The superhero S&P 500 added 3.4%. This means it’s 0.4% in the black for the year so far.
And here we were at Notes fretting over the recent dramatic spike in insider selling, the role of short covering in pushing stocks higher and the government’s funny games. In fact, so horribly emasculated did we become that we even wimpishly fretted over the lessons of history.
We recalled the Nasdaq crash of 2000 to 2002. It spawned two “healthy” rallies it spawned – one of 30.8% and one of 44.7% – before continued selling pressure took the market down to even greater lows. We also remembered the poor old Nikkei Index. Starting in 1990, it showed three very “healthy” rallies of 55%, 51.7% and 131% before collapsing and setting new lows.

And if you take a look at the chart above, you can see that during the Great Depression, the Dow saw no less than eight double-digit percentage-point rallies between 1929 and 1932 – a period when the index lost 90% of its value.

Now that the dust has cleared, it appears that the China plan is not entirely as big as advertised — further diminishing the halo effect on the global economy.

When originally unveiled, China’s $600-billion plan proposed a massive infrastructure build-out through 2010 to help create jobs and shift the country away from it’s over-reliance on exports, which have suffered from the global recession.

The announcement was framed as a brand-new initiative. The blueprint China laid out before the world included projects for low-cost housing, airports, roads, highways and aid to farmers. Pundits saw the investment by China as an overnight boom for raw materials, although we took a wait-and-see approach.

Asian stock markets surged on news. Japan’s Nikkei index jumped 5.8% while Hong Kong’s Hang Seng index gained 3.5%. In China, the Shanghai Composite index jumped 7.3%.

So much for the herd…

Because it now seems that many of the projects China had included as part of the $600 stimulus were already in the works prior to the big announcement. So what had initially appeared as a grand stimulus turned out to be a staged PR event.

Reuters recently characterized the stimulus package as comprised of “old budget commitments, double-counting and empty promises. It was thus mainly propaganda, to convince China’s own people and the outside world that the government was serious about stimulating demand at home.”

Reuters quoted Shanghai Citigroup Ken Peng as saying, “The stimulus package is big, but it’s actually a combination of a lot of things that have already been announced.”

A glaring example of China’s PR machine in action is that the $600-billion package included nearly $3 billion that Beijing had already earmarked for rebuilding in Sichuan province and other regions devastated by the earthquake earlier this year.

The stimulus plan also called for some $292 billion on the railway system. But Ting Lu, a Merrill Lynch analyst, reported that most of it had been previously allocated. He pegged the real number at $58 billion of new funds — still a sizeable number but far short of what China led the world to believe.

Given China’s lack of transparency, the ultimate net number of new funding will be almost impossible to ferret out. But in the end, it becomes increasingly apparent that Beijing is playing a shell game with investors. You can try to figure out where the pea is, or put your money someplace else.

– U.S. stock futures are pointing higher this morning ahead of a widely anticipated cut in key lending rates by the Fed. Futures traders expects the Fed to bring rates down a half-point to 1%. “S&P 500 futures climbed 32.4 points to 867.10 and Nasdaq 100 futures rose 44 points to 1,206.00. Dow industrial futures rose 300 points,” according to MarketWatch.

– Traders across the globe appear to have snapped out of their funk also. Japan’s Nikkei index is up 7%, Hong Kong’s Hang Seng is up 14%, and London’s FTSE is up 2% as of 5:40AM EDT.

– Gold is up in London this morning as stocks rally. So far this month, traders have knocked 14% off the price of gold as they sold assets to raise cash. “Gold for immediate delivery gained $14.92, or 2 percent, to $745.72 an ounce as of 8:56 a.m. in London,” according to Bloomberg.

– Oil edged up toward $64 this morning. The black goo is also tracking the recovery in European and Asian stock markets.

– “U.S. 10-year Treasuries fell the most in almost three weeks as stocks rallied and the U.S. government prepared a record $34 billion note sale to help pay for bank rescues,” reports Bloomberg.

– Don Boudreaux at the Cafe Hayek blog heaps more misery on the head of former Fed head Alan Greenspan by way of a letter to the WSJ. Well put, Don…

To the Editor:

Alan Greenspan now blames deregulation for today’s financial turmoil (”Greenspan Admits Error to Hostile House Panel,” October 24).  Whatever deregulation there was, and whatever its merits or demerits, there is one crucial financial instrument – dollars – that throughout was supplied by an utterly unjustifiable state monopoly – the Fed.  Unfortunately, this decidedly unfree-market arrangement draws little attention.

