Why the Market Crashed Again, Is This Worse Than The Great Depression, Oil Forecast, Earnings Highlights, and More!

by Addison Wiggin & Ian Mathias

  • Stocks sell off, again… the difference between yesterday’s fall and last week’s crash
  • Eric Fry with a surprising chart… is the current crisis already worse than the Great Depression?
  • Byron King with an updated oil outlook
  • Hugo’s back… infamous Venezuelan dicta-president on oil, U.S.
  • Financial earnings’ bombshells… three scary stories, one fairy tale

  Just two days after the proclaimed “bottom” of the current market crisis, traders decided to give the latest lows another go.

Stocks plunged, especially in the last hour of trading. The Dow ended down 7.9%. The Nasdaq got slammed too, down 8.4%.
The S&P 500 fell 9% — its worst single day since the crash of 1987.

The S&P Energy Index fell 15% yesterday alone. It’s now down 49% from its May peak.

  “Honestly, we NEVER expected the mess we now find ourselves in,” admits Eric Fry, editor of our Rudest publication . “Even though we never ruled out the possibility that Depression-like conditions might descend upon the financial markets, we never really expected it.

“There’s a good reason for our shock: Nothing quite like this has EVER happened before in the U.S. stock market. As the nearby chart illustrates, the Dow’s year-to-date performance in 2008 is MUCH worse than the Dow’s year-to-date performances (through the end of October) during the epic crash years of 1929 and 1987.

“So far this year, the Dow is down more than 30%. By contrast, the 1929 Dow finished the month of October down only 10%, while the 1987 Dow finished the month of October with a 5% gain! Obviously, we have not yet reached the end of October 2008, but the Dow would need to soar 3,000 points during the next two weeks to replicate the performance of the 1929 Dow!

“The point is simply that the mark-to-market destruction of capital has been much more severe this time around than it was during the two previous crash experiences. Something like $6 trillion of stock market value has disappeared so far.”

  “Stabilization of the financial markets is a critical first step,” Ben Bernanke suggested yesterday, “but even if they stabilize as we hope they will, broader economic recovery will not happen right away… Economic activity will fall short of potential for a time.”

What do you want from me!?

The prevailing wisdom is that Bernanke’s comments sent the markets tumbling. But as we suspect, as we did on Tuesday , these rallies and crashes are going to be part of the landscape for some time.

Wednesday’s loss was more about September retail sales numbers at their lowest levels in three years. If the consumer stops using credit to keep up spending… we’re all freakin’ doomed.

Today, we’ll be watching Dow 7,773– the low of Friday’s session. If investors think the recession will be mild, the Dow is likely to resist somewhere around here. If it falls through 7,773, we’ve got some more psychological support at 7,181– the low of the tech bust. If it passes through there… well, all bets are off and our worst-case scenario from last Thursday gets even more possible.

The Dow opened down over 200 points, but is trading in positive territory as we write.

  Today’s whipsaw and coming options expirations sent the volatility index (VIX) to its highest point ever: a jittery 81.

The VIX and market uncertainty are great, if you’ve the stomach for it… read here to find out why.

  Ironically, the Libor — the epicenter of the credit squeeze — continued to improve yesterday. Overnight interbank lending rates for U.S. dollars drifted down to 2.14%, from 2.18%. Not exactly monumental, we know, but a whole lot better from last Thursday’s overnight rate of 5.09%.

The three-month rate continued its decent, as well, down another 10 basis points, to 4.55%. It’s still a mile from the Fed’s target rate of 1.5%, but better than the 4.8% from last week. The “frozen” credit markets are starting to “thaw,” as the mainstream media love to put it these days. Heh, too bad the market doesn’t seem to care anymore.

  Oil fell again today, this time about $4, to $70 a barrel. Oil stocks are getting slammed, but the rest of the market fails to benefit.

Pundits argued on the way up that consumers stocks were getting hammered by rising energy costs. If that were true, you’d expect them to rally on declining oil. Not so… concerns over consumer spending have trumped energy savings in the mind of the mob.

  “We might see oil in the $50s per barrel,” says Byron King, revising his forecast from last week. “And eventually, we’ll see oil over $200. All within the next 36 months.
“James Woolsey, former director of the Central Intelligence Agency, has an interesting idea. He says that "Every decade or 15 years or so, the Saudis drop the price of oil to where the economic impact wipes out most of the projects in the world that could lead to an alternative for oil. Then, after the projects get canceled, the Saudis let the oil price drift back up."
“Back in the 1970s, the U.S. was well on its way to developing oil shale. Now the world is going full bore on alternative systems, to include ‘renewables,’ as well as other forms of hydrocarbon like tar sands and coal uses. All are substitutes for traditional petroleum as motor fuel in transport. So what do we get? Dropping oil prices. Most oil companies use a number like $40-50 for scaling the economics of their projects. If oil is over $50, then most projects will still get done. But below $50, watch the cancellations roll in.
“The part about this story that we like is that it’s going to create some incredible buying opportunities for the medium-to-long-term investor in the oil patch.” For the best of those opportunities, we recommend Byron’s Energy & Scarcity Investor.
Get the details here.

