A bruising selloff in world stock markets is about to extract more pain on Wall Street, where stock index futures are pointing to a sharply lower opening.
Overnight, Tokyo stocks lost nearly 2%, Taiwan was down 4.5%, Hong Kong fell 3.3% and South Korea slid 7%. In Europe, the U.K.'s FTSE was off 3%, France's CAC was more than 3% lower and the German Dax was 2.7% lower.
Follow the Money
The yen is rising dramatically this morning hitting its highest level against the dollar in a year, in an unwinding of the carry trade. The popular carry trade allowed big investors to use cheap yen to fund investments around the world.
The S&P 500 and the Nasdaq, at yesterday's close, were both down about 9.5% from their July highs. They are closing in on a correction level of 10% which could play a psychological role in the stock market.
Another day of credit worries dragged the Dow down yesterday by 167 points, or 1.3% to 12,861. The story du jour was worries that Countrywide Financial would have a tough time riding out the credit crunch and CNBC's David Faber reported that it was being squeezed in the commercial paper market.
The Dow is now in its longest losing streak since February and at its lowest level since April 19. The Dow is off 8.1% from the record close reached on July 19. It took just 19 days for the Dow to lose 1,000 points, the most rapid 1,000 point drop since October 2002 when it took 17 days. The Dow is still up 3.2% for the year.
But the S&P 500 is no longer positive for the year. Its 19-point or 1.4% decline yesterday was its lowest close in nearly five months and it is now down 0.8% year to date. The S&P is off 9.4% since it reached its record on July 19. The S&P closed at 1,406, and traders are watching 1,394 as its next support level in a decline. The Nasdaq fell 40 points yesterday or 1.6%. It is still up 1.8% for the year to date.
But it was the shocking drop in short term T-bill rates yesterday that took investors by surprise and prompted a new round of speculation that the Fed will now consider a rate cut sooner, rather than later.
"Three-month T-bills started the day with a yield of around 4.60 and briefly, when the stock market was closing, they traded under 4%, a huge move," says CNBC's Rick Santelli. "Short-term credit is the foundation upon which leverage is built. When de-leveraging occurs what ends up happening is you start to see shorter and shorter maturities involved in the flight to safe credit. We saw that in an extreme process with the T-bill market."
Leave it to Birinyi Associates to figure out that the decline yesterday of 56 basis points in the yield on the 3-month Treasury bill was the fourth-largest one-day decline in percentage terms since the beginning of 1954.
Birinyi also figures that on 11 other days when the yield fell at least 10%, the S&P 500 on average was down 0.63% one week later but up 2.54% after a month and up 6.13% after three months.
What will the Fed do?
CNBC's Jim Cramer has been calling for a Fed rate cut for awhile now, and increasingly the Street is joining his camp.
That view came across in a note from Miller Tabak's Tony Crescenzi yesterday after the surprisingly, steep drop in yields on short-term T-bills. He fired off a note calling the rate move "stark." He said there are increased bets on a Fed cut and now the market is priced for "about 40% odds of a half-point cut in the funds rate occurring by the September 18th FOMC meeting."
"I would expect an almost immediate rate cut in response to any signs of a further seizing up of the Fed funds and commercial paper markets and of the credit markets in general, or a cut that follows many days of calm," he wrote.
CNBC's Larry Kudlow has a different view on what the Fed should do, but he believes it should act urgently to pump even more liquidity into the banking system.
"I have come to believe now the Federal Reserve should be pumping in tens of billions of additional cash into the economy right away," said Kudlow.
"The bond market and the credit freeze-up are telling the Fed to ease...It's time for the Fed to start doing what the Europeans are doing and the Canadians are doing. Let them take more collateral as they pump in more reserves. I want them to buy subprime mortgages, I want them to buy jumbo mortgage loans. I want them to buy asset-based commercial paper so good healthy commercial credit-worthy banks and lenders don't get crushed as the baby is thrown out wit the bath water," Kudlow said on his program last night.
CNBC's Steve Liesman has reported that the Fed is currently restricted from taking subprime mortgages as collateral when it conducts repos. The Bank of Canada yesterday, though, expanded the type of collateral it would accept to include commercial paper and other types of credits.
We asked Liesman what he thinks the Fed is looking at now. "I think the Fed right now is looking at all of its options. There's nothing that is off the table. It's safe to say the Fed is in constant contacts with all the players out there. It has a stream of information coming in from the markets," says Liesman. "They so far have shown they will use their short-term liquidity tools ... They'll act in that market as necessary. But you can't rule out a cut in the discount window rate. You can't rule out an inter-meeting rate cut, but you also can't rule out a Fed that will let the market find its way out of the problem by itself if the macro economy is not dramatically affected by the credit crunch."
St. Louis Fed President William Poole weighed in on the rate cut idea late yesterday. He was quoted by Bloomberg as saying the financial market disruptions had not hit the U.S. economy yet and the Fed should not act before its meeting Sept. 18. He said only a "calamity" would justify an interest-rate cut now.
In an interview with the Wall Street Journal, Treasury Secretary Hank Paulson conceded he does expect the turmoil in financial markets to slow the growth rate of the U.S. economy, but he does not expect it to stall the economy. He repeated his view that this is the strongest global economy we've ever had.
What about stocks?
"It's not the market. This has nothing to do with the stock market," says CNBC's Bob Pisani from the NYSE. "It has to do with the credit problems. It's not a liquidity problem. It's a credit problem. None of the banks want to do anything. None of the desks want to do anything. They are all waiting for it to shake out and eventually it will shake out." Check out Pisani's daily notes on the stock market, headlined Pisani's Trader Talk, to see what's really moving the stock market.
In the category of unusual moves, see that the airlines yesterday fell 7.18%, the worst day for that sector since March 24, 2003. Continental led the way, down 17%, but others also fell hard.
What does Warren Buffett Think?
Well, "Squawk Box's" Becky Quick got to ask him yesterday. Buffett told her that sometimes chaos and turmoil can create opportunities. "You get more excited when there's a lot going on. You can't help it. And frankly, it will probably present more opportunity to us because when dislocations occur, things get more mispriced and that sort of thing," he said.
"So it can be a time of opportunity. It won't be for sure, but generally speaking, when there's a certain amount of chaos in certain sections, the fallout, and it's unpredictable where the fallout will be, but the fallout sometimes offers some real opportunities," he said.
Earnings Central
If traders are looking at fundamentals today, they are most assuredly waiting for the earnings report from Hewlett-Packard, which comes after the bell.
"There's a lot of optimism that the company will handily beat and also raise guidance for the rest of the year. The company, with Thursday's earnings, will be Silicon Valley's first $100 billion company revenue-wise," says CNBC's Jim Goldman. "With the market madness lately, HP's numbers could go a long way toward re-affirming tech as a lucrative safe haven."
Watch Oil
Oil moved up 1.3% to $73.33 per barrel yesterday but it is weaker today. Oil prices have been seesawing, moving up on worries about a hurricane hitting the Gulf of Mexico oil facilities but down on concerns the global economy will slow and demand will fall.
