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Why the Dow Dropped 500 Points

Stock-Markets / Stock Markets 2011 Aug 08, 2011 - 03:57 AM GMT

By: Submissions


Best Financial Markets Analysis ArticleSam Chee Kong writes: The problem that now besiege the US economy does not happened overnight or during the past few years. It had been accumulated for the past 40 years whereby the US government encourage the growth of  credit. Interest rates are kept low so that people can afford to borrow to buy basic necessities like cars and houses. However bankers due to their greed are not satisfied with the miniscule margin they are getting from the traditional brick and mortar business model which is accepting deposits and providing loans.

Ever since then they are lobbying to have the Glass-Steagall Act repealed.  The Glass-Steagall Act was introduced after the stock market crashed in 1933 because one of the main reason for the crash was that commercial banks at that time are too overly involved in stock market investments. This Act separates the investment and commercial activities of the banks. Commercial banks are no longer able to speculate or getting involved in investment banking.

They have succeeded in repealing the Glass-Steagall Act on Nov 12 , 1999 and hence commercial banks are now permitted to get involved with investment banking activities like issuing securities and also allowing them to gamble with depositor’s money. This has led to money creation and an explosion of bets in the global derivatives market.It is estimated that by now the total global derivatives unclosed position  has already surpassed the 1 QUADRILLION mark.
Since my last article on Greece contagion spreading to Malaysia , I have already stated that smart money have or are in the process of leaving this region. The 500 plus points plunge in the Dow are contributed to multiple events and factors. Some say it’s the debt ceiling while others say it’s because of Euro Zone debt crisis is spreading.

The plunge in the Dow is an event that has long been awaiting to happen and it is just looking for a catalyst. The fallout had been delayed since 2010 and the authorities have been kicking the can down the road ever since. The market did not take the hit it is suppose to instead it has been postponed. However recently the ‘kicking the can’ had come to an end because it is now being confronted by a wall.  All options doesn’t seem to work anymore such as Quantitative Easing, Currency debasing and  almost zero interest rate on borrowing cost .

That is just what happens to the financial markets around the globe in the past few months. Authorities are delaying austerity measures and keep buying time , hopefully one day the economy will rebound and everything will be fine again. They hope that  real estate prices will rebound back to its pre crisis level, stock markets will continue their bull run, new jobs and employment will be created along the way, consumer will once again continue their spending habit but it never happened

Even before the current global stock market sell off, there are already writing on the wall and red flags are already appearing.  The current scenario of things that we are seeing (European Debt Crisis, DOW plunge and etc)  are contributed by various events and policies that have been  implemented from the past.

They are already many warning signs weeks before the plunge in the DOW and we now analyze them below.


People are fed up with all the propaganda being fed to them by the mainstream media. Phrases such as ‘This time is different’, ‘Everything will be fine in the few months’, ‘Its normal for the market to behave as such’, ‘the US debt problem is not a problem’, ‘the euro zone crisis is contained’ and so on. People now realized that the core problem during the 2008 financial crisis has never dealt with. Our financial markets never took the hit it is suppose to, instead the problem was swept under the carpet and we move on.

There is also a belief that the central bank is always there to solve our financial crisis. We always believe and trust those in power to take care of things. However after two rounds of quantitative easing (Money printing), we are still not out of the woods yet and instead we are now burdened with more asset and goods inflation. People now realized that the Fed no longer able to contained the financial crisis even if the Fed initiated QE 3. So the next crisis will be the ‘Crisis of Confidence, and when it hits the Fed will no longer able to fix the issues. That’s when the collapse begins and the entire financial structure (Ponzi scheme) comes apart.


Firstly the government has been shifting more than 7 million manufacturing jobs to China for the past 11 years. Along with it goes the tax receipts for the 11 million workers. It is something like loosing 50,000 jobs a month. It is estimated that if they were to fall into the US50,000 pay and 25% tax bracket, the US government over the past 10 years would have collected US 7 trillion in taxes or half of the US 14 trillion in debts. Due to the transferring of manufacturing jobs overseas, the US economy had been STRUCTURALLY ALTERED from being a MANUFACTURING economy to a SERVICE economy.

Secondly, nothing seems to change despite of what the authorities have done. Monetary policies like QE1, QE2, almost zero borrowing cost failed to lift the economy out of its current state of affairs. The main reason being the same bozos who caused the crisis are still in charge. The economy still record high unemployment, low growth, high trade deficits and also a host of other problems that have not been arrested.

With the foreign debt of US 14 trillion, there is no way the government be able to service its debts other than turning to the ordinary folks by increasing their taxes. Due to the reduced tax receipts, the government has to cut back on budgets allocated to local municipals. Essential services such as fire fighting, police personnel, teachers in schools had been drastically cut back. So basically the basic foundation of the US economy had been badly shaken and will not be able to withstand another external shock.


On the 14th of August a day before the DOW Plunge, there are news circulating within the financial market fraternity that Italy has to restructure its bonds and there are deposits run in Italian banks. The most trustworthy indicator for the European banking stability is the EURCHF or Euro to Swiss Franc. During the after hours trade the pair had been plunging more than 200 pips until the European authority SNB intervened to reduce the fall to 100 pips. This shows that people are shifting their holdings from Euros to Swiss Franc which is considered a safe haven currency amid bank runs on Italian banks.

And things just got worse in the euro zone as Italy announced last Friday that it will not sell 3 month Bill at the August 10 auction. This means that Italy is isolating itself from the international capital markets. In truth, the reason they are not selling the bills is that they don’t want the market to price in how junks they are and it is just an extension of the Extend and Pretend that everything is well and contained. This reminds us when Emperor Nero fiddles while Rome burns.

The Moving Average 200 day indicator have been breached since last week. The MA200 is the last wall of defense and breaching it means we are on a long term bear market. It also meant that institutional investors are getting out en mass. 

Another indicator of market top is the very low cash holding by mutual funds. As of July according to Bank Of America, mutual fund cash levels to assets dropped to 3.4 % which is record low. It shows that mutual funds are betting on a much larger scale of their assets into stocks. This leaves us to conclude that the market is now “FULLY INVESTED” and this means there are no more funds to sustain the market and hence the market will soon head south. So the time is just ripe for a huge take down of the markets and unwinding of all assets class. 

Lastly from the sources of the people in the know in the financial industry, it appears that somebody had placed some rather huge bets against the DOW. There are some huge sell contracts on Dow futures in Europe for the past few weeks. That means somebody somewhere are in the know that the Dow is going to plunge anytime soon. This is nothing new, as days before the 911 fiasco, brokerages in Europe reportedly receiving large short sell contracts on airline shares.  Some of these money trail goes back to the Middle East and America. And also the same thing happens during the Lehman Bros collapse.

Anyway the latest news being Standard & Poor downgraded the US Sovereign rating from AAA to AA+ with a negative outlook. This comes after Chinese rating agency Dagong Global Ratings downgraded the US from AAA to AA+ last month and possibly another downgrade before year end if it still cannot put its finances in order. So how will this affect the trading in Asian markets next week? To see what’s in store for trading in Asian shares next week we should look to the closing of the Saudi Arabia’s Tadawul on Sunday. The Tadawul All Shares index closed down a whopping 350.43 points to 6073.44 which amounts to 5%. on Sunday. So we will expect there will be another round of shares sell off in the markets in Asia and Europe on Monday.

by Sam Chee Kong

    © 2011 Copyright  Sam Chee Kong - All Rights Reserved

    Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors.

© 2005-2019 - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.

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