure borrowers,

It's classic banking gone wild, with the old adage that banks will only lend money to those who don't need it being amplified a hundred times in a thousand different places. With credit markets in such a state of fright and panic, the fear is that somebody will toss a match onto the pile by calling in some heavy, arcane debt, taking down a particular firm or financier and toppling the whole house of cards. With governments around the world throwing taxpayer money at the problem left and right, the potential for fraud and abuse also becomes prevalent.

It's a crisis all right, one caused by banks, to banks. As I have opined in the past, they are now ravaging themselves. The upshot of all this high-financial drama is that the high and mighty of Wall Street will be taken down a number of notches. Smaller, better capitalized firms with saner managements will eventually pick up the pieces and the slack and all will be back to some semblance of normalcy in the not-so-distant future.

Some small business owners have had lines of credit reduced or pulled completely, but generally, the wheels of industry are still turning, albeit a bit slower. Nowhere are we seeing banks calling in loans en masse and bankrupting companies. That may occur down the road a bit, but, again, the victims will be few and far between.

Some stocks are at ridiculous levels and have been unmercifully taken down as part of the scramble to exit the equity markets. For instance, Citigroup closed at 14.40 today, a level unseen since 1998, adjusting for splits. GE slid to 20.65, Intel is at 16.25, Bank of America closed today at 22.10.

On the day, a bit more distress from the internals. Declining issues outnumbered advancers, 4839-1687, a bit of an improvement over the past two days. New lows rocketed to 3221, against just 18 new highs.

NYSE Volume 2,106,070,000
NASDAQ Volume 3,576,052,000

If today wasn't the panic selling so often associated with market bottoms, then you might as well kiss your savings and retirement goodbye. As is often the case, the washout from the past two weeks has produced a massively oversold condition. Some stocks have fundamental value far beyond where they are being priced today. It's full-blown hysteria, and cool hands will surely reap the benefits of waiting, watching and finally pouncing. We should witness a number of rapid huge market gains, though they will be short-lived until some semblance of reality and value is brought to bear.

Commodities seem to be taking it all in stride, acting in a more orderly fashion. The December light, sweet crude oil contract closed today down just 28 cents, at $88.43. Gold gained $24.50, to $906.50. Silver edged higher by 39 cents, to $11.77 the ounce.

If the reaction on Wall Street is any indication, the markets should begin to settle down and begin focusing on 3rd quarter earnings - which may not help to averages much - though any positives will be greeted with enthusiasm by those who haven't already thrown in the towel or been thrown to the wolves.