Stocks dive; Dow falls more than 100 pts.

[uppityperson]

http://seattletimes.nwsource.com/APWires/headlines/D8I44TA01.html

NEW YORK — Interest rate concerns sent stocks spiraling for a fourth straight session Thursday as investors continued fretting about higher lending costs choking demand and hurting the global economy. The Dow Jones industrial average is down about 460 points this week.

The death of Iraq's main terrorist leader pushed down oil prices, but the pullback did little to relieve worries about interest rate increases by the European Central Bank and in India. Some strength in the U.S. dollar was countered by an inversion of short- and long-term bond yields.

Without any fresh data to offer clues about the economy's health, investors were unwilling to place bets while they assessed the likelihood of more rate hikes from the Federal Reserve. This week's signals that the Fed would sacrifice economic growth to keep boosting rates and contain inflation saddled stocks and led steep declines in stock markets worldwide.

"I suspect the market is exaggerating the downside move amid fears that the Fed may overextend its tightening policy and dampen economic activity more than anticipated," said Peter Cardillo, chief strategist at S.W. Bach & Co. However, he added that a rebound in trading volume could be a sign that the market is reaching a near-term low point. In midday trading, the Dow plunged 143.36, or 1.31 percent, to 10,787.54. The Dow is about 70 points away from falling into negative territory for 2006...(more@link)

[central scrutinizer]

1. the economy has turned the corner again!

Just like in Iraq, the economy is in its last throes.

[ChairmanAgnostic]

2. tis a shame that reality has set in with the markets

I'd like to see Bush try to sell privitizing SS now.

[fasttense]

3. The PPT been trying to clean it up the last two weeks

and can't seem to get a handel on it. But the government funded manipulation group was able to knock back some of the loss. It is now down about 70 points today. What a wild ride when the feds start playing.

[nick303]

25. Tell me some more about this government funded manipulation group

It's funny, because I work on a trading desk at a major investment bank and I have yet to see any orders coming in from them.

[dkos refugee]

4. Zarqawi?

Could this slide be the result of a possible increase in stability in Iraq?

(Stability = bad for business?)

[uppityperson]

6. possible decrease in stability in Iraq

al Zarqawi was only 1 person, didn't control what was going on in Iraq. There are lots of pissed off people in Iraq and around the world. Martyring him may increase violence also.

[stop the bleeding]

5. for the last hour the DJIA has been fighting to stay around the 10850

mark if it manages to hold onto this to today's close then it will only be about a 70-80 point drop -- yippy skippy

in this mornings session it was around the 10760 mark for about 10 minutes - that is over a 170++ point drop, I think there has been a minor Bull advance over lunch time, it will interesting to see who wins at the 10850 mark, Bulls, Bears, or Draw???

[Yavin4]

7. Rates Are Going Up Over 6%

The Fed has to keep raising them because of inflation.

[Drum]

22. too many dollars?

I've read posts (here and elsewhere) alluding to the US printing scads of new money and dumping it into circulation. I'm a naif about markets and such, but does anyone know how this is done? I mean, who gets these new extra dollars, and how does it find its way to us, or more importantly, to me. Does the government use these extra dollars to pay for some things in cash, and thereby fool us about deficits?

I know it's a tangent from the OP above, but if anyone's moved to share I'm grateful.

-D

[nick303]

26. The Fed uses the following tools to create money

Keep in mind that "creating money" and the physical "printing of currency" are two completely different things. The first one is the one that matters.

The Fed creates money using the following 3 tools:

1) Reserve requirements. Banks do not hold all of the money that they have lended out to people, not even close. Instead there is a minimum percentage they must hold of their total outstanding loans. So if the reserve requirement rate was 10%, a bank could lend out $100,000 using only $10,000 worth of deposits. However, if the rates dropped to 5%, then the bank could lend out $200,000 using the same $10,000 they had before.

Of course, it doesn't stop there, the money the bank lends out at first will continue to circulate through the economy, so that a change of 1% could lead to a huge difference in the money supply. The Fed does not use this very often because it is a very blunt weapon as far as monetary policy goes.

2) Open market operations. This is the most common way, and perhaps the most elegant of expanding/shrinking the money supply. The Fed buys and sells US Treasury bonds. The catch is that the money they use to buy them comes literally out of thin air--there is no account they have that it is drawn from.

