Are You Rattled By The Stock Market Crash?

On Friday, Dow Jones tumbled 128 points, while S&P 500 slid 1.2%, making it the eighth consecutive session of losses. For this week alone, the Dow fell 18%, its worst weekly decline on both a point and percentage basis.

A whooping $2.4 trillion in market value was wiped off on Wall Street and many investors were rattled by this self-feeding frenzy. Billions of dollars were withdrawn from equities as investors scurried into havens like bonds and Treasury bills. Global markets fell like nine-pins too, with the Japanese Nikkei and London FTSE crashing about 10%.

Despite extraordinary measures announced to unfreeze the credit markets (a $700 billion bailout to buy toxic assets, a coordinated emergency rate cut with global central banks, purchase of short-term commercial paper needed to finance daily operations from businesses, making available $600 billion of loans and taking stakes in banks), liquidity remains scarce.

Banks continue to hoard their cash as uncertainty abound over each others’ liabilities. Three-month Libor, or what banks charge each other to borrow for three months, rose to a 2008 high of 4.82% from 4.75% Thursday.

The credit crunch is now the most critical challenge facing the US administrators and central banks around the world. Without loans to lubricate the system, perfectly sound businesses may not be able to meet short-term obligations, and consumers’ reluctance to purchase goods/services will force the economy into seizure with more shutdowns and rising unemployment.

This naked fear among retail investors is not unfounded. Just a few months ago, banks which declared confidently that they are on sound financial footing are now in deep trouble. Fact is, nobody can be trusted and rather than not knowing what is going to hit them, investors might as well as take cover first.

Recently, Royal Bank of Scotland (RBS) share price plunged as it emerged that Fortis, UK’s third largest private car insurer, must now sell its stake in ABN Amro, bought for about 72 billion euros in the world’s biggest financial takeover led by RBS last year.

Concerns over RBS liabilities reached a peak when Fortis was rescued jointly by the Belgian, Dutch and Luxembourg governments with an 11.2 billion euro bailout. The ABN deal was extremely complex and it is anybody’s guess if RBS is able to weather the storm independently.

In the coming months, I believe there will be more bank failures and mergers. Asia is already being swamped by the financial tsunami and Japan is feeling the full force of their biggest crisis in two decades.

Prime Minister Taro Aso warned that the Tokyo market meltdown “has reached a point where it affects the real economy and fundraising.” This week, Yamato Life Insurance became the first casualty of Japan’s financial crisis. The Japanese life insurer said it was unable to close its books at the half year, after a sharp and rapid fall in the value of its equity holdings left debts exceeding assets by Y11.5bn.

Yamato’s collapse highlights the impact of the global credit turmoil on Japan, which is supposed to be more fiscally prudent than Europe and America after learning a painful lesson from the property bubble burst and bad debts debacle in the late 1990s.

To be sure, we need further drastic steps to get money flowing again. Investors can only hope that a meeting between George Bush and finance ministers from G-7 nations on Saturday can yield confidence-boosting measures to stem the tide. Else, we will be experiencing more of the melt-down on Monday again.

The CBOE Volatility (VIX) index hit a record just shy of 77 on Friday. This indicates that retail investors are joining institutional firms in their capitulation. When everyone is getting out, that suggests we’re inching towards a bottom.

After technology stocks crashed in 2000, US slid into a recession stretching till 2003 when stocks bottomed out, which subsequently led to four fat years. While we are within touching distance of the 2003 bottom, stock market lows can be deceiving especially when panic is still rampant. It is likely that stocks could fall to a lower low before making a strong and sustained rally. And I believe financial stocks will benefit immensely from the rebound.

Over the last few days, I have seen a lot of analysts recommending that we sell off our entire portfolio of stocks and be in full cash. The rationale being that the market is headed downwards and the situation will get worse before it gets better. For those who are heavily geared or in urgent need for cash, this is of course sound advice.

However, liquidating positions without regard to prices or underlying fundamentals… simply because everyone is doing it or because an analyst says so, is not right. It irks me that some of these analysts are the ones who postulated positive outlook and growth in stocks for 2008, yet they are now advising that we get out of the market entirely.

I believe the financial analysts had already cashed out before asking us to do so, and similarly when most of the retail investors had taken their advice and sold out, they will have among the first to buy at the start of the rally before issuing their bullish reports.

If Warren Buffett is vested heavily in the stock market, are the analysts suggesting that we head for the exit smarter than him? If so, they will be as rich, if not richer, than Warren Buffett. One of the biggest downfall of investors is their reluctance to follow a proven investment role model and chose instead to heed the advice of “experts.”