“The price of oil is falling?” our favorite South American dictator Hugo Chavez asked yesterday, only to answer himself: “Yes.”

“The price will carry on falling?” The answer: “Probably.”

For whatever it’s worth, Chavez revealed yesterday that he is altering his 2009 budget based on Venezuelan oil netting $55-60 a barrel. As the lower-quality crude there typically trades $10 below the international price, he’s betting on a low of $65-70 for next year.

“Comrade Bush is to the left of me now,” he chuckled, unable to resist drawing attention to our quasi-nationalization of banks. "I am convinced he has got no idea what’s going on.”


  The national average for gas is now down to $3.08. That’s $1 cheaper than its July high… down 73 cents in the last month alone. Another 30 cents and gas will start looking cheap again at last year’s average of $2.77.

  Earnings season is in full swing. Today’s show opener didn’t fail to disappoint.

Citigroup unleashed yet another horrid quarterly report. Highlights include a $2.8 billion net loss for the fourth quarter in a row and another $4.4 billion in write-downs, mostly from mortgage-related assets. Citi cut 11,000 jobs in the third quarter, bringing its yearly layoffs above 23,000. And it’s set aside another $25 billion in loan loss provisions for the next few quarters.

Naturally, Citi shares moved up over 3% pre-market.

  The Swiss suffered a one-two punch today. First, their government took a page from the U.K. playbook and partially nationalized UBS. The government bought $60 billion of bad assets in exchange for a 9% stake.

Simultaneously, Credit Suisse conducted a massive capital raising of its own, but turned to… umn… Qatar. The bank tapped several Middle Eastern investors for an $8.8 billion life preserver. Qatar coughed up the lion’s share.

  Wells Fargo announced a nasty 25% annual decline in profits during the third quarter. The bank did manage a small miracle and turned in a profit greater than its dividend payment. Wells booked a $1.6 billion profit in the quarter, or 49 cents a share… 15 cents above expectations.

  Consumer prices stayed flat at an annual rate of 4.9%, the Commerce Dept. announced this morning. That’s a small reason for celebration, as most economists were anticipating a 0.1% rise. But it’s still not far off the 17-year high of 5.6% garnered in July.

Stripped of food and energy costs, core CPI rose 0.1%, to an annual rate of 2.5%, not far from the Fed’s target of 1.5-2%.

  As usual, the dollar got a nice boost yesterday as the markets swooned. The dollar index popped a full point from its low, to 82.2 as we write.

The euro dropped 2 cents, to $1.33. The pound got shellacked, falling as much as 4 cents, back to $1.72. The yen is up to its old tricks, staying strong when the going gets tough, and is right around 100.

  Gold fell off a cliff, down over $40 an ounce last night, to barely $800. Sigh. More on that tomorrow.

  “Back in 1990,” writes a reader, passing on a viral story that’s infested the Internet lately, “the government seized the Mustang Ranch brothel in Nevada for tax evasion and, as required by law, tried to run it. They failed and it closed. Now we are trusting the economy of our country to a pack of nitwits who couldn’t make money running a whorehouse and selling booze…

“This is exactly what I’m talking about… The Mustang Ranch is back in private hands and open for business once again. For those gentle readers who may be less worldly than others, the Mustang Ranch was, at one time, the largest brothel in Nevada, as well as being the first licensed bordello in that state… After several years of tax shenanigans by the owner, the Mustang Ranch became the first (official, licensed) brothel run by the United States federal government.

“They lost money…

“Now, this is just my opinion, but if your money-handling skills are so poor that you can’t even make a profit selling sex, then you have absolutely no business getting involved in more complicated financial areas.”

The 5: Heh.

Addison Wiggin
The 5 Min. Forecast

P.S. Just a reminder, we’ll be screening the film I.O.U.S.A. at the New Hampshire Film Fest tomorrow night at 4:20 p.m. and then again on Sunday at 4:35 p.m. Both screenings are at the Portsmouth Music Hall. Following tomorrow’s screening, there will be reception for the film across the street at the Muddy River Smokehouse. Patrick Creadon, the film’s director, and Sen. Judd Gregg, ranking Republican on the Senate Budget Committee will both be there. If you’re in the area, hope you can make it.

We’ve also been invited to screen the film at Columbia University in New York City on Oct. 26. Details to come. But what an honor… isn’t that where Mahmoud Ahmadinejad spoke when he came to town?

P.P.S. If you’re nowhere near New Hampshire, here’s another way to tune in and stay informed. We’re hosting a free “Webinar” called The Emergency Retirement Recovery Series. It’ll start with a conference call video hosted next Tuesday (you won’t need any special equipment or software) that will provide specific action you can immediately implement to recover your retirement funds and profit from this messy market. If you’re interested in participating, just click here and we’ll get you set up. Thanks!


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