What the?

In case you were wondering whether your eyes were deceiving you, yes, the market did plummet this afternoon before recovering.  At its lowest point, the Dow was down 1,000 points before quickly rallying.  The Dow closed at 10,520, down only 347 points.  It appears that technical trading was responsible for the sudden falloff around 2:30pm today, with some speculation that trading errors could have been responsible.  We did see a lot of stock quotes that were just wrong (P&G down $16?).  At any rate, for those who were holding out for 10% correction, we got there today.

What triggered it?  There were some concerns about whether Greece would get bailed out, some other signs of trouble in Spain’s debt issue, elections in the U.K., and the passage of legislation making “too big to fail” for U.S. banks a thing of the past.  But there still doesn’t appear to be any news that would suggest a reason for such a massive sell-off.  This borderline-crash was very reminiscent of September 29, 2008, when Congress initially voted down the original TARP legislation.  Here, the fears are similar; that some unprecedented financial system unraveling would occur on account of one sick country infecting the whole world (back then, the fear was that Wall Street would be the infecting agent).

There are two big factors to consider when comparing this Euro financial crisis to past crises, such as the bank bailout in 2008, the Latin America debt crisis in the early 1980s, and the Asian/Russian currency crisis in 1997-98.  We acknowledge one similarity between all crises:  that they are all different, and unprecedented, and require different solutions to fix them.  That’s what causes a panic in the first place—that there is no immediately obvious solution.  If there were, people wouldn’t worry about it.

The first factor to note is that there is, and will be, unprecedented liquidity support for illiquid Eurozone nations.  The reasons:  1) the other Euro countries have too much at stake to risk a crash in their currency, and 2) we’ve all very recently seen what happens when there is a lethargic response to a crisis (as there was in September, 2008).  And, as we have seen from central banks around the world, if liquidity is needed, liquidity will be provided.

The second factor to note revolves around the potential impact on the global economy, and how that would affect the profit prospects of our companies.  Presuming that, in some way, the money is found to keep rogue Euro states floating, there should be no impact on the fundamental value of our companies.  Since the beginning of the Greek debt ordeal, we have been sticking to the line that the recovery is too deep and too entrenched to be sidetracked by something, unless that something is an utter disaster.  If our economy was wobbly, as it was in early 1990, it might be at risk of folding under the weight of an exogenous shock, which, at that time, was Saddam Hussein’s invasion of Kuwait, and subsequent oil price shock.  Looking at other debt crises shows similar evidence.  In the early 1980s, Latin American countries were under much scrutiny for having taken on too much debt, and Mexico actually defaulted (Argentina defaulted much later).  The 1980s weren’t a bad time to be an investor!  The Mexican peso crisis in 1994 coincided with the bankruptcy of Orange County, California.  There was no hit to the global economy.  In 1997, heavily indebted Southeast Asian economies (as well as Russia) saw a run on their currencies, which forced them to devalue and threw their economies into recession, but (thanks in part to the Fed’s quick easing campaign) did not result in a developed-world recession.  These, like the current Eurozone debt crisis, were also very significant crises.

We never pretend to know how the stock market will trade in the short-term; it could very well go lower again.  But to really be bearish, you would need to bet against the resurgent economy, the Fed, the ECB, and all the EU governments with a very big stake in seeing their currency not crash.  When you throw in the fact that basically ZERO money has flowed into stock mutual funds since the market bottomed last March, that’s a lot of money waiting on the sidelines.  You can bet that a lot of investors with that sideline money were not pleased to see stocks run up 70%, and were waiting for some kind of correction to justify (to themselves) getting back in.  Of course, a lot of it will wait “until the smoke clears,” which is why making short-term predictions is tricky, but a positive resolution to Greece’s woes would be a necessary first step.

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