Richard Russell, Marc Faber and Craig Smith discuss stock sell-off
By David Bradshaw, Editor, Real Money Perspectives
Feb. 27, 2007
Stocks plunged Tuesday, sending the Dow down 416 points (3.2 percent), the largest drop since the markets reopened after the 9-11 attacks.
Investors ran for the exit doors after a 9 percent sell-off in Chinese stocks, reports of a possible assassination attempt on Vice President Dick Cheney in Afghanistan and more saber-rattling with Iran.
"It started with the Shanghai market plunging nearly 9%, which set off wave of selling throughout global financial markets. Emerging markets took the hardest hit, but London's FTSE 100 index loses 2.4%," reports Marketwatch.
"Today the trading curbs where put in place to stop a complete meltdown in the market," said Craig R. Smith in a note to his brokers. "So much for a free market in paper assets."
But will today's 3 percent drop in the Dow be enough to crank the bull market on Wall Street back up soon?
"It’s always difficult to tell when a market starts to sell off whether it will end up in a crash, or in a bear market, or just in a correction within a long-term bull market," Marc Faber told Bloomberg TV. "As an investor I would be taking some precaution here and rather selling than aggressively buying the dips.”
Richard Russell of Dow Theory Letters writes, "How much of a change the nine percent drop in Chinese stocks will bring on, remains to be seen. Some see it as merely a temporary warning, a 'gut-check.' Others take it more seriously. My opinion -- major bull moves don't tend to end this way. Major tops entail weeks, more often months, of distribution. I haven't seen the signs of steady distribution yet. I've seen over-valuation, over-speculation, over-optimism, ignoring of risk -- but I have not yet seen the signs of distribution."
Russell continues, "It used to be said that when the U.S. sneezed, the rest of the world caught a cold. And I wonder, has that changed? Is it China that has now taken the U.S.'s place? When China coughs, is the rest of the world in trouble. Hard to believe, but that may well be the case today."
One can only imagine the damage that might have been done if the SEC did not have such control over the ups and downs of the U.S. stock markets.
"The stock market curbs come from SEC Rule 80a state: This restriction is triggered if the Dow (DJIA) moves up or down by 50 points. If this trigger occurs, program trading curbs are put in effect. Essentially, a key computer is turned off, so program trading must be done 'by hand.'" says Mr. Smith.
"So SEC officials stop computers from selling and only allow trading that will benefit or strengthen the market. So much for 'real value.' Given the market functions on confidence, if lost, the market could well go into a free-fall and that has to be avoided at all costs or the damage would be incalculable," adds Smith.
Analysts said that a short-term market correction has been due for a while in China as well as other emerging markets given the spectacular gains in recent months. While the current adjustment is significant, it will not have a long- term, negative impact on global markets.
While Faber doesn’t see the China stock market’s biggest plunge in 10 years as a hugely significant event, he says investors have been lulled into a false sense of security in the past few years, investing on the long side of the markets.
"By my standards, an 8 percent correction is nothing special because in ’87 the Dow dropped 21 percent in one day. It’s just that people got accustomed to markets with very low volatility over the last three years. Since 2003, when the markets began to rise, we never had in the U.S. a 10 percent correction,” points out Faber.
Smith concludes, "Stock markets remain very vulnerable, despite SEC curbs. Do you want your wealth held hostage to the whims of the SEC? What if the Treasury or Trade Department wanted to let a lot of air out of the amount of equity held in paper? Americans who hold gold coins in their hands are not potential victims of the very controlled paper markets. Gold coins don't have 'curbs'. They operate in real markets, not markets designed to enrich a few many stealing from many."
Investors' dwindling confidence was knocked down further by data showing that the economy may be decelerating more than anticipated. A Commerce Department report that orders for durable goods in January dropped 7.8 percent exacerbated jitters about the direction of the U.S. economy, just a day after former Fed Chairman Alan Greenspan said the United States may be headed for a recession.
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