October 15, 2008

Wall Street had yet another dismal day today as the Dow dropped 733 points as very weak and bleak economic data stoked fear and uncertainty in the markets. Investors are evidently worried that all the U.S. and global financial efforts will not be enough to stave off a severe recession.

In addition to the Dows 733 point drop today, the Nasdaq was down 8.47%, the S&P 500 was down 9.03% and the Russell 2000 Small Cap Index was down 9.47%. Since Monday the Dow has given back 86% of its 936-point Monday gain. The S&P's two day retracement has been 92%, and the Nasdaq has given up all of its 195-point Monday gain.

Bad news regarding U.S. retail sales put the big kabosh on today's session dropping by the largest amount in the last 3 years. Consumers cut back on spending in the face of the expanding economic challenges. September retail sales dropped 1.2% month-over-month, the third consecutive monthly drop and largest decline in three years. The drop was larger than the 0.7% expected drop. Sales are down 1.0% compared to last year, marking the first year-over-year decline since October 2002. Also the Producer Price Index, a gauge of inflation, fell 0.4% in September primarily due to a drop in gasoline and other commodity prices. Excluding food and energy, PPI rose 0.4%, which was more than the expected increase of 0.2%.

Crude oil dropped to just under $75 per barrel for the first time since late August 2007 and crude oil is now down 49% from its peak on July 11th and down 21% YTD. Prices at the pump have declined as well. AAA's Fuel Gauge Report put the national average price of gas at $3.125 a gallon today, down 24% from the $4.114 peak on July 17.

Credit Freeze Is Starting to Melt

Money professionals that keep an eye on key indicators of stress in the credit markets see things that indicate that things are looking up. The London interbank offered rate, or Libor, has been moving lower. Libor is a key benchmark rate used to adjust a host of other borrowing rates around the world. The higher that Libor is the less interbank lending that goes on. The three-month Libor was still high, at 4.55% on Wednesday but down from 4.64% on Tuesday. A week ago credit markets were virtually frozen and the Libor was at 5.38%. Last month, the three-month Libor was 2.8%, so things are supposedly headed in the right direction with the Libor rates.

Bernanke Cautions: Things Will Take Time to Recover

Fed Chairman Bernanke cautioned traders not to expect too much too fast from government efforts to calm financial markets. "Stabilization of the financial markets is a critical first step, but even if they stabilize as we hope they will, broader economic recovery will not happen right away," Bernanke told the Economic Club of New York. "Economic activity will fall short of potential for a time." The Fed meets again on October 29th and there are indications that they might drop interest rates again to 1%. It seems that the Fed is less worried about inflation now that oil has dropped back to around $75 per barrel and may be more inclined to drop interest rates again to help get the economy back on track.

Asian Stocks Tumble

Asian stocks tumbled, driving Japan's Nikkei 225 Stock Average down as much as 10 percent, as concern deepened that the global economy is headed for a recession after U.S. retail sales fell.

Commodities prices fell. Sony Corp. and Toyota Motor Corp. lost more than 7 percent as U.S. consumer purchases dropped for a third month. Woori Finance Holdings Co. slumped 9.3 percent after Standard & Poor's said the bank is among seven South Korean financial companies that may have their ratings cut. The Korean won fell the most since the 1997 Asian financial crisis.

The MSCI Asia Pacific Index lost 5.9 percent to 89.51 at 10:49 a.m. in Tokyo, extending yesterday's 1.6 percent decline.

Japan's Nikkei 225 Stock Average dropped 10 percent to 8,591.59. The decline caused trading in Nikkei futures to be temporarily halted. South Korea's Kospi Index retreated 6.3 percent. All benchmark indexes in the region sank and the Japanese yen climbed toward a seven-month high against the dollar.