The storm hitting Wall Street ramped up to category 5, and it's not over.
Wednesday's markets illustrated in every way the fears investors have been living with since the credit crises began a year ago. There's a major lack of confidence in financial institutions and in the stock market itself. Investors are questioning whether the government's massive rescue efforts are the right moves.
So now cash is king. Stocks were shunned. Money ran for the safety of short-term t-bills at an astonishing rate, and suddenly gold, surging 9 percent, is a safe haven from everything, including the dollar.
"The overriding principle is capital preservation ... The pendulum for several years has swung very much to the greed side -- mispricing risk, and now it's swung very hard to the fear side -- capital preservation," said Marc Chandler of Brown Brothers Harriman.
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Thursday's markets promise more pounding volatility. "People sold into the close. They're obviously uncomfortable with what's going on in the markets," said Robert Harrington, head of block trading at UBS. The Dow, which finished down 449 points, more than doubled its losses in the final hour and took a big dive at the close.
"It's a form of capitulation selling, but since we're delevering, how long it can last and how big it will be is a big question," said Harrington. "The VIX is high. There's fear in the street."
"Modern history would tell us that maybe we're getting close to the bottom. The only thing I think is different this time is we're really de-levering and until the leverage is out, I don't know how you build the trust back ... and it's global," he said.
Heading into the afternoon session Thursday, Asian markets bled red across the region, tumbling 3 to 4 percent with Hong Kong down a whopping 6.5 percent near the lunch break.
On Wall Street, financial stocks were down more than 8 percent as a widening in credit default swaps drew attention to Morgan Stanley and Goldman Sachs yet again. Both those stocks were down sharply. By the end of the day, it was clear Morgan was looking for a possible suitor, as was Washington Mutual . CNBC's Charlie Gasparino and David Faber reported Morgan was talking to several suitors including the Chinese government, Citigroup and Wachovia.
Meanwhile, the SEC was moving to implement tighter rules on short sellers, effective Thursday. In a release Wednesday evening, Securities and Exchange Commission Chairman Christopher Cox said he additionally asked the commission to consider requiring hedge funds and other large investors to disclose their short trade positions.
The Dow declined 4.1 percent to 10,609, its lowest close since November, 2005. The S&P 500 slumped 4.7 percent to 1156, its lowest close since May, 2005, and the Nasdaq was off 4.9 percent to 2098, its biggest drop in seven years.
Oil rose by more than $6 to $97.78 per barrel.
The 10-year added 22/32 to 104-29/32, which lowered its yield to 3.412. The two year was yielding 1.624 percent. The three month t-bills were wild, with the yield falling to a level of two basis points, meaning the yield was essentially zero and they were being used as a liquid, safe haven.
Harrington said action in the t-bill market resulted from news that a major money market fund "broke the buck." The Reserve reported Tuesday that it was temporarily freezing redemptions and that its fund was returning $0.97 on the dollar due to losses on Lehman bonds. "It certainly is showing a nervousness and you can't really blame people," said Harrington.
The dollar fell 1.46 percent against the euro Wednesday and was at $1.4352 per euro.
"I thought (last week) the advance of the dollar is probably over, and we're in for a period of dollar weakness," said Chandler, Brown Brothers chief currency strategist. He expects it to move to a level of about $1.50 against the euro before this selling bout is over. The idea that the U.S. is in better shape than the rest of the world had propped up the currency in recent weeks, but he says that trend is over for now.
"Now the spotlight is focused back on the U.S. and the deterioration of U.S. conditions ... Negativism about the U.S. is overwhelming the pessimism on Europe and Japan," he said. Chandler does point out that overseas stock markets fared worse than the U.S. in the past month.
Patrick Kernan, a managing partner with Cardinal Capital, watches volatility closely. He trades options on the S&P 500. In an email, he wrote: "The week has been very strange. Monday on the initial drop, volatility did not go nearly as high as I expected it to. However, the last two days have seen a lot of panic trading and that leads me to believe there is still a lot of volatility left in this market."
He also said investors with a strong stomach might start to see some buying opportunities.
Economic data Thursday includes weekly jobless claims at 8:30 a.m., the Philadelphia Fed survey and leading indicators, both at 10 a.m. FedEx reports earnings before the bell, as do Carnival and Conagra. Oracle reports after the bell.
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