The Pit - IMI Trust

In a week where we thought the biggest news would be Martin Scorcese finally winning the Best Director Oscar he deserves, the wily old man, formerly of the Federal Reserve, Dr Alan Greenspan manages to contribute to the largest drop in Wall Street prices since September 11.

Over the last 24 hours tens of billions, potentially hundreds of billions of dollars, of value was wiped from stock markets worldwide. $632 billion dollars in value was erased from the U.S. stock markets alone.
In this one day period, the Shanghai Stock Exchange, the main index in China, lost nearly 10%. The US markets reacted to this initially with the Dow Jones Index being down 1%. Doesn’t sound that much, buy 1% on over $10 Trillion means taking a bath on Wall St. Then throughout the day, that 1% turned into 3% plus.

The sequence of events give weight to one mans words and not facts produced.

On Monday, Alan Greenspan spoke at a conference in Hong Kong. During that conference he made a single statement which would greatly impact markets aound the world…

Greenspan said, “It is possible we can get a recession in the latter months of 2007, and we are seeing signs of that already.”

Now what is interesting he said this on Monday. The Monday trading in the US has no reaction to these comments what so ever. Record private equities were being announced and it was business as usual.

So when did the reaction take place. Bring on China. Although China’s economy is surging, it is largely due to the purchasing habits of the American consumers. China’s stock exchange is trading at 38 times earnings, so any poor economic news from the US, has a massive impact on China. Volatility… your best friend and your worst nightmare.

The markets knew this and they reacted extraordinarily. The sell of resulted in the largest 1 day drop in 10 years.

Now Greenspan’s comments suddenly had the attention of the world and more significantly the US markets. The US Markets had been waiting for a correction, with the longest bull run in many years. With no poor economic data coming out, the bull were still in there swinging… until today.

When the US Markets opened, the CNBC and Bloomberg commentators looked very distressed. Then mid trading session, the Dow Jones and Nasdaq went through the floor.

Billions and billions of dollars gone, because of a statement made by Alan Greenspan. What I find interesting is that he didn’t provide any numbers or stats to support his claim and yet… there was such a strong reaction. It just shows the power and respect that his words have in the markets.

These kind of days on the markets are rare, exciting and horrifying.

The question lingers… “Is this a great buying opportunity” or “Is there worse to come?”