The recent market turmoil entered its eighth session. Although much remained the same, the level of extremeness certainly got to a new level. I watched the Dow along with several European markets this morning. Quite honest, I thought I was tracking a penny stock instead of the most respected financial market in the world. The Dow was up or down more than 5% within minutes! In the late afternoon trading, a wave of short-covering pushed the Dow up more than 10% within half an hour before pulling it back about 450 points to close just slightly(which is of course based on recent market movements) below yesterday’s close. I’m sure many market participants hope they would never have to live through the week just finished. In fact, we are so “lucky” to experience something that our parents’ generation has not seen, our grandparents’ generation has not seen, our grand-grandparents’ generation has not seen. Maybe some of our grand-grand-grandparents’ generation has seen something like this during the Great Depression. But the past week’s performance in the Dow even surpassed that. Actually the Dow’s 18%-plus drop for the week was the worst since 1914,  right after the market was reopened after being shut down for several months due to the outbreak of World War I. And it never happened in the history of the Dow that it dropped for more than 1% in seven straight sessions. It is certainly regretful that the Dow’s 112 years history is too short to provide us with more historical comparisons. I have spent much of the past seven years studying the financial history in the US and other countries around the world. One of the findings during those years’ of study is we probably have seen all historic events during the past 100+ years. Maybe I won’t change that view right away just because of one week’s events but certainly I have to add a second thought from now on when using historical comparisons.
Three out of the ten major sectors finished the session higher and they are Conglomerates, Financials and Transportations. Energies and utilities took the first and second places in the losers’ list. The CRB commodity index tumbled yesterday and closed at 289, almost 200 below the all-time high reached three months ago. The US closed at a fresh 52-week high against a basket of currencies. Currencies for those commodity-rich countries were being dumped like trash. Treasuries were mixed with the yield curve steepened further. The VIX index closed above 60 for the second time on record with yesterday being the first time on record. It reached a new historical high of 76.94 earlier. The market breath was decisively negative with more than 4300 issues on NSYE and Nasdaq hitting new 52-week lows. Over three quarters of the NYSE companies hit a new 52-week low in today’s trading, which by itself was a new record on top of an already historical week.

The recent market slump entered its seventh session. And little was changed since the beginning of the last week. That is, fear created even more fear and panic led to more panic. It doesn’t matter which markets you are looking at. As history shows once again, all elements of the financial market are inter-connected and correlation among various markets will increase dramatically when times are difficult. However, having witnessed the worst market condition in several generations, I would say that it’s more important than ever to keep a clear mind. We are pretty close to a BIG rebound. Although the exact timing is unpredictable, a short-term rebound is not a question of if but rather when. I spent some time reviewing how the stock market behaved during the “grandfather” of all bear markets --- the Great Depression between 1929 and 1933. Starting from a high of 380 points in late 1929, the Dow reached a bottom of 40 points in 1932. Sounds terrifying, right? But after taking a closer look at the price movements, I found that the drop was not a straight line. Actually the longest losing streak during that period was eight sessions – just one more day compared to the seven-day losing streak we have had now. More important, there were big rallies following the big drop. Some rallies were so big that they managed to recoup all loses during the previous drop while most rallies were anywhere between 20% and 60%. In other words, even if we are going to have something similar to the Great Depression (both GDP and employment shrank by more than 25% during the period), we won’t get there immediately. Right now we simply need a trigger for the long overdue rally. Can tomorrow’s Lehman CDS auction be the trigger? We will find the answer in less than 24 hours.
All ten major sectors finished the session lower by at least 4%. Energies and financials took the first and second places in the losers’ list. The CRB commodity index dropped slightly and gold price dropped today due to continuing rally in the dollar. The US dollar gained against most major currencies while continuing to lose ground to the yen. Treasuries were mixed with the yield curve steepened further. The VIX index closed above 60 for the first time on record. The market breath was decisively negative with more than 3000 issues on NSYE and Nasdaq hitting new 52-week lows.

The stock market continued to be traded in an extreme fashion on this Wednesday. Things were even more dramatic in other markets. Currency market, for example, saw historical movements during the past 48 hours. Australia dollar, which is a popular vehicle used in the yen carry trade, dropped more than 10% at one point in yesterday trading before closing the session lower by 6%. The US dollar has gained over 40% against the Australia dollar in less than 3 months, which is truly incredible to a major currency. In another unprecedented fashion, the Fed along with five other central banks jointly cut key interest rate by 50 bps in the morning. And China’s central bank cut its interest rate for the second time in less than one month. The central banks involved covered more than half of world’s population and more than 70% of the world GDP. The news gave world equity market a big boost initially. Most European markets, for instance, gained at least 5% following the news but the gain was again short-lived. Investors chose to focus on the continuing tightness in the credit market as several key credit spreads hit new record high during today’s trading. We are indeed living in a world that was unimaginable just two months ago. By any measure, 2008 will be marked as the most extraordinary year in modern financial history. I think things will eventually turn back to normal. However, much of damage probably has already been done in many aspects of the economy.
Eight out of the ten major sectors ended the session in red. Basic materials and energies were the only two groups that closed in positive territory. On the losers’ list, we had names such as financials and consumer cyclical. The CRB commodity index was little changed. The US dollar gained against most major currencies while continuing to lose ground to the yen. Treasuries were mixed with the yield curve steepened. The VIX index closed above 50 for the third time in a row. The market breath was negative with more than 3000 issues on NSYE and Nasdaq hitting new 52-week lows.

