The panic selling started in emerging markets last week (Korea, Thailand, Indonesia and now Russia). The trouble with emerging markets is that what is a barn door on the way in for inward investment becomes an arrow slit when you want to leave. The big picture theme is now one of global risk aversion i.e. people looking for safe havens. Investors are seeking asset classes that they can be sure to get their money back on, like the 10 year US government Treasury bonds. This makes NO SENSE as the yield is 3.65% when US inflation in well north of this. That people are willing to take such a low rate shows how distressed the markets are. The second big theme is de-leveraging i.e. banks shrinking their balance sheets due to the credit crunch.

The last remaining bull will tell you that this is a “–344 Dow capitulation” day that they have long sought to clear out the “stale longs”. The bears will say, give me one good reason to buy in this environment.

Today’s Market Moving Stories

• The Fed’s Janet Yellen said inflation risks have diminished somewhat, and she does not foresee a wage price spiral forming in the US. On monetary policy she commented that current levels do “not imply a highly accommodative policy stance”, i.e. lower interest rates. After the speech she was quoted as saying that there was some chance of a rate cut “if things go WRONG”!
• Another Fed president, Fisher said that US growth will be “anaemic” for a few quarters and that the housing market has yet to find a bottom. After the speech he was quoted as saying that it takes time for “monetary policy to take root”. These comments coming from a noted interest rate hawk indicate just how much slippage we have seen even since the last Fed meeting.
• Weekly data from the Fed indicates that borrowing by US banks at the discount window average $19bn a day, a new record.
• Much followed bond guru Bill Gross (who runs PIMCO, the world’s biggest bond fund) says that the US is confronted by a potential fire sale of assets, which if unchecked “can turn a campfire into a forest fire, a mild asset bear market into a destructive financial turmoil”.

A Long Slow Detox for Banks, Withdrawal Symptoms are Likely
After countless warnings the ECB finally announced yesterday that it was tightening the liquidity screw for the banking system. However the changes do not take effect until Feb 2009 and are relatively cosmetic (bringing them into line with other Central Banks).The changes will though increase costs for those most currently reliant an their charity i.e. Spanish & Irish Banks and smaller institutions. Anglo Irish Bank was down over 8% on the news yesterday.

THE US Housing Market. Staring into the Abyss

Robert Shiller had a interesting piece out this morning on the US housing market. Here are his main points:

Home price declines are already approaching those in the Great Depression, when they plunged 30% during the 1930s. With prices already down almost 20%, it’s not a stretch to think we might exceed that drop this time around.

There are about 10 million homeowners whose debt is higher than their home value, which has broad implications for how Americans feel about their wealth and spending habits.

The current hopeful consensus - that house prices will bottom soon and then begin to recover - is most likely a dream. Housing markets don’t usually have “V-shaped” recoveries. And even if house prices stabilize in nominal terms, after adjusting for inflation, most homeowners will continue to lose money.

My Take On Why We Are in A Bear Market for Stocks

When people try to figure out what was the cause of yesterday’s 344 point whackage, Albert Edwards warning about French Bank Societe Generale’s will be one of the reasons:

“Last week saw the publication of Q2 US whole economy profits data. They were shockingly bad. Core measures of profitability are in free-fall and have now reached a tipping point, where corporate activity could easily implode. We have also reached the point where companies give up ‘manipulating’ their profits higher and admit they are actually in free-fall. A combination of economic and reported profits slumping will catalyse the next equity downleg.”

Data Today

Dish of the Day is Non Farm Payrolls at 13.30. Nothing else matters. Consensus is for decline of 75k.

Equity Briefs. Banking & tech Stocks to Feel the Heat Today methinks

• Anglo Irish Bank has announced the sale of their Austrian private banking arm. Shares under pressure again this morning.
• Smurfit Kappa announces increase in prices (a sign of pricing power?). Recall the NCB upgrade of the stock yesterday.
• AIB says that the Irish property slump will continue “for a while yet”. Deutsche bank cut them from a buy to a hold this morning.
• Elan / Biogen said that they have initiated the 1st oncology clinical trial program from Tysabri according to Reuters.