I don’t consider myself to be smarter or more successful than Warren Buffett so if he has the courage and foresight to invest in strong franchises at attractive valuations at this point of time, what are we trying to prove by taking a contrarian approach to him? Betting against his judgment in the long run will be a sure loser.

Let’s not over-react to every reports from analysts. Investors should look at underlying fundamentals of each company and made decisions for themselves. This is the time where only the fittest survive. While overextended companies fight for their dear lives, those which have been managed prudently can capitalize on opportunities. If you are happy with your portfolio, you should stay invested and also look around for bargains too.

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Filed under Banking, Stocks

11 Responses to Are You Rattled By The Stock Market Crash?

  1. Is the LIBOR rate an international thing? I know we have it here in the UK because my mortgage interest rate is linked to it as are many UK sub-prime mortgage loans. Consequently although most people here are experiencing drops in their home loan interest rate, mine goes up :-(
    I am not in a position to re-finance, so unless I can re-negotiate, I am quite possibly going be in difficulty. Fortunately I won’t be in negative equity as only 1/3 of the buying price was loaned, but the future does not look good. I considered moving my ISA to Icesave earlier this year, but for once laziness paid off and I left it where it is. But maybe I should cash it and buy gold?

    Jenny Fletchers last blog post..Problems with entrecard today etc.

  2. Good insights jeflin. While no-one knows what the weeks ahead will bring I believe prudent investors should be looking to add at these levels.
    The Australia market is up today on news of the concerted efforts to halt the slide. Stocks are now historically cheap and should be bought.

  3. Now that most major world governments have signed up to the British Plan (including USA now), the credit crunch should start to ease over the next month or so.
    Thank goodness that Prime Minister Gordon Brown had the guts to start the ball rolling with such an audacious plan.

    John SearchingForTheBigOnes last blog post..Gordon Brown Saves the World from Depression

  4. I agree with you…many of these so-called analysts have no clue whatsoever. They are often reactive and acting like the herd’s mentality.

    Their reports offer good sources of analysis but never trust their words entirely. Always use your own judgment to draw your own conclusion.

    I agree that investing in fundamentally sound companies should bear fruits in the long term. However, in the case of severe market downturn such as what we are experiencing now, this strategy may work against you if you stick to your guns and go against the tide.

    PS Thoos last blog post..Buying Opportunity of the Life-time Or Just Sucker’s Rally?

  5. Little bit rattled down here in Australia, even though we have done nothing wrong we are getting the full force of America’s over spending =)

    Good article mate!

    Drop me a comment sometimes at my site.


  6. @ Jenny -

    This is a period where holding onto a house is the most stressful. And if the house is highly leveraged and financed on ARM, foreclosure is a real threat.

    The purpose of refinancing is to pay off your existing mortgage and create a new one. There are costs involved too so you got to consider if the benefits (lower interest rate, longer mortgage period, getting cash out) can materialize.

    I am not sure why you cannot refinance, is it because of your credit-worthiness?

    By the way, investment in gold is a good idea if you are risk averse.

    jeflins last blog post..Prudence Is The Way To Go

  7. @ Dean -

    That is right. I actually look upon this bear market as a once-in-a-lifetime opportunity for investment.

    As far as I am concerned, pessimism, rather than over-exuberance, is good for value investors.

    jeflins last blog post..Prudence Is The Way To Go

  8. @ John -

    Gordon Brown deserves credit for coming up with a plan that benefits the government and taxpayers in the long run. However, the credit crisis will not blow over so soon.

    By the way, some of the UK banks which have been rescued are already complaining that the terms are too harsh, unlike the US rescue package.

    jeflins last blog post..Prudence Is The Way To Go

  9. @ PS Thoo -

    Well, severe market downturn may cause those who do not know what they are doing to buckle under the pressure and sell off their holdings.

    I am not going against the tide. If I sell out, I will be betting against Warren Buffett, and that will be a financial tsunami when the market recovers.

    jeflins last blog post..Prudence Is The Way To Go

  10. @ Alex -

    Thanks for your kind encouragement and glad to know you are only a little bit rattled…lol

    Actually, nobody deserves to get into the mess which Wall Street created. To make matters worse, these executives are rewarded with golden parachutes for mismanagement.

    jeflins last blog post..Prudence Is The Way To Go

  11. Maybe a little rattled but over the long term things kind of things are going to happen. Buffett is not only invested in the market he has buying. The thing that should worry you as an investor is not stock prices falling but the prospects for the companies in which you own shares declining. The stock price falling only matters if you need to sell soon.

    John @ Curious Cat Investing Blogs last blog post..Financial Thanksgiving

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