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Monday
Morning Market Musings 08/31/98
From Russia
with Love
No, not "World Wide Web" but "Wow, What a Week!"
How bearish are things? Well, things couldn’t get much worse, except for a crash, which is probably right around the corner.
Here are just a few highlights (or lowlights, depending on your perspective) from last week:
- Thursday’s 357-point drop in the DJIA was its worst showing since last October. The 5.5% drop for the week was its worst performance in nine years, since the mini-crash of October 1989. Friday wiped out most of the DJIA’s remaining gains for the year. The DJIA is now up just 1% YTD.
- On Thursday, 999 NYSE stocks registered a new 52-week low. That’s the worst reading since the mini-crash of October 1989.
- The average NYSE stock is now down an incredible 33% from its high. On the NASDAQ, 76% of stocks are down by 30% or more! Yet the belief held by many is that we’re still in a bull market. BULL!!
- The DJIA sank to 8011 on Friday before rebounding a bit to close at 8051. When 8000 fails to hold, and it’s as soft as butter right now, the selling will accelerate dramatically. A combined more than 2 billion shares traded in the US markets Thursday, the second busiest day ever. A 3 billion share day will accompany the crash.
- At 13,900, the Nikkei 225 is now at its lowest level since 1986.
- Closer to home, Mexico is down 40% YTD and the TSE in Canada is off 14% YTD
Pundits and analysts still are not reporting any signs of selling climax. CNBC reported that the tone in most online investing chatrooms remains optimistic. The mood is of concern and worry, not even close to panic. The dip-buyers are reloading for another volley.
Conventional wisdom has it that the 30-year US T-bond is at an historic low yield. But look just a bit beneath the surface. Take the nominal 5.4% rate, subtract out the near-zero rate of inflation, and you’ve got a real interest rate of about 5% - on the high side of the historic range. Hardly bullish for stocks, and, to be polite, not good in a climate of global economic cooling.
The Canadian central bank, in an effort to support the sliding C$, raised interest rates by a full 1%. This, into the face of an expanding global depression!? Shades of 1929?!
In Japan, the long-term government bond surged again, driving the yield down to a negligible 1.07%. According to the New York Times, this represents the lowest long-term interest rate in recorded history. (The previous low was 1.125% on some muni-bonds offered by the city-state of Genoa Italy, in 1619.)
Does Russia matter?
The entire Russian market would barely qualify for membership in the S&P 500. Russia is importantly only symbolically.
"The crisis in this county is only beginning," said a top Yeltsinite. Indeed, there is real danger of a total collapse of the Russian banking system - what’s left of it. "The Yeltsin-Clinton Commiseration Show " this week will be one for the history books, but only because they both will leave office in disgrace. Expect nothing substantive except their mutual survival for a few more weeks.
US trade with Russia is miniscule, but Russia is the world’s largest natural resources producer. including oil and gold The problem? Gold prices are at an 18 year low. The Commodities Research Bureau (CRB) index, a basket of commodities, is at a 21 year low. At $13 a barrel, crude is hardly worth pumping. Russia just can’t generate many dollars for its exports.
The ruble dropped 10% on Tuesday, after which trading was suspended for the rest of the week. At about 8 to the US dollar, the ruble is still in deep trouble. It’s poised to drop to 20 or 30 before attracting any significant buying interest.
The Russian citizenry, adept at waiting in lines for anything and everything, are so far remaining calm in their efforts to salvage their shriveling savings from the few banks that have any currency to dispense. Yes, they’re running on the banks. Who could blame them?
The mood has been characterized as "anger and frustration." When the minor pushing and shoving yields to "blood in the streets," Yeltsin will go down, despite his promises to the contrary. In a few weeks, he will be wishing he had resigned now!
The fear of course is that Russia is just the next domino in the world economic collapse. Germany, which is up to its eyeballs in Russian debt and equities, will be the next major casualty. It will put up a valiant defense, but it too will go down. Once that happens, the rest of Europe will follow. The EURO? - Forget about it!
So what about this week? For the sixth consecutive week, the Asian markets are down sharply and broadly as of 1:00AM EDT Monday. Hong Kong is getting clobbered, down 5.7%. Shanghai, Malaysia, Jakarta, Taiwan, Thailand and Singapore are down 3 - 4 %. The Nikkei 225 is up a few ticks, bringing it back over 14,000. S&P 500 futures on the Globex are up a few ticks.
It will be tough for this kind of overnight action to spark a major rally on Wall Street Monday morning. Last week marked the end of the summer vacation season for many. It’s unlikely those returning to Wall Street and Main Street will be in much of a buying mood.
A short-term bound in the US markets can be expected soon, and it would be welcome. But then, expect a crash, or a series of mini-crashes. Elliotticians are awaiting a dramatic "wave 3 of 3" to commence shortly, which could drop the DJIA by more than 1000 points.
US stocks remain on FULL CRASH ALERT!
"The speculative episode ends, not with a whimper, but with a
bang."
-- J. K. Galbraith
Grizzly
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