Black Friday? Markets brace for worse, and cry for help

If ever there was a setup for a Black Friday on Wall Street, this is it.

We can hope it doesn’t happen. But better that investors are realistic about the risks. Global markets and the world economy are at a dangerous point in this debt-fueled debacle, and anyone who says otherwise is a liar.

On Thursday the U.S. stock market suffered its seventh straight loss, and the 7.3% drop in the Dow Jones industrial average -- down 678.91 points to a five-year low of 8,579.19 -- was the biggest yet in this latest sell-off.

In other words, the get-me-out-at-any-price mentality is more intense than even a few days ago. Many people are morose, demoralized, desperate. They can’t take any more.

"Investors are in survival mode," said Robert Bissell, chief investment officer at Wells Capital Management in Los Angeles. "Stocks of major companies are at ridiculous prices," he said, but no one cares. "This is what panics are all about."

Much of the selling now is forced: Hedge fund managers may not want to let stocks go at these prices, but their clients want their money back. Ditto for mutual fund managers, who are facing a surge in redemptions. Selling begets more selling.

There wasn’t much new in U.S. markets Thursday, and that was the problem. Credit markets remain mostly frozen, as wary banks still refuse to lend to one another despite the federal government’s attempts to break that logjam.

The plan for the Treasury to buy up $700 billion in bad loans from banks now is roundly viewed as too little, too late, or just wrong-headed. Critics say it won’t get the banks to lend again any time soon.

New reports from Washington on Thursday said the Treasury might try another approach: injecting capital directly into banks. Yet that revelation also failed to lift market sentiment.

Coordinated, but modest, interest rate cuts by the world’s major central banks Wednesday didn’t work either.

Maybe it’s time to start listening to people other than the same ones who let things get to this point.

Nouriel Roubini, an economics professor at New York University and head of Roubini Global Economics, over the last two years has predicted much of what has since come to pass. His critics dismissed him as Dr. Doom; now they wish they had heeded him.

Roubini is warning that the world has reached the brink of financial and economic calamity. This is from an e-mail he sent to clients late Thursday:

At this point the risk of an imminent stock market crash -- like the one-day collapse of 20%-plus in U.S. stock prices in 1987 -- cannot be ruled out as the financial system is breaking down, panic and lack of confidence in any counterparty is sharply rising and the investors have totally lost faith in the ability of policy authorities to control this meltdown.

When in markets that are clearly way oversold, even the most radical policy actions don’t provide rallies or relief to market participants. You know that you are one step away from a market crash and a systemic financial sector and corporate sector collapse. A vicious circle of deleveraging, asset collapses, margin calls and cascading falls in asset prices well below falling fundamentals, and panic is now underway.

He says governments have no choice but to take much more dramatic steps -- in unison -- to try to restore confidence. His list includes:

-- another round of interest rates cuts by central banks, at least 1.5 percentage points in size.

-- a temporary blanket guarantee of all bank deposits.

-- a "rapid reduction of the debt burden of insolvent households preceded by a temporary freeze on all foreclosures."

-- a "massive direct government fiscal stimulus package that includes public works, infrastructure spending, unemployment benefits, tax rebates to lower income households and provision of grants to strapped and crunched state and local government."

-- government recapitalization of financial institutions and a reduction of the debt burden of distressed borrowers.

Economic policymakers of the G-7 industrialized nations meet in Washington this weekend. If they don't have their own blueprint for action, Roubini just gave them one.

Photo: On the floor of the New York Stock Exchange on Thursday. Richard Drew / Associated Press

Comments

[Mr.Bilko]

Black Friday, it may be. The Lehman Bros credit default swap auction is slated for Oct.10th. Those with liabilities for their Lehman CDOs will sell stock to raise capital to cover their position. Combine that with investors panicking to sell stock because other people are selling stock to cover their credit default obligations and you have the makings of a very high trading volume day. A smart investor will recognize that the bottom of the bear market is getting close, unfortunately, herd mentality overtakes sensibility. The herd mentality is what helped the real estate bubble to propagate. The herd mentality may result in a huge sell off tomorrow.

