The Wall Street Journal-20080123-Credit Crunch- The Fed Acts- World Stock Markets- No Place to Hide- Investors Around the World on Roller-Coaster Ride
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Credit Crunch: The Fed Acts; World Stock Markets: No Place to Hide: Investors Around the World on Roller-Coaster Ride
From London to Shanghai to Wall Street, deepening fear of a U.S. recession -- and its world-wide consequences -- are taking investors on a roller coaster.
"The market plunge came too quickly this time. It's horrifying," said Xu Shaosong, a drug salesman in central China who watched on his laptop as thousands of dollars vaporized. The money was meant to help him raise a child. But Shanghai's main index is down 13% this year -- most of that in just the past two days.
The worst thing, said Mr. Xu: "I still don't understand what has happened."
Around the world, investors are grappling for strategies to deal with one of the most significant and broad-based selloffs in nearly a decade. It was around 10 p.m. Monday near Leicester, England, that businessman Sean Henry said it hit him "in the stomach" that the turmoil was no longer about abstract losses at foreign banks.
"It was when people said the losses were the biggest since Sept. 11 that I thought 'This is going to knock points off my growth curve,'" said Mr. Henry, who runs a photographic-supplies exporter.
Asia started the rout Monday. It cascaded into Europe, then leapfrogged over the U.S. (where markets were closed Monday for Monday's Martin Luther King Jr. holiday) only to gain new steam yesterday in Asia and then Europe again.
Then came New York's turn. "The world has been reacting to us, and now we're reacting to it," said Steven Grasso of brokerage firm Stuart Frankel, working the floor of the New York Stock Exchange yesterday morning shortly after the open. "We're factoring in a recession."
The depth of the selloff meant that even the Federal Reserve's surprise interest-rate cut yesterday morning wasn't entirely a surprise. "Too little, too late," Mr. Grasso said. "They've got to do more than what the market has already factored in."
As European markets opened sharply lower, Francois Banneville of Societe Generale was on the Eurostar train from Paris to London. When he reached his office, the German DAX index was down about 4%. "Everybody was looking really dumbstruck."
But by 11 a.m., the roller coaster started uphill again: Across Europe, stocks moved into positive territory as investors hunted bargains or started betting that interest-rate cuts were on the way.
"Quite early in the day, the market started to assume significant rate cuts," said Mr. Banneville.
Around that time in the U.K., Mr. Henry, the photo-equipment executive, was watching with "trepidation" where the Dow Jones Industrial Average would open. When he saw the Fed rate cut, he said, he worried that it could be taken two ways: The Fed had everything figured out, or it was panicking.
Mr. Henry said he decided the central bank had it worked out, and the market did likewise. Stocks jumped across Europe.
The Fed's cut was good news for Mikhail Derkavski of hedge fund Compass Asset Management Ltd. He was changing out of his suit and into a pair of jeans at his home in Almaty, Kazakhstan, when he heard about the interest-rate cut.
"I have been calling everyone saying, 'Guess what? The Fed has finally moved,'" he said.
Yesterday morning, he and colleagues had bought back many of the shares that they had "shorted," or borrowed and sold in anticipation that they could profit from their price declines. His reasoning: The dramatic falls in recent days would push central banks into action.
But those immediate market gains were short-lived.
In the U.S., Monday's holiday left traders prepping for a hectic Tuesday: Their world had changed significantly since leaving the office Friday. Prior to the Fed cut, futures prices suggested the Dow industrials would open with a plunge of greater than 500 points.
Around 8 a.m. in New York, Todd Leone, a stock trader for Cowen & Co., was assembling what he calls a "game plan," talking to clients to gauge the depth of their worry. "Hopefully, you don't get hurt too much today," he said.
He was also hoping for a rate cut. "I'd like to see that," he said. "That's what [Alan] Greenspan would do," he said, referring to the former Fed chairman.
Twenty minutes later, the Fed announced it had obliged with its three-quarter-percentage-point rate reduction.
"Here we go," Mr. Leone said, as the market opened, settling into his chair. His immense phone listed major clients on buttons and lights. If they were nervous, the phone would start lighting up right about then.
Several minutes into the trading day, the Dow industrials had tumbled more than 300 points. But, so far, few were calling.
Mr. Leone had bought shares of drug maker Schering-Plough Corp., the sort of stock that tends to outperform during tougher economic times. But otherwise, "I don't have a lot of customer orders right now," Mr. Leone said.
Within a half-hour, the market was staging its comeback. By 10:30 a.m., the Dow was down by less than 200 points, and customers were lighting up the Cowen switchboards to make trades.
The mood on the Cowen trading floor was taut. John O'Donoghue, Cowen's head of equities, clapped his hands as he walked by the traders, in an effort to build adrenaline among colleagues. "Come on, come on," he yelled to no one in particular as he returned to his seat, pounding a fist on his desk.
By the end of the day, the Dow industrials had regained much of its earlier loss, but not all of it. The industrials ended down 128.11 points, or about 1%.
The remarkable turn of events in the U.S. yesterday has roots in Asia's declines in recent trading sessions. In China in particular, a sustained reversal of the stock market there could cast a particularly long shadow over global economic sentiment.
In Shanghai yesterday, as a light snow dusted the streets of China's wealthiest city, a somber tone descended on the small brokerage houses that have become popular public gathering spots in recent years.
On a typical day, locals gather to smoke, drink tea and even play mahjong, the Chinese dominos-style game, while cheering prices upward. But as the market sank, brokerage firms filled to standing-room-only by midafternoon, and there was little of the past camaraderie. Instead of exchanging investment ideas and cigarettes, most investors stood alone, staring at price boards ticking off deep losses.
"How couldn't I feel anxious?" said Shi Yinghua, standing in a Shanghai Securities Co. outlet. Another woman said she spent the lunch hour quarreling with her husband about their portfolio.
In China, all eyes are on the investing public, which was responsible for opening a whopping 35 million new trading accounts in the first 11 months of last year. Their buying power in recent years pushed the Shanghai index up 97% last year, to levels widely viewed as a bubble.
Now, a market downturn could hurt the spending power of consumers in the world's most populous nation. It has already generated anger directed at China's government.
Many investors in China have never experienced a sustained market downturn. Interviews with dozens of investors suggested some are losing confidence that Communist Party leaders will prevent a major fall in stock and property markets. Some voiced expectations that the government needs to step in.
Nervously waiting her turn at a trading terminal in an overcrowded outlet of Aijian Securities Co. in Shanghai, a woman who said her name is Ms. Zhang lamented putting all her "sweat and blood money" in the market. But she knows who to blame, she said. "The government just didn't take care of individuals," she said. "I feel very lost, totally confused."
China's market has actually been struggling since October. Nevertheless, the market pullback yesterday leaves the benchmark Shanghai index ahead 351% since mid-2005.
In yesterday's raucous Asian markets, India perhaps best illustrated the panic that some analysts said has set in among Asia's individual investors. When trading in Mumbai began, the benchmark Sensex fell 10% and trigged an automatic hourlong break in activity. It then went down 13% at one point, before finishing the session down about 5%. Japan's Nikkei 225 lost 5.7% and fell to its lowest level since September 2005.
In Japan, investors such as Yoshio Nakamura, a 65-year-old former railway company employee, blamed the U.S. for the rout. "America is the culprit," said Mr. Nakamura as he watched prices fall on a screen just a few blocks from the Tokyo Stock Exchange.
"If the U.S. problems didn't exist, Japan's stock market wouldn't be down this much."
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Miho Inada in Tokyo, Jackie Range in New Delhi and Bai Lin and Ellen Zhu in Shanghai contributed to this article.
