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