Credit Crunch Fears Reappear
Travel back to Thursday, July 19, 2007. The Dow broke 14,000 for the first time ever, ending the day at 14000.71. On Friday, it retreated 150 points, though, and closed just above 13850. Days later on Monday, July 23, 2007, the Dow posted a solid gain of ninety points to once again come close to the 14,000 mark. Two days later on Wednesday, it also than 4% for the week. All three major US indices lost more than four percent the week of July 23rd, matching weekly losses not seen since 2002 and 2003. Fresh concerns about the economy’s exposure to subprime lending and data suggesting it had begun impacting corporate borrowing (and thus the takeover landscape) along with weaker than expected home sales set things on fire. A week later, things had really hit the fan when several major international banks froze their assets on account of US subprime concerns, helping prompt the Federal reserve to inject tens of billions into the US markets in order to halt the free for all that looked ready to take place.
Led largely by technology stocks, from mid-August until the middle of last week, the markets looked not only stable but fantastic. The Dow once again hit 14,000 and stayed above that mark for almost two weeks in October, and the NASDAQ reaching its highest levels since the end of the bust. The only exception to this almost three months run up came on October 19, 2007, the anniversary of 1987’s 508 point shocker dubbed Black Monday, when the Dow lost 360. All of this changed just over a week ago as scenes from mid-July started to play themselves out again when the Dow and NASDAQ began an uncomfortable slide, both posting four days of straight losses. Beginning Wednesday, November 6th and ending Monday, November 12th, the Dow slid 4.9% and the NASDAQ a staggering 8.5%. The technology stocks that aided the August through November gains spearheaded the decline, not due to any bad news of their own but due to assumptions made about them after first Cisco, whose technology powers almost all other technology companies, and later Qualcomm gave guidance for upcoming quarters below analysts’ expectations. Two trading days later, this past Monday, November 12, Etrade lost 60% of its value, not due to subscriber related issues but because of its exposure to the subprime market and the losses that exposure will cause the company.
To illustrate the dramatic changes that have taken place over the past four months, we’ve assembled the following images taken from Google Finance. First, a look at the Dow.
The timeline starts just before the middle of July, and scanning the peaks and values, left to right, you can see the drop from July to mid August ("Credit Crunch Correction") the climb to record levels through the end of October / beginning on November ("Tech Boost"), and then the cliff at the end of the chart which ends earlier this week on Monday, November 12 ("Tech Correction").
Now, we look at three of the tech stocks that best illustrate the ups and downs of the period – Google, Apple, and Baidu.
1) Google 
Credit Crunch Correction – a) 555 to 491 -11.53%
Tech Boost – b) 491 to 741 +50.92%
Tech Correction – c) 741 to 627 -15.38%
Period Totals: 555 to 627 – +12.97%
2) Apple 
Credit Crunch Correction – a) 146 to 117 -19.86%
Tech Boost – b) 117 to 191 +63.25%
Tech Correction – c) 191 to 153 -19.90%
Period totals: 146 to 153 – +4.79%
3) Baidu 
Credit Crunch Correction – a) 212 to 175 -17.45%
Tech Boost – b) 175 to 416 +237.71%
Tech Correction – c) 416 to 301 -27.64%
Period Totals: 212 to 301 – +41.98%
By comparison, the following shows the tale of two major banks over the same time period, perennial leader Goldman Sachs and hyper-exposed and beleaguered Citibank whose continued investments into risky subprime related vehicles recently resulted in the ousting of its president Mr. Prince with help from its largest single shareholder, a Saudi Prince.
While things have recovered somewhat at Etrade and other stocks since the recent shedding, chances are we aren’t out of the woods yet. Subprime exposures will continue to appear, and despite the major drops we’ve just seen, many stocks still trade up sharply, which to us means that if more weakness appears, stocks still have room to give.
