MARKETS WORRY

CENTRAL BANKS AREN’T DOING ENOUGH

The week starts on a rough note, on Wall Street and overseas.

9,955.50.

Unfortunately, Monday saw another descent on Wall Street – but it wasn’t as bad as it could have been. In brief, investors worldwide were fretting that the Wall Street bailout (and other global responses to the credit crisis) weren’t enough. The Dow Jones Industrial Average closed below the psychologically significant 10,000 level for the first time since October 2004. It fell 369.88 for the day.1 Fortunately, losses were pared – at one point, it was down 800.06.2 The Dow, NASDAQ and S&P 500 lost between 3.6-4.3% Monday.1

What drove the selloff? Worry that the credit crisis is spreading, plain and simple.

In Europe …

Federal governments scrambled in the past few days to save five banks in seven nations. By late Sunday, Germany’s government had devoted 50 billion euros to the bailout of Hypo Real Estate, a leading mortgage lender. As for the Benelux effort to aid Fortis, the Dutch government took over part of the bank on October 3, and the Belgian government sold a stake its portion to French lender BNP Paribas. Rumors of trouble have swirled around UniCredit, the biggest thrift in Italy; it said that it would increase its capital by 6.6 billion euros after its shares plunged last week.3  

Last week, Ireland played the maverick and became the first nation in Europe to guarantee all retail bank deposits (at Irish-owned banks). Germany, Austria, Greece and Denmark have now made the same move, and a European Union official has called for coordinated action to insure deposits in the EU’s 27 member countries.4

EU leaders are currently meeting in Luxembourg at a two-day summit to address the financial turbulence, but European markets were unimpressed by their actions, and those in America. In France, the CAC 40 dropped 9%. Germany's DAX index dropped 7.1%; the FTSE 100 (Great Britain) lost 7.9%. The euro fell to $1.35 USD.5

In Asia …

Investors’ actions were also affected by fears of economic contraction. Monday, the Hang Seng index (Hong Kong) fell just a little less than 5%, and the Nikkei 225 (Japan) slipped 4.3%.5

One interesting bright spot in Asia: as the economies of India and China put much less money into mortgage-backed U.S. securities than some of the region’s other economies, they may end up more insulated or “decoupled” from the effects of the credit crunch. But at the same time, a senior fellow at the Peterson Institute for International Economics projects overall emerging-market growth at 5.7% in 2009, as opposed to 7.4% in 2007 and a 6.3% PIIE forecast for 2008.6

Just in case, a “circuit breaker”.

Some journalists have worried about the possibility of a “perfect storm” of indicators or headlines triggering a Black Monday-like selloff on the Dow. They may not realize that trading halts can be called to help avert such plunges.

In the late 1980s, the New York Stock Exchange put “circuit-breaker” levels in place. Should the DJIA drop 10% in one trading day before 2:00pm EST, the NYSE would implement a one-hour pause in trading. Should it drop 20% before 1:00pm, a two-hour pause would occur. Should the DJIA suffer a 30% decline at any time during a single market day, the market would close for the remainder of the day.7

This is, in fact, a market rule: Rule 80-B of the Securities and Exchange Commission. Since Rule 80-B was put into place in 1988, it has only taken effect once – on October 27, 1997.7

Cash infusions, cash auctions.

The European Central Bank made the equivalent of $50 billion USD available to banks Monday, while the Fed decided to double its cash auctions to banks to $900 million.8, 9 Meanwhile, ECB President Jean-Claude Trichet stated Monday that he feels worldwide financial markets are overreacting to risks; from Luxembourg, he pledged that the ECB would provide the EU’s money markets with sufficient liquidity for as long as they needed it.10

Monday morning, the Fed made a decision to pay interest on bank reserves. Right now, banks deposit only the minimum reserve required; interest payments could attract additional reserves to the Fed, and paying interest on reserves could help the asset size of the Fed’s balance sheet to expand without pushing the federal funds rate to zero.11

Some perspective.

If you remember the late 1980s, you certainly remember the savings and loan crisis. That era was certainly unsettling for financial institutions and financial stocks – but the banking industry and the markets turned around from it. Solutions are rolling out to this current crisis, so a gradual improvement may take place in the credit markets and the financial markets – though it won’t be instant.

You may wonder if this is the time to revise your portfolio. Or, you may wonder if it is the right time to buy stocks. One thing is for certain: it is not the time to make unconsidered financial moves. Talk with your financial advisor today about your possible choices.

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Andy Tomlinson is a Representative with Andy Tomlinson Wealth Management and may be reached at www.tomlinsonwealth.com , 928-776-1031 or andy@tomlinsonwealth.com.

This article was written by Peter Montoya Inc., not the named Representative or Broker/Dealer, and should not be construed as investment advice. Neither the named Representative nor Broker/Dealer gives tax or legal advice. All information is believed to be from reliable sources; however, we make no representation as to its completeness or accuracy. The publisher is not engaged in rendering legal, accounting or other professional services. If other expert assistance is needed, the reader is advised to engage the services of a competent professional. Please consult your Financial Advisor for further information.

Citations

1 http://cnbc.com/id/27053361          [10/6/08]
2 http://ap.google.com/article/ALeqM5gHs5OM3gFG_DytQQZFbWfgPT08MAD93L6GL80             [10/6/08]
3 http://economist.com/world/europe/PrinterFriendly.cfm?story_id=12370596        [10/6/08]
4 http://iht.com/articles/ap/2008/10/06/business/EU-EU-Deposit-Insurance.php   [10/6/08]
5 http://money.aol.com/news/articles/_a/bbdp/europe-governments-go-their-own-way-on/200770 [10/8/08]
6 http://csmonitor.com/2008/1007/p01s03-usec.html   [10/7/08]
7 http://nyse.com/press/circuit_breakers.html               [10/8/08]
8 http://afp.google.com/article/ALeqM5i3Fnb_RhAG7WnoMPMrpWKYfjBBcA              [10/8/08]
9 http://iht.com/articles/2008/10/06/business/6fed.php                                 [10/8/2008]
10 http://forbes.com/feeds/ap/2008/10/06/ap5515548.html                            [10/8/2008]