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Re: We’re Cooked

Gordon, you say “We’re cooked.” Perhaps not quite yet. For one thing, we have not yet had a classic crash, such as we had on October 29th, 1929, and October 19th, 1987.

A crash is characterized by two things: 1) a precipitous decline in prices caused by a huge excess of sellers over buyers as everyone rushes for the exits at whatever price they can get, and 2) unprecedented volume. We have not yet had a day like that in 2008.

On both those previous crashes, the decline in the Dow exceeded 20 percent. Today’s decline was 3.59 percent. Not a good day, to be sure, but no crash — and far better than the initial selloff. The volume on Black Friday, 1929, was 16,000,000 shares. Piddling by today’s standards, of course, but it was a record that stood for 39 years, longer than Babe Ruth’s home run record of 1927. The volume on Black Monday, 1987, was triple the previous record volume. This has been the pattern of late — bad days getting better towards the end and good days getting worse towards the end. That indicates high market nervousness, not panic, with bulls still willing to buy on dips. The recent record volume came on a strongly up day, not a down one. It might also be noted that the Asian markets were worse hit than the European ones and we did better than the European ones. In other words, fear was reduced during the course of the trading day; it didn’t run unchecked through the streets. In a real crash you can practically feel the fear, so pervasive is it. Even if we had a crash, it would more likely signal the end of the bear market that began a year ago, not the beginning of a far worse one, as stocks will have moved from weak hands to strong ones. Even though the Fed kept money tight after the 1929 crash (a serious error), the Dow recovered half its losses by April 1930. Then a string of further disastrous government mistakes, starting with the Smoot-Hawley Tariff,which was signed in June 1930, and  precipitated a global trade war, converted an ordinary recession into the Great Depression. In 1987, when the government did what governments should do in such a situation, the decline of Black Monday was fully erased within two years and the market went onward and upward from there.

It’s going to take longer this time to work out all the problems of a badly stressed financial system. But once the fear subsides, traders will realize that Chicken Little was wrong. Again. There are positive signs (the falling price of commodities, especially oil, by no means the least of them) and therefore bargains to be had. A few cautious nibbles will cause the market to move up a bit, bringing in more nibblers, and the business cycle, as much an artifact of human nature as tears and laughter, will be once more be on the upswing.

And it might be noted that the American dollar is stronger than it has been in quite a while. In these sorts of markets, there is always a “flight to quality,” so it is nice to see that people have been buying, not selling, dollars of late.

That would mean =the market is still betting that the American economy is not totally cooked yet.


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