Carnage on Wall Street

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February 27, 2007 | Stocks | | Author Asif

The correction in the market that many market observers have been talking about for months finally occurred today with the Dow Jones Industrial Average falling 416.02 points or 3.29% in a single trading session, the biggest one day drop in more than 5 years. At one point during the day, the Dow fell as much as 200 points in just one minute. The Nasdaq fared even worse that the Dow, falling 96.66 or 3.86% today, wiping out all of its gains for 2007. Not a single sector of the market was spared and commodities like steel, silver and gold were the hardest hit.

Every single one of the 23 individual stocks I hold in my personal portfolios were in the red and the SINLetter model portfolio, which was showing a gain of 95% (since inception) yesterday, retreated to a gain of 87.01% since inception. The only saving grace were the put options I picked up for the model portfolio as described in the section Hedging The Economy Through LEAP Puts. The put options for the mortgage lenders Countrywide Financial (CFC) and New Century Financial (NEW) are now up 78.86% and 447.22% respectively.

So what caused this sudden drop in the markets? It is usually hard to pin the movement of the market to a single factor and it is actually quite amusing to watch the media try to explain why the market moved in a certain direction almost every day. Amongst many other factors, the following events were weighing down the market today.

I was having a tough time finding two new stocks to feature in the March 2007 edition of SINLetter, which is due out in a couple of days, either because valuations were too high or the sector was facing a slowdown. A stock screen I ran last week finally brought up a company that appears to have excellent prospects and this market correction has made it even more attractive. If you are a subscriber, you should get to read about it when the next investment newsletter is sent out on March 1st. I plan to continue staying away from mortgage lenders, home builders and transportation stocks and focus on large cap or dividend paying stocks for the near future.

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  1. Anis Haroon
    February 28th, 2007

    It was carnage on Dalal Street as well. After losing almost 9% until yesterday, today the market started weekly in response to the week conditions prevailing in world markets especially in china (which actually finally reversed the downtrend and gained 4% at the time I wrote this) and to top that off, today being budget day, the Finance Minister of India did not help much with his budget by announcing a few negative measures, like hiking Dividend distribution tax to 15% and introduction of Minimum Alternative Tax (MAT) for IT companies, which proved fatal to multiple sectors like IT, Cement and Pharma. Though economists feel the budget was not overtly bad and in continuation of the Governments policies, the industry and the Markets were not very pleased. The pros and cons of this budget are highlighted well here. The BSE finally closed at 12,938.09 down -540.74 pts (-4.01%).

  2. Asif
    February 28th, 2007

    Your input about the Indian market is appreciated Anis. I like the focus on agricultural and rural infrastructure in this budget but cannot say I am happy about the increase in the dividend tax.

    I think a key development is the proposal to allow individual investors in India to invest outside the country through mutual funds. The restriction on investing abroad did not make any sense and I am glad to hear that they are lifting it as investors can now diversify their portfolios globally and reduce their risk. I am sure there is going to be scramble amongst mutual fund providers in India to come up with new funds.  

    I am very surprised to see that even though Tata Motors (TTM) dropped 4.59% on the Bombay Stock Exchange, the ADRs are up more than 2% on the NYSE today. Maybe it is just rebounding along with the rest of the US market after dropping 18% since Jan 16th.

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