What your analysis fails to consider is the fact that credit markets are FROZEN. In order for these companies you speak of to continue operating, they must get credit. Our economy runs on credit. I don’t just mean the stupid consumer credit, spending more than he can afford. That fueled the bubble. But credit and leverage fuels our economy. Firms can’t afford working capital without credit. They can’t pay their employees without credit. I’m sure you know all this, but perhaps since you are (luckily) out in Arizona you don’t see it. The credit markets are frozen. overnight LIBOR is through the roof. The only signal that things will recover will be if LIBOR goes back down to reasonable levels. The fed can’t do a thing about it. ‘pushing on a string’ and all that.

The comparison with 1987 is invalid. The market is falling because there is a very real chance that the economy will just stop. In ‘87 it was just a program-trading based short-term crash, as the commenter said. It was not due to any fundamental economic factors.

The crash was 20% in one day. We’re down 22% in 7 days, if I recall correctly. We’ll see a 20% down day before too long.

I was too late in selling all my equities. I got out last week, continuing to think, “well the various doomsayers have a good point, but they can’t be right. Let me keep my head in the sand”. Now I think the doomsayers are more likely right than wrong. I have now bought puts on the SPY. If the market spikes and the LIBOR doesn’t come down, I’ll buy more puts.

Check out the following blogs/sites:

Mish’s Global Analysis
Market Ticker
Nouriel Roubini (NGE I think)

Nope:

Deletions

S&P 500 Lehman Brothers Holdings Inc. LEH 2008-09-16 00:00:00

S&P 500 Washington Mutual Inc. WM 2008-09-29 00:00:00

S&P 500 Federal National Mortgage Association FNM 2008-09-10 00:00:00

S&P 500 Federal Home Loan Mortgage Corp. FRE 2008-09-10 00:00:00

S&P 500 Countrywide Financial Corp. CFC 2008-06-30 00:00:00

S&P 500 Ambac Financial Group Inc. ABK 2008-06-10 00:00:00

S&P 500 The Bear Stearns Companies Inc. BSC 2008-06-02 00:00:00

Kent Brockman: Professor, would you say it’s time for our viewers to panic?
Professor: Mmm, yes I would, Kent.

This is unfortunately true, but it is a stupid change from the way stocks used to be. Owning stock is owning part of the company. Most of the value of the stock should come from the actual value of the company (real estate, equipment, inventory, copyrights, patents, etc.) and the intangibles (quality of employees, customer good will, name and brand recognition, etc.). Only a small percentage of stock price should reflect current and expected profits. But, we’ve turned that on its head. Expected profits drive stock price, not corporate value. I remember years ago when Apple stock fell, and fell, and fell because of two mediocre quarters. The stock fell so low that the total value of all shares was less than the five billion dollars of liquid assets owned by Apple! (Just prior to this ‘crisis’, Apple stock was twenty times higher than that low value.)

Valuing stock primarily on next quarter’s expected profits is idiotic, and it is partly responsible for the increased volatility of the stock market over that past twenty years. This is one of the downsides to the Information Age.

That is incorrect. Some people freeze. Some run around in random directions. Some scream or cry or rage. Almost none mobilize.

I think you meant that generating panic is the best way to make people agree to a stupid plan. And that’s certainly what the federal government has done.

Doom gets extrapolated.

Also, your comparison to 1987 is flawed. Back then, it was computerized trading that tripped more computerized trading to create a cascade that was unstoppable. This time, we have had days and days to think about this and we are still selling. That should scare the crap out of you. It’s time to panic your ass off.

Or not.

And you are right about the market vs. the economy. People want to trade, but credit markets are mucking that process up. If the market is allowed to, assets will find their best uses and trade will resume.

I got up today, the sun was out, I felt good, I hugged my wife and kids, I came to by job, the credit markets are a nuisance, there are some worries about how strong the consumer will be, my Roth IRA took it in the shorts, but the world hasn’t come to an end.

It’s really important to keep perspective and realize that right now “it’s winter and summer clothes are on sale”, so buy a little while the prices are good. Can things get cheaper? Sure. Will things get cheaper? Probably a good chance in the near term. But when is it good enough. I’ve been buying shares of good companies I felt were undervalued all the way down. And each time I buy I’m dollar cost averaging at a cheaper basis. “Don’t try and catch a falling knife” they say. But hey, at some point, it’s cheap enough, and if you’re a buy and hold guy, you just ride it out.

In the novel, it is said that despite its many glaring (and occasionally fatal) inaccuracies, the Hitchhiker’s Guide To The Galaxy itself has outsold the Encyclopedia Galactica because it is slightly cheaper, and because it has the words “Don’t Panic” on the cover.[1]

Arthur C. Clarke said Douglas Adams’ use of “don’t panic” was perhaps the best advice that could be given to humanity.[4]

“Exactly,” I replied. You could almost see it sink in by the way her eyes widened.