Professor Elam

India dropped 11% during trading today and European exchanges are down 4-6%.  The DOW was only down .5% here Friday but clearly the recession contagion fears have spread. The worry is that the US is now THE export market for Asian goods. A recession here mean less demand for goods there.

Ben Stein weighs in on the history of recessions and admits he has been over optimistic.  He does give you the track record for such past events.  Remember when he quotes percentages he is NOT quoting the stock exchange drop but the drop in the Gross Domestic Product or some such indicator.

Everyone I have read is still on the just stay the course do not worry it will come back track. This was not the case in Japan from 1990 to 2003 when the Nikkei fell from 37,000 to about 7,500 a loss of some 80%.  I can recall an interview with John Templeton, an early international investor, a few years back. He opined that he did not believe the American public would ever stand for a protracted period of economic decline like the Great Depression again. I agree, politicians would get tossed out in rapid fire succession until someone did something right. Of course that could take a while given the two year congressional election cycle or the four year presidential cycle.

It has been reported that there in fact is  a Federal Plunge Protection Team.  This was begun after the 1987 stock market crash.  It works this way.  The FED uses ‘moral suasion’ to get big banks and mutual funds to buy stock index futures on a particular morning. With such overwhelming force the market is hopefully forced up. Short sellers have to cover and the downward plunge is stopped. If they have been trying to do this lately clearly it is not working.  If there was ever a time to try halting the decline, it will be tomorrow moring after the declines in the rest of the world.  A 5-10% plunge here would certainly not be reassuring to the rest of the world.

Stock index futures are trading today on commodity exchnges even though the US stock exchanges are not open, got that? Futures traders can trade overall stock market indices even though the stock markets themselves are closed. The S & P has dropped some 60 points to 1265 from Friday’s 1325 close. An S & P point is worth about 9.3 DOW poinst so that would be a 9.3 x 60 = 558 DOW point drop.

We are certainly at a severe oversold level. In an election year neither party wants a recession, this will be an interesting week to say the least.