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Black Monday Harsh Memories
Black Monday Harsh Memories

On October 19, 1987, historically referred to as 'Black Monday', the Dow Jones Industrial Average (DJIA) dropped by 508 points to 1738.74 or 22.61% in one trading session, for the Dow’s worst single-worst day percentage drop ever, and the worst market day for any investor who lived through it. During the crash, brokers were telling clients to dump their entire stock portfolio. Investors in traditional mutual funds back then, who might have wanted to bail, knew that their trades would not be processed until the end of the day. Many mutual funds were priced only once a week and many shareholders weren’t sure what happened to their assets for several days. Potential causes for the crash include program trading, overvaluation, illiquidity, and market psychology. After the crash, many blamed program trading strategies for blindly selling stocks as markets fell, exacerbating the decline. By the end of October 1987, stock markets in Hong Kong had fallen 45.5%, Australia 41.8%, Spain 31%, the United Kingdom 26.45%, the United States 22.68%, and Canada 22.5%. The terms Black Monday and Black Tuesday also apply to October 28 and 29, 1929, which occurred after Black Thursday on October 24, 1929 which started the Stock Market Crash of 1929. The DJIA was positive for the 1987 calendar year - to opened on January 2, 1987 at 1,897 points and closed on December 31, 1987 at 1,939 points. The DJIA did not regain its August 25, 1987 closing high of 2,722 points until almost two years later.

With markets taking a beating across the board on Friday - Dow Jones Industrial Average hosted a high triple digit loss of over 180 plus points, S&P 500 down over 20 plus points, NASDAQ facing a 60 plus point loss - investors on the long end of a position got whacked, short selling traders on the other hand, were making bank. Whether they were trading stocks, futures, forex or options, the way to trade on Friday, was to the downside - banking that positions would take a loss. Recent weak earnings reports obviously assisted the down draft. So far for Q3 earnings season, only 42% of companies have reported sales above Wall Street’s estimates, which is “well below” the average of 55% recorded over the past four months. The stats are the lowest percentage of companies to report sales above estimates at this stage of earnings season since Q1 2009 when that percentage was 35%. In comparison to the average of 70% of companies that reported earnings above expectations over the past four quarters, approximately 70% of the 98 companies that have reported for this quarter so far, have reported earnings that were above expectations.

Apple Inc. (AAPL) shares took a beating along with the rest of the market Friday - sinking by over 3% into mid afternoon trading, giving up over 21 points. The tank on Apple - to its lowest level since early August - set the tone for NASDAQ to sell off. The sell-off followed a huge slump across the tech sector, and disappointing earning results.

A proposal issued by the Securities and Exchange Commission requiring banks to hold more capital for their securities derivatives - an approach some regulatory observers believe has failed. Based on the proposal, big banks can be approved by the SEC to model their own risk internally, using so-called “value-at-risk” modeling to assist in the calculation of how much capital the banks must hold for their securities derivatives. The SEC contends that higher capital will reduce the likelihood that a financial firm with significant derivatives positions will collapse, just American International Group (AIG) was on tap to do during the financial crisis of 2008, without government infusion. Bank risk officers employ value-at-risk modeling which is a complex calculation used to estimate the maximum amount an institution can lose during a specific period of time. An SEC fact sheet states that financial institutions that employ models will still need to hold a minimum of between $100 million and $5 billion in capital as a safety net to account for any problems that might arise with their modeling. These banks will continue to be subject to new stress tests as well as liquidity requirements and will be monitored periodically by the SEC. Any new financial instrument employed in a model must be approved by the SEC. Any model that has not been doing a good job predicting risk, must be changed.

The National Association of Realtors reported Friday, sales of existing homes declined 1.7% during September to a seasonally adjusted annual rate of 4.75 million from a slightly upwardly revised rate of 4.83 million in August. Striking the largest annual gain since November 2005, the median existing-home price rose 11.3% from 2011. Striking the first reading below six months since March 2006, inventories declined 3.3% to 2.32 million units in September, representing 5.9 months of supply at the current sales rate. "The shrinkage in housing supply is supporting ongoing price growth, a pattern that could accelerate, unless home builders robustly ramp up production," said Lawrence Yun, NAR's chief economist.


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Oct 19, 2012


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