History in the Making

With the credit markets this week becoming even more frozen the equity markets around the world have dived dramatically. Mutual fund redemptions are at record levels which causes selling regardless of fundamentals. The increased flight to treasury bills and away from risk have launched yield spreads to astronomical levels.

On Monday the market plummeted when the expectations that the TARP plan passed by Congress on Friday would spark a rally never materialized. The news on Monday was light, however concerns over AIG’s ability to repay their loan was in question and as it turns out they later revealed they had to borrow more money from the government to stay solvent. There were also additional downgrades of stocks by brokerage firms that added insult to injury.

Tuesday the Federal Reserve took the drastic step of entering the commercial paper market and lent money short term to sound companies that need cash for everyday operations. The Fed has never done this before and it goes to show how far the government is willing to go to free up the credit markets. The result of their action did not change our situation much but something should be said for how aggressive the Fed is being in their attempts to clear up our credit problems. None the less the market was down nearly 200 points, but unfortunately that was only just the beginning.

Wednesday came in with mixed news before the open of trading. IBM came out with earnings that beat estimates, but the retail sales report was weaker than expected as the entire country has felt the credit and housing mess. However the market did not react well as more panic selling met a lack of buying conviction that brought the market down nearly another 200 points.

If you thought that was about all you could take, then you were in for a real shocker on the back end of the week. Thursday was a light news day, but that just beget more selling pressure as the Dow plummeted at the end of the day to 8,579 down 679 points. Friday however could be argued to be a much wilder day. General Electric came out with earnings that met its previous pre-announcement and the market acted mixed. There was massive selling on the open and the market traded lower most of the day. However, the final hour was by far the brightest part of the dismal week. The market rallied over 700 points at one point from the bottom, but selling near the end of the day pushed the market to a close of only down 128 points.

Altogether the Dow Jones Industrial Average closed down 1,874 points or 18.15% for the week. We are witnessing history here. This is a market that we will not see for decades to come. The investing opportunities out there are many, but prudence is needed. The market is currently ignoring fundamentals on most companies and the time to be searching for them couldn’t be more enticing. Some stocks are trading at levels you might never see again, but there is still more work to do. The credit markets also pose immense investment potential because of the huge disruption. Yields in those markets must turn lower before equities can mount a comeback. The Fed and global central banks are taking very bold steps to clear the credit pipes, but it is obvious more needs to be done. The G7 meetings that are taking place this weekend will be solely focused on fixing our now Global credit crisis. LIBOR rates are sky high and must come down in order for the market to feel confident again. There is talk about the government’s guaranteeing the loans between banks, which would push the rate back down to normal levels. Will that happen? No one really knows, but it is obvious to all financial leaders that this has transformed from a U.S. housing bust into a problem that is affecting all corners of the globe. It may not seem like a time to be optimistic, but now is the time to get excited about the opportunity in front of all investors.

Was the brief market rally on Friday the sign of the bottom? Who knows, but I do know that the key to that answer lies behind the doors at the G7 meetings. The ideas they may formulate and how well they are received in the credit markets are the tools that will bring us back from the abyss. Look for these signs before getting too excited, but keep your head up. With history being made during such a bad time there will also surely be history being made when the sun is shining again. When that happens, remember this week! It was one for the record books!

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