[Windfall]

Armageddon can wait.

I know it’s the stretch run of a presidential election. I know the media has drank the kool-aid and is without question completely in the tank for the Marxist Messiah Barack Obama. I know that it makes sense for them to gin up as much pessimism in capitalism as possible but really. This panic is completely overblown and senseless.

Yes, the government went diversity mad and extorted banks to abandon their traditional lending criteria in favor of affirmative action lending which has left us with millions of mortgages that are not going to be repaid by their makers. Big deal. The underlying properties still have some value. Maybe it’s only 70 percent. Maybe it’s only half but there is a tangible value there. Someone will be more than willing to move into those houses and make the payments provided the valuations aren’t too far off from reality.

Yes, banks and mortgage-backed securities investors are going to have to absorb some losses. But, other than that, our economy still has the same building blocks as it did a year ago. No one has bombed New York City, Washington, D.C., our off shore oilrigs or anywhere else for that matter.

Everything still works. All of the technologies developed over the history of mankind still work. Yes, the infrastructure is a bit worn in places but we still have the greatest system of roads, bridges, canals, railways, airports, power plants, sewer systems, pipelines, electrical transmission lines and communications networks ever devised. Our work force hasn’t been hit by a plague nor have they forgotten how to do what they do. No one has tried to shut off our oil supply or quarantine our exports. All of our farms are still producing at record levels. Manufacturing capacity is still in tact even if demand is questionable.

As any fool knows but no politician has the guts to say these days, the fundamentals of our economy are sound.

The real reason why investors are bailing out of the market has nothing to do with the soundness of the economy. It has to do with the certainty of property rights.

As polls now indicate that we seem to be on the verge of electing a Marxist to the office of President of the United States, investors worldwide interpret that as a lack of faith in free enterprise on the part of the American people. Now, of course, workers all over the world know that Marxism is a miserable failure and they wonder what will happen to the world economy if that bulwark of freedom, The United States of America, suddenly loses its collective mind and abandons the very principals that made it the greatest nation with the highest standard of living and largest economy in history.

That is why the markets are tanking. With the specter of a Marxist taking over as “Leader of the Free World”, no one knows for sure if anybody really owns anything. If the U.S. no longer believes in freedom, who will guarantee, or even threaten to guarantee, the property rights of the Free World?

Walter Williams sums up their sentiment like this, "We might have reached a point where the trend is irreversible and that is a true tragedy for if liberty is lost in America, it will be lost for all times and all places."

http://townhall.com/columnists/WalterEWilliams/2008/10/01/destroying_liberty

It’s not a crisis of economic confidence. It’s a crisis of political confidence.

And the Marxist Messiah is at the heart of it.

[jb]

My finances are decimated as are others. We demand that the financial industry be reguilated to the hilt, fraud exposed and those responsible in jail, and taxed heavily on future gains. These masters of the universe should be drawn and quartered. No one in this industry should ever make a dime again.
Charlatons and crooks.
Politicians - do this or we will burn this country to the ground.

[John E McCue]

Before the folks handlking the financial problems (Sec. Paulson et al) were appointed they were allowed to sell their holdings at top market prices with out campital gains tax. Then over a year ago, it is reported they had a team stry to sell the sub prime paper to foreign countries and, apparently, Japan and China bought a lot of it.
This may suggest they knew about the pproblem before they were appointed and would explain why they had a plan so fast after the announcement of theproblem.

[Smith]

He left out some things:

- A lot of debt is consumer credit (credit cards, cars, personal loans).

- Then there are non-debt obligations (you name it... existing contracts, court orders, etc.)

For all this to be relieved, the only thing that is going to work is to wipe it away with massive inflation --- to make the debt effectively worthless.