3) Changing the discount rate. This is the rate the Fed charges to banks to cover their reserves when they get low. Increasing the rate will cause banks to be more cautious and lend out less money, leading to a decrease/slowing down of the money supply. However, banks only receive about 0.1% of their funding from the Fed, making this a less important factor as well.

[Drum]

27. Thanks so much for the follow-up!

:toast:

[katinmn]

8. AP says Zarqawi's death pushed oil prices down! What a bunch of BS

If oil prices are going down it would be because we possibly have averted war with Iran (no thanks to the US)!

[Massacure]

28. Because the AP always blames oil prices for events the day before.

They are too focused on one small piece of a very large puzzle.

[swag]

9. Golly, and after all that stocks finished up for the day.

Not really suprising, with the broad market trading at a discount to its historical average earnings multiple, and with a share of earnings at the aggregate level being the cheapest in many years.

Individual investors may be fleeing stocks and stock funds but corporate buybacks and acquisitions are highly net positive. So the chumps are getting flushed out of the market, and companies are buying cheap stock.

Me, I'd love the market to fall further. I like to buy cheap stock too.

[Zynx]

10. This sell off is so fundementally unwarranted.

PEs on a forward basis are at 15. With earnings continuing to grow, stocks are cheap. What's more is that the sell off overseas isn't even warranted either. PEs in most foreign markets are between 10 and 12. This seems almost as extreme as the multiple compression seen after the Great Depression when in 1954 PEs got down to something like 5 or 6.

[swag]

11. I hear ya. Stocks could still go lower, but that mean reversion

is a powerful tendency. I'm glad I'm a buyer.

[Zynx]

13. I have a substantial bond position I am thinking about putting in.

I'm faily heavily committed to the market as it is, but I think that a risk reward analysis would lead to one conclusion: buy more.

[swag]

15. Seems like a nice time for even strategic asset allocators to rebalance

Best to you.

[skipos]

12. To me ,15 means fair value.

I know the talking heads think the economy is swell, but most Americans think this economy is weak. Personally, I tend to invest more with a democratic president and less with a republican one. Historically democratic presidents make for better economies and better markets.

[Zynx]

14. 15 historically is on the lower end of the range for an economic expansion

and this is particularly true in the modern era. Over 20 I get concerned, but earnings growth is solid and there is no froth in the market and there is virtually none in any global market that I can think of off hand. India is a little pricey at 18x for an emerging market, but that's not extreme. This is not 2002 or 2000 or even 1998(in the case of emerging markets) all over again for global stock markets. The closest analogy I can find is 1994, which could mean a very good year next year.

[swag]

17. Average P/E ratios for various perios (from S&P and Jeremy Siegel)

S&P 500 Price to Earnings averages (as reported earnings)
Average from 1996 (S&P) 27.47
Average from 1988 (S&P) 23.23
Average from 1960 (Siegel) 17.00
Average from 1935 (S&P) 15.68

[Zynx]

18. Thanks.

This is an example where median and mean might be different by a lot. Back in the early 50s, it was single digits and back in 1999 it was over 40. I'd be curious what the median and mode are.

[swag]

21. Bob Shiller has a nice data set at

http://www.irrationalexuberance.com/ie_data.xls

That could be used in such computations.

Note that his P/E column is his own special "10-year trailing smoothed" (not even Benjamin Graham goes to a 10 year extreme) P/E ratio, which he uses to justify his dubious claim that US stocks are still bubblized. I like Shiller, but I'll take the Siegel view on what constitutes a reasonable multiple).

For shits and giggles, S&P has a nice page full of data here:

http://www2.standardandpoors.com/servlet/Satellite?pagename=sp/Page/IndicesMainPg&r=1&redirect=Y

[superconnected]

16. Someone please educate me.

Why is the dow dropping everyday?

Wasn't it at it's highest, with high interest rates when Clinton was prez?

The artical says interest rate concerns are driving it down.

[Zynx]

19. Interest rates historically weren't that high under Clinton.

They aren't that high now either, but the concern is that inflation may be building and the Fed will be forced to raise over 6% which would mean a lot of trouble for the economy. There is a lot of uncertainty right now and the market hates it.

[daleo]

20. But...but...Zarquawi

Wasn't that supposed to make everything better?

[regnaD kciN]

23. Boys and girls, can you say "stagflation"...?

Sure, you can!

:scared:

[sendero]

24. That's exactly..

...what we've got.