Sunday, August 12, 2007

Is this the August Before anoter Black Monday Tuesday?

In August, 1987, the Economist magazine ran a cover that looked like the poster of a horror movie entitled "The Return of Inflation." The U.S. stock market started falling culminating in the crash of October 20th ("Black Monday".) From August to Black Monday the Dow Jones fell a thousand points (when a thousand points was a lot.) Five hundred of those points were lost on October 20th.

Are we on the same path?

The U.S. housing bubble has ended with a large amount of mortgage backed securities backed by subprime mortgages that are turning sour. Hedge funds and other investment funds are holding large amounts of these. As they try and sell these securities, they are finding there is no market. This global run from risk is causing treasury securities to rise in price and the world's central bankers rush in shoring up the liquidity of their banking systems.

Listen to Phil Resler, Chief Economist of Nomura Securities, discusses the current liquidity scare with the Wall Street Journal's Phil Izzo and David Wessel.

The S&P 500 may seem cheap at 17 times earnings, but it spent most of my life below 15x.

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