I would add to his list:

- freeze on all consumer debt payments including mortgages

- ban on all fees / charges where such charges result in an interest rate exceeding 8% pa

- setting usury interest rate at 8% and unilaterally modifying all debt to conform to this rate including fees, points, penalties, etc.

A similar mechanism for all existing contractual or legal arrangements where either party may declare a "time out" until the economy stabilizes.

Effectively, what is being proposed is to grant everyone who owes the equivalent of a form of special bankruptcy protection.

The time out period shall last initially 2 years, and thereafter,r until the economic stabilization measures kick in and the President and Congress declares the national emergency over.

This would be a good start.

[david]

Our economy has been based on consumer spending for decades and now we are paying a price for that bad idea. We need to get back to basics in our way of living and get off this spending kick. I wish they would bring back the all savers certificates and encourge Americans to save more and spend less.

[Jeff]

"Windfall": Marxist messiah, eh? You idiot. You complete idiot. You have no f..n idea what you are talking about. Fools like you are just as damaging as the financial idiots who started this mess. You could think yourself half-lucky to get Obama as president instead of a militarist who is likely to start a war to get the economy going. God help us if that old bastard wins.

[anonymous]

My comment/question here the other day about Jim Cramer calling a bottom was perhaps made out of ignorance, of which I have plenty.

Here's my question now: For those who have been in cash for quite some time now, what's the best way to get into the market as a bottom nears?

Dollar cost average in -- into what? Individual stocks? ETFs, mutual funds?

Whom to ask for help? Most people have no idea where to begin.

Vanguard, for instance, will do a cookie-cutter plan, for a fee that depends on how much you have with them. Some experts would say that a cookie plan from Vanguard is much better than doing nothing or sticking with a stock broker. Is it?

Mr. Petruno is the one financial journalist I trust with this question.

[TIPP]

I SAW A COMMENT WHERE YOU BLAMED THIS ON THE ELECTION? ARE YOU OUT OF YOUR MIND!!!! GREED IS THE PROBLEM. THE MARKET IS JUST BALANCING ITSELF OUT FROM YEARS OF RIDING THE BULL BUT TO CLAIM SOMEONE IS A MARXIST AND A MESSIAH IN THE SAME PHRASE IS ABSOLUTE STUPIDITY. OUR INFRASTUCTURE IS NOT SOUND! AND THE QUICKER WE INVEST IN REVAMPING IT, THE MORE JOBS, MONEY AND BETTER THE US WOULD BE. I CAN'T BELIEVE YOU WOULD BLAME SOMEONE WHO SUPPOSE TO BE "A NEW KID" ON THE SCENE FOR THIS MESS. HOW ABOUT THE POLITIANS WHO HAVE MAJOR INVESTMENTS IN EXXON, JPM, AIG, CITI, WHO CAN'T BARE TO SAY THE TRUTH B/C THEY KNOW THEY WOULDN'T HAVE A FIGHTING CHANCE. HOW ABOUT THE POLICTIANS WHO WERE TEXTING THEIR BUDDIES(CEO'S OF MAJOR COMPANIES) LETTING THEM KNOW THEY CAN BREATH B/C THE BAILOUT IS GOING THROUGH. OUR GOVERNMENT WASN'T BASED UPON VALUES, IT WAS BASED UPON CORRUPTION. AND IT IS ABOUT TIME THAT WE HAVE SOME ACTUAL PEOPLE IN OFFICE AND NOT PUPPETS.

[woti]

"freeze on all consumer debt payments including mortgages" - are you kidding me? We are in this mess because people spend money they don't have. New car every year - big screen TV - the McMansion. The people living beyond their means should be allowed to crash and burn. I don't have a new car each year and live in a house I can afford - why should I have to pay for the toys of the reckless spenders now that they can't pay for them on their own.

[subgenius]

Ahhh, so NOW the media starts paying attention to Roubini. Shame it didn't start back at the BEGINNING of the crisis - instead of just labeling him Dr Doom and mocking him. Maybe the politicos will finally even consider asking him for advice, rather than simply relying on the people who got us to this state....

