Trader Talk

One Very Clear Market Message


The message of the markets has been clear since the open: without stability in financials it will be difficult for the broad market to stabilize.

We are again on the verge of a 90 percent downside day, the second since last Wednesday, which is when the Bank Index broke to new lows.

But the weakness was fairly broad-based, with 6 percent declines in many retailers, 3 to 6 percent declines in many commodity stocks, and industrials down 4 to 6 percent as well.

Never mind that financials are now less than 10 percent of the S&P 500 (tech, the largest sector once again, is 16 percent), or that financials are now only the sixth-largest component of the S&P.

The core of the concern is that current efforts to stabilize financials by injecting capital have not worked.

Critics of the current approach point out that we have advanced Citi $45 billion, but it now has a market cap of $16 billion due to worries about continuing massive losses.

Since the losses are due to bad assets, the best way to stem the losses is to either wall off the losses or create a good bank/bad bank. The Street now believes that is all but inevitable.

Elsewhere, traders are pointing to the bond market rally, along with a failure of commodities to rally (never mind a 2 percent rally in gold), as further sign that equities will have trouble rallying short term.

Why? Because they are looking for selling in bonds to finance some stock purchasing, and the failure to rally in commodities is an indication that sentiment for cyclicals in the second half remains poor.

The Dow intraday closing low on November 21 was 7449; we are still 500 points away from that.

Finally, just to illustrate the breathtaking drop in financial value: Citigroup announced that it was going to be selling its Japanese retail brokerage operation, Nikko Cordial, only one year after it acquired the company for $17.7 billion.

Citi's market cap at the close today was $15.5 billion.

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