World markets entered free fall for the second day in a row. Nothing seemed capable of reversing the recent trend despite enormous efforts taken by the central banks around the world. The Fed, in its latest attempt aiming to bring more liquidity to the banking system, announced this morning that it had created a Commercial Paper Funding Facility (CPFF), which will provide a liquidity backstop for the strained commercial paper market. The commercial paper market is like blood to many big corporations and it has been under tremendous stress following the Lehman collapse early September. The Fed also mentioned it has no limit to how much commercial paper it can buy. The news initially gave the equity futures an early boost. In addition, several key credit market indicators including OIS spread and TED spread narrowed a bit from their record highs. However, concerns over the broad economy along with no immediate rate cut from the Fed made the rally short-lived. By close, all three major indices finished the session lower by at least 5%, making the market head to the worst annual performance since 1937. In other top financial news, several central banks including the ones in Australia and HK cut their benchmark interest rates by as much as 100 bps. The market widely expects other central banks including the Fed, ECB and BOE to follow suit soon. Finally, consumer credit in the US fell $7.9 billion in August compared to a gain of $5.0 billion expected. This marked the first month-over-month decline since 1998, indicating either consumers were reluctant to spend amid global financial turmoil or credit card companies were reluctant to lend due to their own financial stress or probably both.
By the end of today’s close, at least $27 trillion market cap has been wiped out in the stock markets around the world compared to 1 year ago. What does this number really mean? It equals almost one half of world’s $60 trillion GDP expected for 2008 or more than eight times China’s GDP or more than 20 times India’s GDP. It also can buy more than all real estate properties in the North America and can pay almost every person on the planet $5000, which is a sum that nearly 2 billion people have to work for more than 10 years to make. Clearly, the impact of the recent financial crisis probably won’t be fully felt until years later.
Almost repeating what happened yesterday, all 10 major sectors posted a loss in excess of 2%. Basic materials, energies and financials were among the worst performers. The CRB commodity index rebounded a bit following yesterday’s slump. The US dollar retreated a bit after hitting a fresh 52-week high earlier. Treasuries gave back some of the recent gains amid latest efforts by the Fed. The VIX index closed above 50 for the second time in a row. The market breath was decisively negative with more than 1700 issues on NSYE and Nasdaq hitting new 52-week lows.

Stock markets around the world had another “Black Monday” just one week after the Dow dropping the most on record. At its worst, the Dow was down over 800 points but a wave of buying in the last hour of trading prevented it from setting a new record. Several European markets including FTSE 100 and CAC 40 had their biggest one-day percentage drop since the “Black Monday” in 1987. Emerging markets fared even worse. Russia’s Micex Index plunged 19% after trading was halted three times while Brazil’s Bovespa was down as much as 6000 points and halted twice before recouping some of its losses. Currency markets experienced similar volatility if not more compared with the equity markets. Several major currencies including Australia dollar, India Rupee dropped to multi-year lows against the US dollar. Brazil’s real weakened more than 6% today while Korean won tumbled 5.6% after reaching the lowest level in more than 7 years against the US dollar. Credit markets didn’t fare much better either. Despite the latest efforts by the Fed, several key measures including LIBOR, Euribor, OIS spread, TED spread, High-yield spread remained at or close to record levels. The Fed’s latest efforts include doubling the auction of cash to banks to as much as $900 billion and paying interest on bank reserves. However, none of the efforts was able to lift the market in today’s trading.
By any historical comparison, today’s market action represented a text-book style “capitulation”. The panic level has reached record levels on many fronts. But the question is whether it’s the final “capitulation” we are waiting for? I think the next few sessions will be extremely critical. If the market is able to hold today’s lows and risk spreads are able to narrow a bit, then we probably are on our way to a nice fourth-quarter rally. Otherwise, world economy may suffer something similar to the Great Depression. And that’s a scenario nobody wants to think about.
All 10 major sectors posted a loss in excess of 2%. Basic materials, energies and financials were among the worst performers. The CRB commodity index tumbled more than 5% with pretty much everything dropping except for gold, which gained more than 4% as its was viewed as a safe-haven during market turmoil. The US dollar hit a fresh 52-week high against a basket of major currencies. And the unwinding in yen carry trade caused the yen to reach a three-year high against the euro. Interestingly, many favorite currencies used in the carry trade such as Australia dollar dropped like a stone recently. Treasuries rallied sharply as typical flight to quality. The odds of a 75 bps cut have exceeded the odds of a 50 bps cut (arguably the Fed has already implemented a 75 bps cut by introducing a spread under the Fed funds rate). The VIX index closed above 50 for the first time since 1987. The market breath was decisively negative with almost half of the issues on NYSE and Nasdaq(3000) hitting fresh 52-week lows.