[Gerard Mulholland]

The inexorable laws of economics are leading us to worthless money, no-value assets and debt that is unimaginable and unpayable! Half-measures like bailouts will merely prolong the ever-deepening agony. UN should convene a new Bretton Woods Conference of G8 plus China, India, IMF, World Bank and WTO. With a global economic freeze to calm things -temporarily nationalising everything without payment and cancellling all debts- we can start again with a new agreed international basis for currency, markets, business, international relations, international law and trade. The new basis of value cannot rely on the dollar which has been wantonly destroyed. The new basis must be the value of the one thing that is permanent and indestructible - all the land on earth.

[Karen]

The free market was like a drunken party -- out of control. Cutting off the flow of booze, throwing out the most rowdy players, and if necessary imposing a curfew is not necessarily the end of life as we know it... or the end of partying.

Some things don't work. Credit to uncreditworthy borrowers, for example. Duh.

It was past time for a "get real" wake-up call, painful as it is. The fear will stop when it becomes clear that there are basics still there we can count on. You know, supply, demand. Rules that cut off the liquor to the drunkest guests. We'll still have a hangover but we'll get over it.

[356man]

I think "Windfall" is the one who needs to lay off the Kool-Aid. Marxist Messiah? Puleeease...

[Stacy]

Thanks GW, it could be worse, just imagine if we would of taken the brilliant idea of GW and replace SS with the stock market, there would be riots in the street by now. I am a Republican and please vote this illiterate pathetic moron and McCain the same out of office. Please send him back to Texas where he blends.

[Bruce Hopman]

FINANCIAL CRISIS: THE MUSICAL
The economy is no laughing matter. But this parody about the economy is.
Check it out at: http://www.youtube.com/watch?v=henMX35nkJg

[Mike Barker]

Windfall had a lot of it right with a few exceptions. Bush did not practice diversity by allowing the unqualified to receive loans because of affirmative action. He, Rove, and Cheney directed Greenspan to reduce interest rates so that the booming economy of the 90's, fueled by computers and the internet, would not decline under a Republican. This encouraged the housing industry to do anything and everything they wanted including making some very bad lending decisions.

As far as Obama being a Marxist, that seems a little simplistic. Maybe he is, maybe not. What I have seen, though, is that all Presidents seem to do about the same thing, no matter what party they belong to, in response to events they encounter. It has been a very long time since we have had a leader who knows where he is going and takes us with him.

[DON]

THE DEMOCRATICS ARE 100% THE BLAME FOR THIS GLOBAL MARKET
CRASH,BY PLAYING GAMES FOR 2 WEEKS WITH THE 700 BILLION BAILOUT. I HAVE BEEN A DEMORCRAT VOTER FOR THE LAST 30 YEARS.
THIS YEAR I AM GOING TO VOTE REPUBLICAN ALL THE WAY!!!!!!!!!!!!
I HAVE LOST MY LIFE SAVING BECAUSE OF THE DEMORCRATS!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!

[Brad]

If the gov't waves its magic wand and dismisses all consumer debt, does this mean that consumers have to give back the Range Rovers, flat-screens, Jimmy Choo's, and all the other assorted bling they've padded their (now underwater) nests with for the past 8+ years?

I mean, fair is fair right?

[PNW Trojan]

Yes, we are soon rid of the feeble-minded simpleton bush, and the repub neo-convicts (oh, how we WISH!!!) but then, I look and see Pelosi, Reid, Blarney Frank, Chris Dodd, LIEberman, Boxer and Feinstein....THIS will be better?????

We have 1 chance to truly express our wrath; VOTE AGAINST EVERY INCUMBENT! (Sorry, Waxman....but 'YOUR' Party is GUILTY as 'ell, too!) The dems have had too much power for far too long; anyone over 35 KNOWS how far Calif has sunk into an abyss, created by sniveling dems. How many welfare recipients now have Govt jobs? How many got a Govt credit card for 'expenses?' And how many Detroit garbage scows are they driving, on YOUR taxpayer dollar??? We shudder, to think about THAT!!!

