Is This A Big One?

Gripped by fear of another recession, the financial markets suffered their worst day Thursday since the crisis of 2008. The Dow Jones industrial average fell more than 500 points, its ninth-steepest decline ever. The sell-off wiped out the Dow's gains for 2011. It put the Dow and broader stock indexes into what investors call a correction _ down 10 percent from the highs of this spring.

The guiding factor permeating the scene was that governments seems to have "NO PROPER SOLUTIONS" to the current and looming sovereign debt crises.

Having said that, FEAR took over as frightened investors were so desperate to get into some government bonds that they were willing accept almost no return on their money. Since July 21, the Dow has lost more than 1,300 points, or 10.5 percent of its value. It has closed lower nine of the 10 trading days since then. This wasn't a sudden thing, the fact that we have 9 days of down markets indicated something was not right, the big drop was somehow a climax after the 9 days of "not-Christmas-at-all".

For the day, the Dow closed down 512.76 points, at 11,383.68. It was the steepest point decline since Dec. 1, 2008. Thursday's decline was the ninth-worst ever by points for the Dow. In percentage terms, the decline of 4.3 percent does not rank among the worst. On Black Monday in 1987, for example, the market fell 22 percent.

First it was the US debt ceiling. Almost immediately after that was solved, concerns about the economy took over, and the selling only accelerated. On Thursday, growing fear about the weakening U.S. economy was joined by concern in Europe that the troubled economies of Italy and Spain might need help from the European Union.

The European Union has already given financial assistance to Greece and Ireland, two countries that have struggled to pay their debts. A financial rescue package for Italy or Spain might be more than the group of countries can handle.

In an indication of how frightened investors are, Bank of New York Mellon said it would start charging large investors to hold their cash. The bank's clients include pension funds and large investment houses. Other market indicators reinforced the risk-averse mood. Gold, which is seen as a safe investment when the stock market is turbulent, set a record price, $1,684.90 an ounce, before falling to finish the day at $1,659. Adjusted for inflation, gold is still far below its record high, reached in 1980.

The yield on the 10-year Treasury note fell to 2.42 percent, its lowest of the year, and the yield on the 2-year Treasury note hit its lowest ever, 0.265 percent. Bond yields fall when demand for bonds increases. The yield on the one-month Treasury bill fell to almost nothing _ 0.008 percent. Investors were willing to accept paltry returns in exchange for holding investments they believed to be stable.

Then came last night, when it finally dawned on traders in Europe and North America that there is almost no way to avoid an economic calamity. European stocks set the scene for fresh global falls when they tumbled to a level not seen since after the financial crisis in mid-2009. Italy's equity market sank firmly in bear market territory - down nearly 30 per cent since February - as investors worried the eurozone debt crisis was spreading.

Italy's blue-chip FTSE MIB Index was suspended about 30 minutes before the close. The index tumbled slightly more than 5 per cent. The CBOE volatility index, or VIX, known as Wall Street's fear gauge, jumped 35.4 per cent to 31.7, its highest in more than a year. The move was the biggest jump since February 2007, which came during the US subprime mortgage meltdown.

Italy, Spain

Markets were unconvinced the ECB bond buying will be effective in stopping contagion and some were disappointed that Italian and Spanish bonds, whose yields climbed above 6 per cent recently, were not the target of the purchases.

It wasn't a unanimous decision to (buy bonds). (ECB President Jean-Claude) Trichet looked really uncomfortable saying it. The market, obviously, dismissed it pretty rapidly," another trader said. Markets were unconvinced the ECB bond buying will be effective in stopping contagion and some were disappointed that Italian and Spanish bonds, whose yields climbed above 6 per cent recently, were not the target of the purchases.

"It wasn't a unanimous decision to (buy bonds). (ECB President Jean-Claude) Trichet looked really uncomfortable saying it," one trader said.

WHAT TO DO

a) Fear index has gone very high to 34, even if you are thinking of bottom fishing, you can do it when VIX starts to drop.

b) One thing to remember is that liquidity is still very strong in the global arena, its just that we are having a sovereign debt issue.

c) If a very big company goes bust, we can get the government to step in to rescue. What happens when governments go bust, who can we ask to step it? Collectively, the EU cannot manage to save Greece, Italy and Spain all at once. They will be trying very hard to find a solution. To me, the best solution is for the affected countries to STEP OUT OF THE EUROPEAN UNION and work their way out of their problems. Get back when they have met certain thresholds. That way, each country can use their own currency and interest rate to adjust their economy without affecting the rest of EU.

d) All that still makes emerging markets as the only shining bright lights. Will their demand for exports be curtailed? Well, they already have for the past 2 years. Emerging markets have been trading more among themselves. I expect funds to shift to emerging markets in a big way.

e) I do not see a similar sell down pattern for Asia. I see a rebalancing positively towards the second half of the day.

f) I think we can expect CHINA to play a very big surprising stabilising role today. If China comes in and offer help with some of Italy and Spain bonds, it would not be just EU fixing things.