Seven Days of Loses Makes One Weak

Ouch! The poor Dow Jones Industrial Average has continued it’s rout for the last 7 days. Falling from 10750 to close today at 8579. That’s a decline of roughly 20% in one week. If we go back one full year, the Dow closed at 14164 on 10/9/07. A loss of roughly 40%. Put those two numbers together and we see that the Dow has suffered half of its 40% decline on the year in the past seven trading days.

Gold closed the day at $910. For those of you who have read my book and are interested in the Dow-Gold ratio, gold was priced at $730 an ounce one year ago. It’s $910 today. So the Dow-Gold ratio has fallen from a ratio of requiring 19.4 ounces of gold to buy 1 “share” of the Dow a year ago to only requiring 9.43 today. That’s a decline of roughly 51% in one year. Any way you slice it, stocks have been an absolute bloodbath.

It’s been a good market for us bears, and it will continue to be. I am predicting that the Dow-Gold ratio will continue to fall all the way to a bottom of two or three. That’s another 70%+ loss or so, but I don’t think it will come this year. I think the stock market is do for a snap back. The carnage will take a breather and it will lull in people who feel it’s a good time to buy. People who do so hoping to make a good long term investment are going to be sorely disappointed. You might see some short term gains, but it’s still a long way down. It’s a traders market.

I haven’t seen many stories today discussing these market declines in terms of the Efficient Market Hypothesis (EMH). In years past, whenever you’d see these market declines a Hedge Fund somewhere would suffer some huge loss. Typically the press would ask the manager for a comment and the manager would say something like, “The market activities of the last couple of weeks of market activity are so extraordinary that they were impossible to predict. These types of market only occur once every 1000 years.”

Those statements were based on predicting stock market returns as a normal distribution about a daily average with each day having no influence on the days following it. As we’re seeing, that’s just not the case. The last few days along have seen a string of huge loss after huge loss one right after the other. That’s not bad luck; that’s a bear market.

I have a hairstylist friend who works in a very expensive hair salon. She keeps my book at her station and has noticed a lot of people asking about it lately. It prompted one of her clients revealing that she and her husband had lost the entire $250,000 investment they had made in a hedge fund just a few months prior. Which just goes to show that old story about a fool and his/her money.

Short term corporate bonds are going for unheard of yields.  The search on my Scottrade account is showing annualized yields of 80.9% for National City Corp bonds maturing in April of next year, and that’s but one example. There are plenty others. Those National City Corp bonds have an A3/A- rating, but it seems no one is trusting the rating agencies anymore. And why should they. Washington Mutual bonds were rated as investment grade until just a couple of weeks before they became worthless. With events happening like that, April of next year can seem a long time away indeed. But it does represent a good opportunity for the Michael Millken’s of the world who can sift through the financial statements and sort out the goods bonds from the bad. Then again, with all the accounting shenanigans and off balance sheet Structured Investment Vehicles, who can really tell the junk from the gold anymore. 

That’s the problem with markets that aren’t transparent. No one knows what’s good, so they abandon everything. Until we start to see the yields on these bonds coming down, credit markets will continue to be frozen. That means capital is at a premium and stocks are going to have real trouble doing well. What the next market development is is anybody’s guess.