Market Meltdown averted...for the time being. NASDAQ enters Bear Market.

Here is the promised post from new author Christian Flanders!

I apologize for the sensationalist title but it seems only fitting. With the DOW Futures down around 550 points overnight and overseas markets down 5 to 12% around the world, it looked like we were heading into the worst one day drop since 9/11. I was sitting at my desk around 8am when over the squawk box news of a surprise 75 point basis cut from the Fed caused a momentary spurt in future prices only to see them settle back to their levels of around -500.

However, the open was a different story. After a sharp gap down, the markets rallied throughout the day and finished *only* down 1.5%. That is still quite a bit, but compared to the indication at the open, a 4.5% drop (500 points) the markets escaped relatively unscathed. If the DOW had sold off to the equivalent levels of the asian markets, we could have easily seen a 1200+ drop. (In comparison, Japan had sold off 5% on monday then 8% on tuesday). Interday the NASDAQ did drop to the 20% from its peak level signaling the onset of a bear market. The DOW and S&P did not technically enter bear markets.

We now have a "bottom/support" at the ~11600 level approximately where the DOW opened today. Should the level crack anytime in the future, be prepared for prices to drop significantly from there.

The thing that is scary to me and probably a good indicator of how bad it is in the financial markets was that Ben Bernanke and the fed felt compelled to cut rates by 75 basis points with just 7 days to go until their scheduled meeting. The last time they cut rates 75 points between meetings was in 1985. The next few days will let us know if we have put in a short term bottom or if we will break the 11,600 mark on the DOW. Apple beat earnings after market hours but lowered their guidance. The stock has taken a hit down 10% after markets and the rest of the tech heavy nasdaq is down 1% as well in sympathy. Who would have thought that people would be unwilling to buy $400 gadgets and $2000 laptops in a recession!? Outrageous.

This rate cut only delays the inevitable. The amount of excess in the last couple years fueled by cheap money that was pumped into real estate coupled with the tremendous amount of debt we have as a nation must sooner or later be accounted for.

While we're on the topic of real estate I'm sure many of you have heard about the real estate in Manhattan. How it is so strong and will escape the wrath of the real estate bubble. You've probably heard lines like "Manhattan real estate is so strong, it always goes up." or perhaps "It's an island therefore there is a limited amount of space (scarcity) so prices will always go up, there is never a bad time to buy."

Well folks, that is the kind of talk is characteristic of a bubble. It sounds very familiar to the talk at the top of the NASDAQ in 2000. JDSU, AKAM, AMZN, EBAY, CSCO, MSFT, can't go down! All of those stocks are still dramatically below their highs set in 2000. For whatever reason, we have very limited and selective memories. Real estate brokers have either forgotten or were not brokers during the real estate recession in the late 1980's that trimmed 20 to 50% off the real estate prices in NYC.

Here is a link to a fascinating article about it:



Arjun said...

I agree about NY chris, but I ask you, because I dont know, whether the weakness of the dollar makes a difference in this case. Some here in eindhoven have suggested that the strength of real estate in Manhattan and Laguna Beach is because people with Euro are looking to make good investments. Thoughts?

Adrian said...

I don't know what Chris thinks but I would think European investment in NYC real estate would not continue if the real estate market bombed unless there was a fear that the favorable exchange rate would end. Thus they'd invest in NYC real estate even if the market was falling, if they thought the Euro might fall worse against the dollar. The favorable exchange rate would offset their (temporary) losses from the market.

But that's a guess. Chris?

cflanders said...


The Europeans are definitely buyers in Manhattan.

They were buyers in Miami too, until Miami started tanking and they stopped buying. I believe the same will happen in Manhattan.