Slip-Sliding Away

Remember when we thought the financial system was on the precipice of disaster? Well, fears of widespread systemic failure may have passed, but investors are now worried about the economy—big time. It seems that all of the TARPs, EESAs, rate reductions and bailout plans have left us exactly where we were a month ago—at the depths of market lows with little confidence that relief is coming.

Despite massive government interventions, stock prices fell to 5 1/2 year lows yesterday as fears of a deep recession plague the investment horizon. The Dow plummeted 427.47 points, or 5.1%, to 7997.28, the lowest close since March 31, 2003; the S&P fell 6.1% to end at 806.58, well-below this year’s previous low of 840 and on pace for its worst year since 1931; the NASDAQ was tumbled 6.5% at 1386.42; and the small-stock Russell 2000 fell 7.8% to 412.38. I don’t know how many days that I have written “ouch” in response to these types of numbers. Suffice to say that the pain is actually becoming less acute and more chronic, as we all get used to these massive sell-offs.

Some said deflation was the catalyst for the selling—the Consumer Price Index fell by 1% in October, the biggest one-day drop in the 61-year history of the index. I don’t buy the deflation explanation as the reason for the fall. I think that investors are realizing that things will not turn around any time quickly and as a result, many are throwing in the towel and waiting it out. Maybe that’s why Henry Paulson essentially took a mulligan on the TARP and will let the next administration play out the round.

It’s probably a safe bet that the government wishes that it could go back in time and save Lehman Brothers – indeed, it was that company’s failure that sparked the massive slide. Since then, the Dow has plunged 30%. Yesterday, selling in the financial sector once again led the way. Citigroup in particular ran into a brick wall, falling 23.4% to $6.40, a 13-year low, after announcing that it will purchase the final $17.4 billion of assets still in structured investment vehicles; Bank of America dropped $2.13, or 14%, to $13.06; and Goldman Sachs fell $6.85, or 11%, to $55.18, the lowest close since the company's initial public offering in 1999.

Additionally, there was selling pressure in some of the larger insurers, many of which are busy buying banks so that they can tap the TARP. Lincoln National plunged 40%, the steepest decline in the S&P 500, to $7.31, after saying that it expects a charge of as much as $300 million because of declining equity markets last month; Hartford Financial dropped 24%; and good ol’ AIG fell 15%. Adding market woes is the uncertain fate of the automakers -- GM fell 9.7% to its lowest price since the 1940s, while Ford lost 25%.

Here is what I think is going on: everyone is waiting for some good news and it’s just not there. Every time we turn around, there is more disappointing data about housing or retail sales or confidence. At some point, people are going to examine the valuations of companies and realize that not every single one of them should be tossed aside. Until then, we are slip-sliding away.