This is The Wall Street Digest Hotline Update for Wednesday, September 17, 2008, at 6:00 p.m. EST.
The short-sellers ganged up on the financial sector today. At the closing bell, the Dow sank 449 points, closing at 10,609, while the Nasdaq fell 109 points, closing at 2,098. The S&P 500 dropped 57 points, closing at 1,156. Oil closed $6.01 higher at $97.16 per barrel, and gold closed up $70.00 higher at $850.50 an ounce.
The SEC just issued new rules on naked short selling. That should substantially reduce market volatility.
From the opening bell today, it was clear that Wall Street was not impressed with an $89 billion loan at 11 percent to AIG, a company with a trillion dollars in assets. Even worse the Fed is not replacing liquidity as fast as it is evaporating in the form of rapidly depreciating debt. Also, the banks don’t want to lend because they may not be repaid in the current environment. Gold jumped $88 intraday as investors dumped stocks and purchased gold & silver in a flight to safety.
Everything that is happening today (Bear Sterns, Fannie & Freddie, IndyMac Bank, Lehman Brothers) is a symptom of the real problem, which is the enormous level of defaulting debt. There is almost $600 trillion in derivatives debt, over $2.5 trillion in credit card debt, and $58 trillion in credit default swaps. We are witnessing the very beginning of a worldwide credit-market meltdown. Long-term, the banking and financial sectors may not bottom anytime soon.
We sold the last three positions in our portfolio at the opening bell this morning. You should be 100 percent cash today.
The next Hotline Update will be on Friday, September 19, 2008, at 6:00 p.m. EST.