Dow Jones Hit Worst Low Since 2002

By Jeralyn, Section Economy
Posted on Fri Feb 20, 2009 at 05:33:54 PM EST
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What's changed since the Stimulus bill came along? Stocks have sunk even lower. The Dow Jones Industrial Average today sank to a level not seen since October, 2002.

Worst of all, analysts say today's drop means it's going to go even lower. [More...]

The measure’s slump below its Nov. 20 low to the worst level since October 2002 means it will keep falling, according to a 19th-century analysis known as Dow Theory. Its adherents say that losses in the average worsen when the Dow reaches a low at the same time as the Dow Jones Transportation Average, which happened today and yesterday.

Concern the deepening global recession will force the U.S. government to take over banks sent the Dow to its worst weekly decline since October. The rout left the Standard & Poor’s 500 Index, the benchmark for U.S. stocks, within 2.3 percent of the worst level since 1997.

Sen. Chris Dodd says we may have to nationalize banks for a short period.

More here:

Wall Street has been sinking lower and lower as investors come to terms with the fact that the optimism that fed a late-2008 rally was clearly unfounded. Companies' forecasts for this year, which accompanied a dismal series of fourth-quarter earnings reports, pounded home the fact that no one can figure out when the recession will end.
"It was a market that was built on that hope and what we're seeing now is an unwinding of that," said Todd Salamone, director of trading and vice president of research at Schaeffer's Investment Research in Cincinnati, of the rally from late November to early January.

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Dow Jones Hit Worst Low Since 2002 | 31 comments (31 topical)

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Hitting Bottom (5.00 / 1) (#1)
by MKS on Fri Feb 20, 2009 at 06:01:20 PM EST

hopefully soon.....

Nationalzing the bad banks looks like a distinct possibility.....We may just have to burn off all the inflated real estate. That could take awhile.

: HOLC would fix all that the quickest way (5.00 / 1) (#26)
by Militarytracy on Sat Feb 21, 2009 at 11:15:33 AM EST

It would also significantly stave off unnecesary real estate deflation. Not so much burning.

: "burning" it down (none / 0) (#2)
by andgarden on Fri Feb 20, 2009 at 06:18:23 PM EST

might be the quickest way, though that makes my bleeding heart feel icky (I would almost prefer to give it away).
Selling it off could take years.

Since I waited (5.00 / 1) (#22)
by CoralGables on Fri Feb 20, 2009 at 09:01:13 PM EST

until near the end of last year to fund the 2008 IRA thinking it had bottomed (dumb when I could have waited until anytime before April 15, 2009), it looks like now may be the time to go ahead and gamble with fully funding the 2009 and then hope for the best.

It's a disease I think. The three-quarters empty glass still looks half full to me.

A New Economic Strategy for the US (5.00 / 2) (#31)
by robert diogenes on Sat Feb 21, 2009 at 03:13:09 PM EST

WHY A New ECONOMIC POLICY II

THE FACTS BEHIND THE NEWS

Elizabeth Warren head of the oversight panel setup by Congress to monitor the Federal Bailout says, "THE GOV'T STILL DOES NOT SEEM TO HAVE A COHERENT STRATEGY FOR EASING THE FINANCIAL CRISIS. "Instead the gov't seemed to go from one tactic to the next without clarifying how each step fits into the overall plan.

A reason for Ms. Warren's observation is the US does not have an economic strategy. Professor Michael Porter distinguished Harvard School Professoris a strong advocate of the need to develop an Economic Strategy.

Professor Porter notes the American political system has evolved with piecemeal reactions to current events.

Is what has driven our success starting to erode?
.
Prof Porter believes" a series of policy failures have offset and even nullified "US " strengths just as other nations are becoming more competitive". Let's have a look at some of the economic areas.