Skepticism is advisable when the former head of a government-created and protected monopoly blames the market for using that monopoly’s output unwisely.  Would the demand for mortgage-backed securities have been as frothy as it was if Mr. Greenspan’s Fed had not created so much new money?  Would the demand for owner-occupied housing itself have been so intense?  Because money plays a common and vital role in all of these transactions – and because Mr. Greenspan’s Fed kept pumping dollars into the economy with no way to know what the ‘correct’ supply is – you’ll pardon my inability to give credence to Mr. Greenspan’s latest pronouncements.

Sincerely,
Donald J. Boudreaux

– Friday’s improvement in U.S. existing home sales data is no doubt having a positive effect on the markets. New home sales were up 2.7% from their 17-year low in September. The question is: Will the uptrend hold? This from Rob Parenteau, the new editor of the Richebacher Letter, as quoted in The 5. Min Forecast.

We have to wonder whether this [improvement in housing] will hold in the months ahead. Layoffs are mounting across many industries and the prospect of further foreclosures weighing on the market must be rising.

Initial unemployment claims are pushing through the prior two recession highs. As personal income growth slows, household debt servicing is bound to become even more problematic, barring a much lower mortgage rate environment.

While the money markets seizing up was the clear-and-present danger, the attempt to reel in mortgage rates must be the next policy priority. Beyond that, perhaps with a stabilization in the equity market from oversold conditions, value players may start to arbitrage corporate bond yields in. Without this type of sequencing, a lower fed funds rate does not mean much beyond some possible psychological relief for equity investors.

Refi activity remains well below its peak rate level back in February, and the longer it takes to get mortgage rates down, the more homeowners will be unable to refi as home values fall below mortgage loan values. Surprisingly, bank real estate loan activity has not fallen off a cliff, although that is mostly because households are still tapping home equity lines of credit, while mortgage loans for purchases have gone flat.

At the New York close on Friday, the blue-chip Dow Jones Industrial Average Index had plunged 312.62 points (-3.6%), to trade at 8,378.63. The tech-laden Nasdaq Composite Index shed 51.88 points (-3.23%), to reach 1,562.03. And the broader Standard & Poor’s 500 Index dropped 31.45 points (-3.46%), to hit 876.66.

“It’s a bear market on steroids,” David King, a money manager at Putnam Investments, who helps manage about $137 billion, told Bloomberg Television. “It’s very accelerated by the pace of financial markets today.”

Prior to the New York opening bell, pre-market traded futures for all three major U.S. indices fell their maximum allowed daily limit, causing safety measures to kick in and halt futures trading until the market’s open. Dow futures crashed 550 points, or 6.27%, to 8,224. The S&P 500’s futures index plunged 60 points, or 6.56%, to 855.20, and Nasdaq futures skidded 85 points, or 6.20%, to 1,175.75.

But despite the bleak picture futures painted, the U.S. markets recovered from the day’s deeper lows to close higher than originally indicated.

Commodities tumbled on fears of demand destruction from weak economic growth. Gold traded down to $681.00 an ounce from an opening level of $713.30. Oil also declined despite production cuts from the Organization of Petroleum Exporting Countries (OPEC). [For a related story in Money Morning on OPEC’s production cut, please click here.]

“Selling is across all asset classes,” Robin Bhar, a commodities analyst at Calyon in London, told Bloomberg News. “A month ago we were on the edge of a cliff and now we’re in freefall.”

In overseas markets, Japan’s Nikkei Index had an 811.90-point decline to close at 7,649.08, its lowest level in over five years. Hong Kong’s blue-chip Hang Seng Index plummeted 1,142.11 points to close at 12,618.40, its lowest level since August 2004.

“The market is pretty desperate and at a loss. Four days running of big losses, though the turnover is quite low,” Howard Gorges, vice chairman South China Securities, told Reuters, speaking of the Hong Kong markets. The Hang Seng Index has dropped 55% so far this year.

“People are just standing aside. These are dangerous markets to play around with. That’s the main reason for getting into cash,” Gorges said.

In Europe, major indices sunk on news that the United Kingdom’s gross domestic product contracted more than expected with a decline of 0.5% in the third quarter.

“We are obviously not sure exactly how this whole situation will develop. We’ve had some quite deep and severe recessions in the UK before, and hopefully we can avoid that sort of situation in the current circumstances, but the risks of that have increased,” Andrew Sentance, a member of the Bank of England’s rate-setting monetary policy committee, told BBC Radio Leeds.

The FTSEurofirst 300 Index of blue-chip European shares skidded 4.9% to close at 829.73 points, its lowest closing level since May 2003, Reuters reported.

The Paris-based CAC40, London’s FTSE 100, Madrid’s IBEX 35 and the Frankfurt-based DAX all posted triple-digit losses.

At the New York close, the dollar had gained ground against the euro [up 2.46%] and the pound sterling [up 2.02%], but lost ground against the yen [down 2.94%].

Source: Global Sell-Off Takes a Toll on U.S. Equities