The Dow Jones Industrial Average dropped again this morning. It was down another 200 points just before 9am Central time. It briefly rose and then began to fall again.
Peter Costa, a long time trader and CNBC analyst, said this morning that the recession is being priced into the stock market. He would not predict what number the Dow would hit today.
The Dow has now hit its lowest level in 5 years. It’s down 17 percent just this week – and perhaps it will fall more today.
Last night I heard some market observers debate about how much government intervention is needed. One free market proponent said that if the central banks around the world stopped taking action it would be a sign of their confidence in the markets. Many traders and economists feel this approach is highly risky. They want government intervention saying that the central banks need to insure more money, specifically interbank lending, such as what Britain recently did. Insuring interbank lending would get money flowing again between financial institutions and their borrowers.
It’s hard to gauge exactly how slow the credit market has become. But one factor that affects it is commercial paper, which is short term lending to corporations. Companies issue commercial paper to raise short-term cash and in some cases, when they have a good credit rating, they can get better rates on it than they could by taking out bank loans.
Commercial paper comes in denominations of $100,000; $250,000; $500,000 and $1 million and companies have to repay those who buy their commercial paper within 270 days, per a regulation from the Securities and Exchange Commission.
So if companies are in trouble, get lower credit ratings and cannot find buyers for commercial paper it may grind their businesses to a halt.
With the commercial paper market in trouble some look to banks to pick up the slack by increasing lending. But banks have become very risk averse and so people call for central banks to lower interest rates and make conditions more favorable (such as providing increasing insurance) for banks to loan money.
We’ll continue to watch what happens with the markets and how governments worldwide respond.
I’ve heard several market pundits say that if stock market losses keep you from sleeping you should get out of the market. Clearly, it’s a tough time.
But if you have 20 or 30 years to go it may be wiser to hold tight and not act. Your losses don’t become real until you sell. I know this is easier said than done.
President Bush just spoke to the country about how the FDIC and NCUA would be raising the amounts of money they insure in bank accounts and credit union accounts. He said the government would provide relief to the commercial paper market. We’ll see what effect his words have on the stock market.
October 10, 2008