"An nadequate rate of reinvestment in science and technology is hampering our feeder system for entrepreneurship. Research and development as a share of the GDP has declined, while it has risen in other countries". This is well recognized but policy makers have failed to act.
Our belief in competition is waning. "A creeping relaxation of antitrust enforcement has allowed mergers to dominate markets". "We are seeing more interference in competition with protectionism and favoritism."
US colleges and universities do not have a serious plan, such as GI Bill or National Science Foundation programs, to improve access to them. The US now ranks 12th in educational attainment for 25 to 34year olds. For 30 yrs we have not improved ourselves in this area. This is an "ominous trend in an economy that must have the skills to justify our high wages."
At a time when job insecurity and turnover are high the US gov't has not taken responsibility to provide a transition safety net for US working people. The job training system is ineffective and receives less funding each year. Pension security is declining. Social security is not being adjusted and strengthened. Access to affordable health insurance is a major worry to most people. The gov't could equalize the tax deductibility of individuals purchasing insurance to assist those not covered by their employers, but has failed to do so.
The US is energy inefficient. Public policies fail to promote energy conservation.
"Trade and foreign investment are fundamental to the success of the US economy but the US has lost its focus and credibility in shaping the international trading system." "With no strategy the US has failed to work with other advanced countries to assist poorer countries to feel confident about opening markets and internal reform." "Our foreign aid is still tied to the purchase of US goods rather than the actual needs of countries."
"The federal gov't has failed to recognize and support the decentralization and regional specialization that drives our economy.
Lack of regulatory oversight combined with lack of a strategic plan has resulted in a hodge-podge of policies that have driven up the costs of doing business. TO SUM UP WE HAVE HAD POOR ECONOMIC MANAGEMENT.
Is good strategic economic plan possible considering our political system? It requires political parties and private leaders to come together and chart a long term plan. Prof Porter recommends a bipartisan joint planning group to coordinate priorities,

Does the new Stimulus Bill help solve these problems?

The banks issue (none / 0) (#3)
by christinep on Fri Feb 20, 2009 at 06:25:47 PM EST

Based upon the comment here, comment there--and, especially considering Chrmn Dodd's suggestion that short-term "nationalization" may have to occur--the direction toward a type of receivership that may be called "nationalization" seems only to leave the question about when we actually take that decision. I am more than curious about the state of the various banks' books in that event...and how we, the public, come to terms with what a number of people are speculating about that state. Right now, tho, it certainly feels like a period of acclimation to the notion of "nationalization." (Strangely, I guess these next months or years will give a very real lesson in fiscal policy, etc.)

Interesting, as I had a case in (none / 0) (#4)
by oculus on Fri Feb 20, 2009 at 06:28:09 PM EST

which FDIC met with Board of Directors of a nationally-chartered bank and went in the very next day, wiped out the Board, and put a receiver in place to run the bank. Why doesn't FDIC do this now on a per case basis?


I tink they've been doing that (5.00 / 1) (#8)
by Anne on Fri Feb 20, 2009 at 06:40:59 PM EST

pretty much every Friday for weeks - a bank here and a bank there - with a short break at Thanksgiving and another mid-December through the end of the 2008; I've been finding that news buried every Saturday in some small and obscure part of my newspaper.

Here's the list: 27 bank failures between 2000 and the end of 2007; 38 banks failed in the last 14 months.

That's not a good sign.


Nothing this week, apparently (none / 0) (#9)
by andgarden on Fri Feb 20, 2009 at 06:47:53 PM EST

Maybe they're preparing something big. . .


They usually don't appear (5.00 / 1) (#16)
by CoralGables on Fri Feb 20, 2009 at 08:52:56 PM EST

in the news until Saturday since they get taken over after their Friday closing, but one has jumped the gun. Closing today was:

Silver Falls Bank, Silverton, OR


I'm going to have to watch (none / 0) (#18)
by Inspector Gadget on Fri Feb 20, 2009 at 08:57:22 PM EST

"Zeitgiest, the Movie" again this weekend.

Chris Dodd is not someone who I trust, but I do wish Kucinich and Ron Paul would both give the country their analysis of what is happening.


: Ron Paul is a gold bug (5.00 / 1) (#21)
by andgarden on Fri Feb 20, 2009 at 08:58:23 PM EST

I have no faith in his advice. Kucinich. . . What does he know?

I think they can (none / 0) (#7)
by andgarden on Fri Feb 20, 2009 at 06:40:02 PM EST

The problem is that these banks are BIG, so seizing them would be expensive.

If Sheila Bair wants to take the initiative and just do it, I wouldn't object. I'm just not sure she has the staff.


She definitely doesn't (none / 0) (#10)
by Steve M on Fri Feb 20, 2009 at 08:10:59 PM EST

They have been working overtime just to sort out IndyMac and it remains a work in progress.


Can you imagine (none / 0) (#12)
by andgarden on Fri Feb 20, 2009 at 08:29:58 PM EST

if the Wachovia-Citi marriage had gone through?

I'm just worried that the ghost of Wachovia will end up taking down Wells too.


