The Stock Market Crash: Ahead of Us or Behind Us?

Today’s reverse crash resulted in the Dow up $889.35 to close at $9,065.12. From peak to recent trough, the Dow has moved from its all-time high of $14,164 on October 9, 2007 to a low of $8,176 on October 27, 2008. That’s a decline of $5,988 or 42%. It earned back about 10% of that today.

So, let’s try to figure out what caused all this exuberance and determine if it’ll hold.
Over the weekend it was reported that emerging markets’ debt, currencies, and stocks are crashing, a series of events that the US will be relatively unscathed by, for a change. **not much bearing on the Dow unless there’s more to this story, but go on**

Then there was the Washington Mutual CDS auction, which settled at 57 cents with less than a billion of net open interest. One way or the other, the counterparties are good for it; the Fed will give them the money. **under the radar, next**

OK, this is a biggie: the commercial paper market unfroze. The Fed has invoked Depression era power to buy short-term debt directly from issuers. Yesterday, companies sold a record of $232 billion in commercial paper, of which a record $67.1 billion was out 80 days or more, compared with a daily average of $6.7 billion last week, according to Fed data. This is good news since it’s frequently the inability to obtain short-term funding that pushes companies into bankruptcy. **now you’re talking, two thumbs up**

However, there’s a little catch. **uh oh** According to Adolfo Laurenti, a senior economist at Mesirow Financial Inc. “The central bank probably absorbed about $60 billion out of the $67.1 billion of total 80+ day paper.” Also of interest is that General Electric, the largest issuer of commercial paper and the parent company of CNBC, sold commercial paper as “a test” and a “show of support” for the Fed’s program. Another first, The Korea Development Bank, borrowed directly; however, it did not beat around the bush making lame excuses, it just needed the money. It now has a line with the Fed for $830 million. **this casts a different light on the term “unfreezing” but go on**

No, none of these are big enough to turn around the crisis. Au contraire, upon second glance, the commercial paper thing could be a negative. The root cause of this crisis, from the standpoint of the US, is derivatives counterparty risk and that’s where there could be big change. **now you’re talkin’**

From Bloomberg, ever at the ready: “The Federal Reserve has given US futures exchanges until Oct. 31 to present written plans on how they'll make the $55 trillion credit swaps market less risky . . . The Fed is pressing the industry to set up a central counterparty that would absorb losses should a market maker fail, a step that might have avoided last month's bankruptcy of Lehman Brothers Holdings Inc.” **they should have thought of this sooner** But wait, who will absorb the losses when a counterparty fails? No one has said, so I guess it will be the Fed then, who else.

And now, for those still with me who are dying to learn the answer to the question, is the stock market crash ahead of us or behind us—the answer is . . . ahead of us.

mg