Feb 28 2007
The Day After the 540 Plummet
I had a chance to listen to and then briefly question J.P. Morgan’s global equity strategist, Abhijit Chakrabortti on Wednesday. I was surprised by how concerned he was about earnings growth and the economy as a whole. Frankly, I was reminded of Stephen Roach over at Morgan Stanley, who, the day before the Great Plunge, had posted a quite sobering dispatch about Wall Street and global complacency titled The World Drops Its Guard — a quality read if you are among the masses scratching their heads wondering what exactly happened yesterday. Actually, even if you aren’t, its good perspective to have.
Why did The Great Plunge happen? Chakrabortti understood this much: China was the catalyst, but something much deeper has to be going on. A drop of 540 points reveals the existence of a hair trigger amid the amazing amount of complacency in the markets. China tripped the switch, but a 540 drop out of the blue, said Charabortti, could have as easily been triggered by any number of other rogue wave incidents.
The drop was a punch in the consensus’ jaw, amid record or near-record bullish sentiment, depending on which figures you reviewed. Clearly a systematic or fundamental button was pressed yesterday to expose something much bigger than just a little market complacency.
Loudmouth analyst Jim Cramer, blamed “the system” for failing investors. Wrote Cramer in his RealMoney.com column at 4:15 EST,
“You didn’t even have time to panic. The system failed us, breaking down too fast for you to panic. We totally collapsed between 2 p.m. and 3 p.m. ET, dropping 200 points. All the circuit breakers and all of the rules that were put into place years ago after 1987 just utterly failed.”
Certainly, many will be looking for scapegoats like Cramer. Perhaps “the system” failed, but that’s missing the deeper point.
On the other hand, our belief is that the crowd just smelled the sudden odor of smoke, but few are even close to understanding that the roof is on fire. It has happened in the midst of a pretty darned good party where folks have been so drunk on good times that they’ve been too busy to bother to acknowledge that a the increasing number of people staggering and throwing up might be a sign that things are too carried away. Nobody wanted to listen to sober party-poopers repeatedly reminding everyone that playing with fire is dangerous, and that inevitably someone is bound to get hurt.
But now the cat is out of the bag, and it will be interesting to see how many people start to rethink their reality. Obviously there was something big going on, and they had no idea. The scramble is on, although I expect that, given the extreme bullishness we’ve seen, too few will heed the warning without a few more smacks in the jaw. For better or worse, that’s just human nature.