Heh (none / 0) (#13)
by Steve M on Fri Feb 20, 2009 at 08:32:14 PM EST

Not to mention the ghost of [insert name here] taking down BoA, which seems positively possible.


: They really did gobble up everything, (none / 0) (#14)
by andgarden on Fri Feb 20, 2009 at 08:47:39 PM EST

didn't they? I have to say, I would feel a little bit of justice seeing MBNA go down. . .
Wells can actually now trace its founding date to 1781 and Robert Morris's Bank of North America (Wachovia, First Union, CoreStates, Philadelphia National Bank. . .).

I think (none / 0) (#11)
by Steve M on Fri Feb 20, 2009 at 08:12:40 PM EST

that the 30-day "stress test" is designed to sort through a lot of what you're talking about.

I really hope that at the end of that process, they can come out and say "okay, these banks over here are insolvent and we're nationalizing them, these other banks are fine and you can rely on their balance sheet." But I really don't know if they're prepared mentally or otherwise to take that kind of dramatic step.


Seems like some of the issue may (none / 0) (#15)
by 1jpb on Fri Feb 20, 2009 at 08:49:37 PM EST

be semantics. Even a reliably conservative economist is sort-of on board.

But, I do wonder if folks understand how complicated modern financial institutions are. These corporations can be broken into holding companies, affiliates, sister companies, subsidiaries, and all sorts of other entities with different regulatory, structural, and capital requirements. For example how many folks realize that AIG contained more than 200 different entities:

Under the federal Gramm-Leach-Bliley Act (GLBA), insurance regulatory authority only applies to actual insurance entities and transactions with those entities. Within AIG, there are 71 U.S. insurers subject to this authority. The remaining 176 entities are split between foreign entities and non-insurance U.S. entities. The lead U.S. regulator of AIG financial holding company is the Office of Thrift Supervision (OTS), a federal banking regulator.

BTW, OTS was the regulator that Countrywide chose to switch to as its regulator not long before it blew up. And, they also so-called regulated WaMu and Indymac. Does it seem odd that we hear a lot about Fannie/Freddie, but not much about OTS which was run by the Bush Treasury department?

Anyway, my point is that I wouldn't be surprised if the level of complexity associated with modern financial institutions isn't driving the BHO folks to try and avoid a total take over. These are not your father's banks.

I thought that the $75 billion part of the BHO mortgage plan was very clever and elegant. It was a good balance of, banning flippers and the like, requiring bank concessions, providing bank incentives, avoiding help for folks that aren't close to being able to afford their homes, tying the assistance to a borrower continuing to pay, keeping the borrower w/ a serious debt which they chose to take on, and providing incentives for the borrower to keep paying. And, they are making technical changes that will make it possible to back out and modify individual mortgages from the MBS's in which they are buried.

The other $200 billion part was a no-brainer, because it helps perfectly qualified folks w/o mortgage troubles (except that they're underwater because their hoods have depreciated) to refi. And, it won't help folks who were originally over leveraged, because you can only be 5% underwater. This means that these folks had to have solid equity before values sank. And, they are not adding debt, which is the only reason to restrict LTV in a refi. These folks will have the same principle amounts, but they can lock in the extremely low rates that are now available, so their lower payments will result in more cash in their pockest each month. Hopefully, some of this will find its way back into the economy.

Anyway, my point is that I hope the BHO folks will find an equally elegant plan for the very complicated banks that may already be insolvent, all things considered.


Heh (none / 0) (#19)
by Steve M on Fri Feb 20, 2009 at 08:57:37 PM EST

I knew that! Course, AIG is our biggest client.


Traditionally, The Feds Finds Buyers for ... (none / 0) (#20)
by santarita on Fri Feb 20, 2009 at 08:57:44 PM EST

the banks or at least their assets. The large bank holding companies may be complicated but the Fed can break up the BHC into smaller, easy to digest parts and sell off those. It won't be easy, fun or profitable. But the choice may be between throwing good money after bad or placing the banks on the auction block.


You mentioned: (none / 0) (#24)
by 1jpb on Fri Feb 20, 2009 at 09:29:07 PM EST

But the choice may be between throwing good money after bad or placing the banks on the auction block.

Assuming that a total takeover and break up is the best option (although, the endless money pit known as AIG (which is arguably much less twisted and substantial than the big banks) makes me nervous about that assumption.)

