- The Washington Times - Tuesday, October 14, 2008

Investors flashed a rare glimpse of optimism Monday about global efforts to ease credit and bought up bargain-priced stocks in a frenzy, staging the largest one-day rally in Wall Street history and signaling that the market may have hit bottom after last week’s dramatic losses.

The Dow Jones Industrial Average surged 936 points, or 11 percent, mirroring gigantic gains in European stock indexes set off by forceful joint action to bolster banks over the weekend and a central bank move to flood the banking system with dollars. In one fell swoop, indexes recovered more than half of last week’s 18 percent losses. And just as the stock plunge earlier this month was the worst since the 1930s, yesterday’s gains were the best since the Depression era.

The huge jump in the century-old blue-chip index was nearly twice the size of its previous record gain of 499 points and vaulted the Dow back over 9,000 to 9,388. As investors rushed back into the market en masse, the Standard & Poor’s 500 Index and Nasdaq Composite Index both catapulted by 11.6 percent, cutting the S&P;’s loss for the year to 32 percent.

“The end of this panic-driven, grizzly bear market is near,” said Robert J. Froehlich, vice chairman of Deutsche Bank’s DWS Investments, one of many stock gurus who advised clients over the weekend to stay invested in stocks and view the current downturn as an opportunity to buy the downtrodden shares of premier U.S. corporations at “fire sale” prices.

“This stock market is not just on sale; it is the Kmart ‘blue light’ special,” he said. “We need to hang a huge banner from the New York Stock Exchange that says 40 percent to 50 percent off.”

Ford Motor Co. shares had fallen as low as $2, General Motors Corp. was trading below $6, while the once-mighty Morgan Stanley had sagged to less than $10. All were beneficiaries of Monday’s stock-buying binge.

Among the measures that Mr. Froehlich cited as proof that the market was severely oversold: On Friday, nearly 10 percent of U.S. stocks were trading at values that were less than the cash holdings of the companies; and more than a third were trading at half the historic average valuation of 16 times the prior year’s earnings.

“That was exactly what panic selling looks like,” he said. “We went beyond fear to panic in one of the worst bear markets in the history of the stock market.”

“Last week’s sell-off met the definition of capitulation selling regardless of whether it was an important market bottom or not,” said Alexander P. Paris, an analyst at Barrington Research.

“Capitulation” is the state of despair that market watchers say marks a major turning point in stocks. Mr. Paris noted several indicators: The market lost between $2.5 trillion and $3 trillion in just eight days; every sector in the S&P; 500 fell by double-digit percentages; there were already deep losses averaging at about 10 percent during September. Also, individual investors liquidated $40 billion from stock mutual funds during the week, and the volume on the New York Stock Exchange reached a record level on Friday, with a record swing of more than 1,000 points in the Dow.

Still, Mr. Paris is reluctant to say the nightmare is entirely over for stocks. The U.S. markets are tied to the fate of the U.S. economy, which has entered a deeper stage of recession, with the vise of tight credit causing broad job losses and threatening mass bankruptcies among consumers and corporations.

Mr. Paris said the economy fell into recession at the end of the summer and will stay there at least until the beginning of next year. Many other forecasters are not so optimistic: They expect the recession to last through next summer or beyond.

Just as the stock market last week signaled that the economy is sinking into a significant downturn, it will turn up again once stock investors spot the first signs that the economy has rebounded and is entering a recovery, Mr. Paris said.

“Longer-term-oriented investors may be starting to look past the negative growth” right now, he said. “But in light of the magnitude of the net liquidation of equity mutual funds currently in progress, it may be too early to hope that the huge sidelined investment money is coming back in with any strength.”

Some of the most influential money managers are not advising their clients to jump back into stocks. Christophe Bernard, managing director at the Swiss private bank Union Bancaire Privee, is advising his wealthy clients to be “ultradefensive” and keep their money in “cash, gold or guvvies,” such as Treasury bills.

“Even if the market looks appealing, the timing is a bit too early” to pile back into stocks, he said.

Among the reasons to remain cautious: Key bank lending rates declined in the wake of yesterday’s show of force by central banks, but they remain elevated far above levels considered normal and healthy. Also, major corporations like General Electric Co., GM and Ford remain mired in slowing sales and the choke of scarce credit.

Bill Gross, investment manager at Pimco bond fund, said the government moves show promise of eventually mending the banking system, but it is being overwhelmed for now by “a lack of confidence in the market and lots of fear.”

One major factor causing the big day-to-day swings in stocks is the “technical unwinding of asset positions in hedge funds,” which are having to cover losses in investments they bought on credit, he told Morningstar this week. “There’s forced liquidation of high-quality bonds, stocks and real estate,” he said, and that is “mandating lower prices” across the board.

“The financial system’s deleveraging much like it levered up for the last 20 to 30 years,” he said. That’s sending the economy into reverse, but “ultimately the global economy should recover in 12 to 24 months,” after a “significant recession” with “high unemployment and low levels of profits,” he said. “It’s not a fortuitous scenario.”

“We have seen worse stock market panics,” said Standard & Poor’s Corp. chief economist David Wyss, noting that the 42 percent loss in the S&P; 500 at the end of last week was exceeded by its 49 percent loss from 2000 to 2002 and its 48 percent loss from 1973 to 1975.

“It is approaching the size of those bear markets, however, and could get there quickly,” he said. “What is unique is the combination of the stock market panic and the credit market panic. In past crises, lending market activity continued even though stock markets plunged. This time, everything has locked up.”

Mark Arbeter, an S&P; technical stock analyst, said, “We believe the stock market is close to a major bottom” because of the climactic quality of the recent sell-off and because November, December and January are usually the best months for the market.

The market has gone through all the requisite phases of fear, panic, despair and despondency, he said.

“We think it is clear that we have seen panic and capitulation over the last couple of weeks. By the looks of some of my co-workers and fellow commuters, there was a look of despondency and depression on their faces this past week.”

Jack Bogle, founder of the Vanguard funds, said that in his 57 years in business, he’s never seen speculation and leverage driving the stock market like it is today.

“There’s twice as much stock trading turnover than 1929,” he told Morningstar, calling Wall Street “the winner” by collecting $600 billion a year in fees and commissions earned on frantic “wild and woolly” days of trading like those seen this year.

“The system is crying out for change, but I never expected change would be so abrupt, speculation so rampant, credit so easy, and credit standards so devastatingly low,” he said. “Unfortunately, the one solution we’re going to get is government intervention. Nobody thinks the government can do a better job, but they certainly can’t do a worse job. It’s the only body with any liquidity left. This is in fact the greatest financial crisis since the Great Depression.”

Despite the monumental obstacles facing the market, Mr. Bogle advised small investors to stick with their stock portfolios and not try to bail out.

“A sharp market decline is of course bad for sellers, but it’s good for buyers,” he said. “That’s the greatest time to invest.”

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