- Friday's big crash scared a lot of people, but some are bargain hunting now.
- Some analysts believe the capitulation isn't over and central banks don't have the ammunition to fight a looming recession.
- Don't discount the possibility of a snap-back rally.
Searching for a Bottom - Stock Markets Today
The market crash of Friday scared a lot of people, but it had others searching for a bottom from which they might buy stocks today. U.S. stocks had their worst day in years on Friday, with the Dow losing 530.94 or 3.12% to finish at 16,459.75, the NASDAQ down 171.45 or 3.12% to 4,706.94, and the S&P 500 falling 64.84 or 3.19% to finish at 1,970.89.
In all these cases the markets fell below important “technical resistance” levels, indicating further falls are possible. All are now below the levels at which they started the year. This has created some bargains, like Apple (NASDAQ:AAPL) being offered at a Price/Earnings multiple of 12.22, including $35/share in cash, at 105.76, and Disney (NYSE:DIS) selling at below $100, $98.75 to be precise, for the first time since February. There's a more detailed look at some of last week's biggest losers in the tech space, in the Sunday special edition of Markets This Morning.
Is This What Capitulation Looks Like?
Friday’s collapse was hardest on the companies that had been doing the best earlier in the year. Netflix (NASDAQ:NFLX) fell 15.75% during the week, to $103.96. Facebook (NASDAQ:FB) fell about 10% in two days, leading to stories about how much billionaires like CEO Mark Zuckerberg lost. Bloomberg estimated losses for the 400 richest people around the world at $182 billion for the week.
Yet analysts like Jim Cramer refuse to call this the bottom. “No capitulation yet” he tweeted late Friday, predicting gains won’t come until the Federal Reserve agrees with the International Monetary Fund and takes a September hike in interest rates off the table.
A lot will depend on what happens in Shanghai this morning, where the market is down 7% since the 2% devaluation of the Yuan. Despite losing 30% of its value in less than two months, the index remains above its January level and if it can hold that level the whole thing might be written-off to a speculative bubble.
What the Bears Say
What the bears, especially those who believe in the Austrian School of Economics, are saying is that people around the world are losing their faith in central banks, that the banks are running out of ammunition with which to fight off a looming global recession.
If there is an economic problem in the world right now it’s deflation, with commodities like oil and gold –the usual “safe havens” of traders – falling in value. There is too much supply, not enough demand, and in a deflationary spiral wages always fall faster than prices.
Which means someone needs to step up and buy. Use the value or it will be frittered away in useless trading.
The Real Problem - Who Will Support The Market?
Government would be the usual suspect when looking for buyers of last resort, but as in the early 1930s most governments are frozen by fears of debt. Greek debt, Puerto Rico debt, the U.S. national debt – everyone claims to be tapped-out, forced to stop buying and pay back what they owe.
Still, history shows that, in cases like this, someone does eventually find an excuse for buying. Unfortunately, that excuse is usually “those” people “over there” – some foreign enemy against which “we” must “re-arm” or face “Armageddon.”
As was said nearly a half-century ago, before the first Earth Day, “we have met the enemy and he is us.” Maybe, this time, we’ll find something better to do with our unspent wealth than kill one another. We can always hope.
I think we get a snap-back rally Monday.