Today was an historic day for the stock market. The Dow plunged 299.64 points to close at 6763.29. The numbers are just plain ugly. All 30 Dow stocks were down, and Citigroup (C) dropped by 20%. What used to be the world’s largest and most important financial institution is now worth just $1.21 a share. For the year, the Dow is down nearly 23% which is about the same as the one-day market crash in 1987.
The S&P 500 dipped below 700 today which is a crucial level though it managed to close at 700.82. The S&P is now at its lowest level since October 1996.
The selling was put in motion this morning after the stunning $62 billion quarterly loss from AIG (AIG). It’s hard to imagine how a company could lose that much money in just three months. CNN put the figure in some perspective: You could pay off the combined national debts of China, Australia, Mexico and Ukraine, and still have “plenty left over for a good night out.” Wow!
The government now owns 80% of AIG, and I wouldn’t be surprised to see the company come back for even more bailout money. The same goes for companies like Fannie Mae and Freddie Mac. These are cash-draining machines. We’re really putting off the inevitable and the longer we wait, the worse it will get. My preferred option would be to pull the plug on lousy banks, then sell off their toxic assets in an RTC-style program.
Now I’m hearing rumors of an internal power struggle within the White House economic team between Larry Summers and Paul Volcker. Apparently, Summers’ idea of tossing in more bailout money is gaining the upper hand.
The fact is that a huge amount of money is being transferred from the private sector to the government’s balance sheet. That’s why I think we’re going to see the dollar take a big tumble. Frankly, it will be the only thing that will save us. A lower dollar will be a huge boon to commodity-based industries like farming and energy. That’s also where I’m seeing a lot of good stocks.
The market also digested the news of Warren Buffett saying that the economy will be in “shambles” this year and probably next. I think he’s exactly right. His words definitely aided the bears today. What hasn’t got as much attention is that Buffett also said that the Treasury bond market is a “bubble.” Once again, I whole-heartedly agree.
The government has been auctioning off more and more debt and the market will only take so much. On the stock side of the market, the squeeze is being felt in value stocks. I think value stocks are an awful place to be right now. Investors who think they’re safe in value stocks are making a big mistake. Dividends are being cut at the fastest rate since World War II. For now, value investing is dead.
There are a few key events for tomorrow. Both Bernanke and Geithner will be testifying before Congress. We haven’t heard from the Treasury Sectary since his horrible speech on the bank plan. Hopefully, their words will calm the market. We’re also going to get a report on cars sales, but everyone knows that’s going to be rotten. General Motors (GM) finished the day at $2.01.
The biggest news this week may come on Friday. That’s when the government will announce the jobless rate for February, and I’m expecting a big increase to 8% or 8.2%…who knows? The unemployment rate could reach 12% before we’re done.
For now, the stock market needs to see a big intra-day reversal. Don’t ask me when it will come, but it will be soon. After that reversal, the market will then have to retest that prior low. Until that stage passes, you can expect a lot of day-to-day volatility. Until then, investors should focus their portfolios on fundamentally superior stocks.