After the likely hundreds of entities, each w/ thousands of activities, are sorted, I'm sure you'd agree that there would still be a whole lot of good tax payer money thrown away. The private industry won't pay for the total junk, Uncle Sam gets to keep that (of course this is likely under any circumstance.) And, it's not yet entirely clear that the Feds wouldn't be taken to the cleaners on the non junk that they could sell. And, while they're doing all this untangling they need to take over the basic day to day operations (where a fair number of the most capable folks in some of the less solid entities are likely to see the writing on the wall at the same time they would like to be the first person looking for other options rather than the last person turning out the lights at the gov.s request) so that their newly acquired behemoths don't overly shed functionality and value as they stand by to be sold or otherwise disposed of.

Anyway, it's quite a mess. There are no good solutions. Hopefully the BHO folks end up choosing one of the less awful options. Time will tell.


: Assuming that the Feds are... (none / 0) (#25)
by santarita on Fri Feb 20, 2009 at 10:44:24 PM EST

thinking take over for the purpose of liquidation, they will take time to set up the sales of various assets to private parties so they won't have operations responsibility.
This would be orderly liquidation vs fire sale.

: At least.... (none / 0) (#30)
by MileHi Hawkeye on Sat Feb 21, 2009 at 02:31:24 PM EST

..."that money pit known as AIG" is in a position to pay back some of their loan.

In October, AIG said it would sell off a number of business units to repay the initial $85 billion Fed loan. The loan, which was reduced in size to about $60 billion under the restructured rescue package the government put together in November, had roughly $35 billion outstanding as of last week.
Thanks in no small part to the insurance side of the Company retaining its viability. The business units that were closely monitored, regulated and supervised by the States.

Well, it looks like a few (none / 0) (#5)
by 1jpb on Fri Feb 20, 2009 at 06:32:11 PM EST

of the 30 components are almost as ripe as AIG was when it was recently replaced as a Dow 30 component.

Turns out that it was unwise to, in recent times, change the Dow 30 so that it was loaded up on the financial industry (because they wanted to match the fact that this industry was booming--thanks to piss poor long term decisions.)

It is sad how they wait for a company to be run into the ground, then after it does it's part to destroy the Dow, they pick another stock that starts at a high point (because it's the flavor of the day), so there's plenty of value to potentially destroy. And, if that's not good enough, they use price weighting.

Can we start a rebellion to get the media to push the S&P 500 as a benchmark? We'll still be freaked out by huge losses, but at least there will be a more sensible metric to freak us out.

: That's a really good point (5.00 / 1) (#6)
by andgarden on Fri Feb 20, 2009 at 06:36:48 PM EST

Well, the household TV "expert" (none / 0) (#17)
by Inspector Gadget on Fri Feb 20, 2009 at 08:53:22 PM EST

Suzie Orman said this week on several programs:

If you have money in a 401K and less than 10 years to retirement, pull out your money! That piece of advice, should a million babyboomers take it, will have a mighty strong impact on the market.

She based her advice on the fact that she says her "gut" is telling her that the bottom has not yet been hit...and, her advice is definitely going to see to it that her "gut" is correct.

Pull out your money, (none / 0) (#23)
by Anne on Fri Feb 20, 2009 at 09:01:59 PM EST

or change the investments? Or stop contributing?

You have to be 59 1/2 to take the money out without penalty. You still have to add to your income whatever amount you do take out.

If you're under 59 1/2, add a 10% penalty.

I can see moving it into low-risk investments, but the tax consequences of pulling it out are crazy.


: You could borrow cash from your 401k (none / 0) (#29)
by ding7777 on Sat Feb 21, 2009 at 01:59:58 PM EST

without penalty (I know, I know, repaying the loan plus interest with after tax dollars - only to be re-taxed later could be considered a penalty) but getting up to 50% out now before the market drops futher might be a way
Also, there is a penalty free 1st time home buyer provision.

I stopped watching Orman (none / 0) (#27)
by Militarytracy on Sat Feb 21, 2009 at 11:19:45 AM EST

when she started selling A.R.M.s as a good thing.


My own personal prediction for the bottom (none / 0) (#28)
by Militarytracy on Sat Feb 21, 2009 at 11:26:48 AM EST

was 6500. Did I not go low enough? Do I need to take some time and retally what has yet to fall? It's strange, but talk about nationalizing banks causes the market to fall.....yet once the banks have been stabilized what happens to the market then?