UPDATE: Dow plunges 500pts, oil plunges t0 $67 per barrel. Lets see if the DOW can make a bottom by Friday 24.10.2008. I found a Jim Jubak video explaining what I was theorizing :
http://www.youtube.com/watch?v=l8xqYDWeYa0 . This short term selloff is about raising cash and redemptions rather than discounting a deflationary recession which I believe will come. In the longer term things are not so sanguine. A few months ago I highlighted the work of Nouriel Roubini in particular his "12 steps to financial disaster". To get out of this mess and break out of the 12 step there are more things the US govt must to and Roubini outlines it in this video: http://www.youtube.com/watch?v=JbDDJeQXob8&feature=related. The global economy is pretty much doomed if govts stop here and do nothing more - they really have to jump ahead of the curve and do much much more.
First of all, just let me qualify that I'm not an analyst or a financial expert. I invest for the long term and don't recommend anyone invest for short term because it is 'usually' unpredictable. I do scan through various markets surh as gold, oil, copper etc as part of my daily routine and read voraciously about what goes on around me - that includes going through most of the business news to know what goes on in the financial markets. What I'm going to say is based on what I observe and you shouldn't act on it - it is just for fun...and for you to flame me should I be wrong about this.
Here are a few of things I noticed in the markets:
1. Our STI & Hong Kong's HSI are actually leading the DOW. ...and that includes the DOW Futures. For a number of days, I noticed that the STI fell for no apparent reason and the DOW followed. The pattern recurred and is happening too often to be coincidence. It looks like funds are collectively selling Hong Kong then Singapore then New York.
2. Commodities are falling in tandem with each other including the safe haven gold. This tells me something about the selloff. People are selling for a reason and it is not fear.
3. In markets where foreign funds are not so active due to controls such as Malaysia, the falls are much smaller.
4. The US$ is rising against everything except the Yen.
5. This pattern of selling occurred after Lehman's collapse.
I've seen the above pattern occuring almost every other day for a number of weeks. What is going on???? Many analysts cited deleveraging as the reason. However, we have had almost one whole year of deleveraging already. The best explanation and the one I agree the most with is by Jim Jubak. Remember the Friday before Lehman Brothers' collapse? AIG was looking for $20B. After Lehman's collapse, AIG needed $85B urgently. $20B---->$85B in a few days. What happened when Lehman collapsed was it left a black hole in the books of AIG and they needed to raise cash immediately to patch it up. $85B was too big and the govt had step in to give AIG more time to sell assets. But AIG was not the only company with links to Lehman. Lehman's collapse resulted in hundreds of black holes in the balance sheet of many companies, hedge funds etc in US & Japan where Lehman was most active. All of them had to sell assets and close positions in commodities, equities and foreign currencies.
Why do I think the market will find a near term bottom soon? Much of the derivatives associated with Lehman expires by this Friday. According to Jubak, the losses associated with Lehman's collapse will become clear and companies do not need to raise more cash once that happens. We can expect to see a near term bottom today or tomorrow in the DOW and Asian stock exchanges. This is a short term rally that may last for a few weeks before concerns about the recession creep in.