So Now It’s Official: U.S. Stocks in “Correction”

Don’t blame international markets for yesterday’s sharp reversal of fortune in U.S. stocks. Equity markets in Asia moved sharply higher on Monday, but the U.S. failed to follow through on the upside.

Instead U.S. indexes fell to new correction lows – down over 10% from record highs achieved on October 9th – just seven short weeks ago. 

Domestic stocks opened higher in the morning, but quickly succumbed to another strong bout of selling; thanks to more worries about the ongoing credit-crunch market shock that’s impacting the financial sector. In the end, the Dow Jones Industrial Average suffered another triple-digit decline (-237 points, -1.8%) while the S&P 500 Index shed a still more bearish 2.3%.

Asian Markets Turn in Strong Rally

Markets in Asia, and to a lesser extent in Europe, tried to get Wall Street kick-started to the upside this week. The MSCI Asia Pacific Index jumped 2.7% overnight on Monday – the biggest advance since mid-September. Japan’s Topix index jumped 2%, South Korea’s Kospi index surged 4.7%, and in Hong Kong the China Enterprises Index soared 5.4%.

But it didn’t help Wall Street much.  The culprit was an old familiar tune: the credit-crunch blues, which have been impacting the financial sector since the summer. Yesterday HSBC, a leading bank in the U.K. suffering from U.S. sub-prime problems, dropped another bomb on investors. Here’s how Bloomberg described it (emphasis mine):

“Banks and brokerages declined after HSBC, Europe's largest bank, said it will bail out two structured investment vehicles by taking on $45 billion of assets to avoid a fire sale of bond holdings. Banks are trying to prevent SIVs, companies that borrow short-term to invest in higher-yielding securities, from collapsing and forcing fund managers to sell their $320 billion of assets. Bank of America, Citigroup and JPMorgan are trying to persuade competitors to help finance an $80 billion ``SuperSIV'' fund to bail out the companies.”

Too Many “Unknowns” Still Have Investors Fearful

I wish Wall Street, and its front-man: U.S. Treasury Secretary Hank Paulson, all the best luck in getting the proposed super-SIV up and running in time to bail-out... er that is relieve the Wall Street credit crunch.

The reality is that there are still just too many “unknowns” out there. It’s not yet known what the financial sector’s true exposure is to toxic sub-prime paper that’s defaulting at an accelerating rate. And how could it be known? Sub-prime mortgage resets will continue to RISE into the spring of 2008.

This will trigger a still “unknown” number of additional loan delinquencies on Main Street. Nationwide, foreclosures have surged to the highest level in 50-years, and are still climbing. We are certain to see a growing number of asset-backed loan defaults on Wall Street as a result. But just how much: that’s the great “unknown.”

During the depths of the last “great” U.S. housing depression in the 1930’s, President Franklin D. Roosevelt said “we have nothing to fear but fear itself.” On Wall Street however, the reverse is true. Financial markets fear EVERYTHING – and especially the unknown.

Fear is Feeding on Itself in Financial Sector Now

As banks and brokers go careening headlong toward year-end – just six-weeks away – they are once again growing fearful to loan cash to each other, even on a short term basis.

Bloomberg reports that 3-month Libor rates -- a key inter-bank lending rate – “rose for a ninth day to 5.05 percent” in London yesterday. “That's 55 basis points more than the Fed's benchmark rate, the widest gap since the Fed cut its benchmark rate for the first time in 4 1/2 years on Sept. 18.”

Fear among investors tends to feed on itself until a full-blown panic is reached. Are we there yet? NO; but we may be getting close.

Watch to see if Asian markets can hang on to yesterday’s gains, or will follow Wall Street lower yet again. This morning these markets closed slightly lower in “sympathy” with Wall Streets drubbing on Monday. Stay tuned.