Herman

Cain

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October 13, 2008

Ten Reasons the Stock Market Plunged

As usual the mainstream media has done a great job of sensationalizing the dramatic drop in the stock market over the last two weeks. As usual, they have done a poor job of reporting many of the reasons it is happening.

The emergency financial rescue legislation passed by Congress less than two weeks ago was never intended to be an instant cure for our ailing economy, but some people have criticized the package because it was not. Wake up people! This is not a movie. This is real.

Here are 10 factors driving down the domestic stock market:

(1)         Banks are resetting their lending guidelines.

(2)         Large companies (Fortune 1000) are revising their fourth-quarter earnings outlook downward. Stockholders are expecting this.

(3)         Many large companies may suspend their fourth-quarter dividend payout to conserve cash, and they may make sizeable job cuts.

(4)         Stock portfolio managers are attempting to cut their losses, out of panic and fear of not knowing where the bottom is going to be.

(5)         Pension fund managers are trying to maximize their cash, because they are trying to sustain pension payments.

(6)         Small businesses are trying to hang in there until the credit market thaws out before being forced to start laying people off.

(7)         Details of the emergency $700 billion (plus tax extenders and pork) rescue package have not been implemented yet.

(8)         General uncertainty and panic selling are contributing to a downward snowballing effect.

(9)         Foreign markets are experiencing the same effects, which impacts our domestic markets and vice versa.

(10)     There is a general negative outlook for 2009 due to the poisonous political tone in Congress, and negativity in the presidential campaigns.

These are just some of the more obvious factors driving the stock market down. Some of the not-so-obvious reasons are risky financial instruments, called derivatives, which are used by financial professionals.

Over-valued and bundled mortgage-backed securities are examples of such derivatives, which have backfired and imploded on some lending institutions’ balance sheets.

Can we say Fannie Mae and Freddie Mac?

Up until a month ago, most of Main Street America didn’t even know what Fannie and Freddie were, but now they do. And they are learning more and more about them every day, and the role they have played in setting off the national financial crisis.

The stock market will bottom out sooner rather than later, because there is real value in millions of real products and services, which are being produced and provided by real businesses and most importantly, real people.

It’s called economic resiliency.

Businesses large and small, banks, credit unions, mortgage companies, stock market traders, portfolio managers and investors are all redefining “business as usual”.

Lending institutions will start lending again, businesses will readjust their operations, consumers will keep buying stuff, and we will begin to bounce back when a collective calm starts to offset some of the fear and irrational decisions by some people in the financial markets.

The U.S. economy has more economic resiliency than any other economy in the world, because of our free markets system, ingenuity, entrepreneurial determination, and the underlying winning will of the American people.

We have been shaken, but not stirred.  

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