Stock Market Jitters — Time To Buy?

Rumors that the Chinese government might introduce both a capital gains tax and capital controls caused a major decline of some 19 percent in the Chinese (Shanghai) stock market that had seen a 160 percent gain over the past year. The selling continued in Asia and in Europe.

In New York, the Dow fell off over a hundred points soon after the opening. At around 2:00 pm it was off some 200 points. Then, at about 3:00 p.m. it dropped off a further 300 points in a matter of minutes.

At that time, panic was in the air. Questions still remain as to what exactly happened.

[Editor's Note: Sir John Templeton first warned of housing, market crash – Read More Here]

Apparently, it was a computer glitch, caused by an overload that resulted in a "statistical sheer" of a 300-point drop in which an hour or more of trades and a major block trade, hit the tape in just two minutes.

(The so-called "Hybrid System," which uses electronic matching of buy/sell orders to enable floor specialists to trade more stocks, became overloaded.)

Story Continues Below

However, soon afterwards, the market recovered somewhat, but in a highly uncertain manner.

The Dow closed down 416.02, or over 3 percent. This was the largest single drop since the re-opening (Sept. 17, 2001) after 9/11.

In addition, it was an extremely volatile day in New York, reflecting great uncertainty.

The volatility was such that it may have led and even continue to lead to massive computer generated sales.

Is this major fall a sign of correction or of a major market downturn?

[Editor's Note: Best way to insure your investments from a 2007 market crash.]

This is the key question that faces those of our readers who are still in the U.S. equity markets.

The majority view expressed by Wall Street and media commentators have been of the typical "stand firm: don't panic." We expect "verbal intervention" to calm markets will soon issue forth from various key governments and central banks.

We believe it could be the start of something big — the dawning of reality or, as we have forecast for some time, of 2007 as a year of reckoning.

Our readers will be familiar with our view that the massive liquidity of recent years.

Liquidity has been the justification of taking massive risks. At the height of the "irrational exuberance" of 2000, there was some $278 billion of margins on Wall Street. Today that figure is some $285 billion.

The massive one-day fall yesterday could result in major margin calls and an unwinding of the many speculative positions that have kept the stock markets in euphoria for some time.

In addition, consumers have record high levels of debt and low levels of savings.

In view of the housing problem that we have long highlighted, we have grave concerns as to the continued resilience of the great American consumer, who has defied gravity over the past decade.

[Editor's Note: Protect Yourself: 5 highest yielding, safest investments for 2007]

In addition, the massive rise of some $26 trillion in mortgage backed loans over the past 12 to 15 months may test the massive derivatives market to the point that we may be forced to see just where the buck stops. That is a most worrying thought.

Finally, in China, where spending on fixed investment now stands at over 45 percent of GDP, there is reason for the government to reign back.

China and America are the two great economic engines of the world. If they are both to correct, we continue to believe that the overbought stock markets are decidedly dangerous places to be sitting.

We continue to believe that U.S. stock markets in particular are vulnerable to what we term, "2007-The Year of Reckoning."

Editor's note:
Sir John Templeton first warned of housing, market crash – Read More Here
A 2007 global recession is in the cards. Here`s how to position yourself now for monster profits before the panic headlines begin.
5 highest yielding, safest investments for 2007
Get our top 4 ETF recommendations for 2007
Get George Soros` top stock picks for 2007.
Best way to insure your investments from a 2007 market crash.