Lehman's Collapse - Markets May Not Fall As Much as You Think

Lehman's Collapse - Markets May Not Fall As Much as You Think

Everyone is predicting a horrible day on Wall Street today and for the next couple of days.  I'm not so sure.  Here's why.

Lehman's stock has already taken its beating.  As the chart below shows, Lehman, as well as the other financials have been steadily losing value over the last six months.  This is not a suprise or a shock.  I fact the Fed let Lehman fail because it felt that traders and markets should have been prepared for the company's problems.

One author on BestCashCow was speculating about Lehman's collapse several months ago.

Markets are forward looking.  It was then that the markets should have been falling, and as the data shows they were.  

Dow Jones Industrials

As you can see, the Dow fell from 13,200 in May to under 10,800 in July.  Since then, the Dow has held up relatively okay despite the government takeover of Fannie Mae and Freddie Mac.  Why?  Because none of this was unexpected and these problems were already prices into the market.

There's another reason the market will hold up okay.  Oil is continuing to drop.  Oil today dropped by by almost another $5 and is at the $96/barrel level.  Declining oil prices provides support for the stock market in two ways.  It takes away some inflation pressure and allows the Fed to consider dropping rates and it helps to lift consumption and improve consumer confidence.  

The Markets Could Still Drop

Markets could still drop dramatically but I think it will take a surprise to do it.  Perhaps the failure of an insitution considered sound, like Bank of America or even one that's damanged like Citicorp.

Forest Fire

When a forest fire starts, it's sometimes best to let it burn and remove all of the old trees and wood.  We're at that point.  There will be a lot of pain, but the failures we are seeing are all part of the economies ebb and flow.  When the pain ends, the economy will be the stronger for it.

The markets realize this and will act accordingly.

Sam Cass
Sam Cass: Sam Cass, MBA, JD, University of Texas at Austin. Always a fan of Leonardo Da Vinci.

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Comments

  • Arthur

    September 16, 2008

    Bad call so far. Dow is down almost 500 points.

  • Sam Cass

    September 16, 2008

    5% is significant but it's hardly a catastrophe. It's nowhere near a bad a drop as experienced after 9/11, Asian financial meltdown, 1987, etc. Let's see what happens over the next couple of days. I could be wrong on this but need to wait a day or two before I admit that.

  • Sam Cass

    September 18, 2008

    Maybe I got this one wrong. So much for efficient market theory.

  • Sam Cass

    September 19, 2008

    Dow up 400 points today as markets respond to Fed liquidity and bulls come in to buy banks at low prices. Maybe I was right?

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