[Bob Gary]

This is bad but the bottom is here. The Dow bounced off of 8000 twice today hard. Capitulation day mark my words. With panic there is opportunity.

http://www.greenfaucet.com/the-market/the-crash-of-2008/53336

[Bad Santa]

Say what you will, but I've been sitting on hoards of cash just waiting for this kind of over-correction in the markets. Call me a bad Santa, but it's going to be a very merry Christmas at my house. Ho, ho, ho!

[dr david hill]

Capitalism, the impostor of universal wealth creation and where it has to be replaced with a universal humane and sustainable value system

Isn’t it now perfectly clear that governments do not run the world but the rich and powerful? For now as investors (the rich) pull out their capital from stock markets all around the world, the global economy is in free-fall, punishing most of humanity in the process. Therefore the ‘capitalist’ system as an economic system is highly unstable and volatile. For what they do affects us all through capitalism and super-capitalism (globalization) and the effects brought about by them alone. This system is therefore bankrupt in human development terms, as when it goes wrong it harms everyone on this planet except the very few rich who undeniably perpetrate this harm on humanity. Therefore when we are all over this human disaster, governments around the world have to change the economics of the world from basically just being there for the rich to that of human sustainability and need. If we do not, the world will continue to be enslaved by capitalism, which makes the very few rich beyond their wildest dreams and the majority unsustainable. In this respect over half the world is still living in poverty and more will be doing so in the future due to the dictates of the capitalist market system. It is the majority of humankind therefore who really suffer when things in this system fail, go so very wrong and where the few who instigated the problem get off scot-free. At the end of this month, if anyone is interested, the WIFC is publishing the ‘independent’ reasoning of some of the world’s most eminent independent thinkers on what can replace our present economic system. It will be published on Press TV. But overall, we have to change completely for our own good, our mere existence and for the lives that our young will now inherit, or may be not.

Dr David Hill
World Innovation Foundation Charity (WIFC)
Bern, Switzerland

Ps. To show that the system is so good for the few I noticed today that Aston martin's new One-77, the most expensive road car in the world at $2 million a go, is oversubscribed already although it has only just been unveiled this week at the Paris motor show. this shows the system for what it really is and where the rich have no problems and we the majority have them all.

[David Bruce]

My school has begun a debate about Islamic Banking. And while I don't subscribe to religiousness of any sort, the model is intriguing. Furthermore, with cash in their coffers, they may come to the 1st World's rescue. It might not be a bad thing.

[andrabr9]

I am so grateful that on myinvestorsplace.com we have been discussing and following Nouriel Roubini. At first many members thought he was over reacting... but after chatting and discussing on the forums... so much of what he had to say was just common sense... I sold approx 80% of my holdings but the remaining 20% are very worrisome... Would like to hear Roubini's opinion as far as what we need to exactly do on a personal level...

Great Article...thanks

[sid khanna]

super note

[Raymond1965]

Everyone had better hope that Obama doesn't get into office...You think things are bad now...JUST WAIT. The radical muslims call him the Messiah. How sick is that!!! Wake up Americans. I am a black man that is waiting for the market to open tomorrow so I can buy stock.

[Maggie Knowles]

Obama is not a marxist, for heaven's sake. Go read a book.

[martscan]

anonymous: For pete's sake, if you can't figure out how to buy some of the best companies in the world, i.e., GE, PFE, T, BP, etc, if for no other reason than their dividend rates at current prices...you don't belong in the markets.

Don: YOU are responsible for losing your life savings. YOU obviously invested blindly or took someone's opinion and YOU watched your stake evaporate...I have no sympathy for you. If YOU earned your dough, its YOUR responsibility to adhere to the ONLY hard and fast rule of investing...protect the principal.