Top 10 Myths of Tuesday's Correction

On Tuesday, a long overdue market correction took place. At its worst, the Dow Jones Industrial Average was down well over 500 points. As has been recounted endlessly by the media, this was the worst single day since Sept. 17, 2001.

It didn't take very long for the spinmeisters to get busy. Numerous reasons were spun out as to why stocks fell -- ranging from merely uninformed to misleading to utterly false. I have seen, read or heard each of the following reasons offered either on the major networks, in the business press, or on the radio. While you have likely seen most of these, I doubt you have seen the facts figures and analyses that follow each.

My top 10 myths of the Great Correction of 2007:

1. Chinese regulators caused the meltdown.

The timing of the Chinese news release makes this statement suspect: On Sunday, China's main stock exchanges (in Shanghai and Shenzhen) issued new guidelines regulating member securities companies.

An article on the subject "China tightens regulation of securities dealers with new rules" was posted at www.GOV.cn on Monday. Here is an excerpt:

China's Shanghai and Shenzhen stock exchanges issued on Sunday the new rules of regulating their member securities companies in a bid to ward off risks in stock trading. The rules, which will come into effect on May 1, set limits to the varieties, methods and scales of stock trading that dealers are allowed to conduct, preventing them from engaging in high-risk business beyond their capacity.

Note that these details were released on Sunday, and on Monday Chinese markets set new all-time record highs! Indeed, despite recent official discussions of new capital gains taxes, increased regulation and the government's desire to reduce speculation in China, their indices had advanced 13% in the prior six sessions -- all setting records.

2. It was Greenspan's fault.

I've given Easy Al a lot of grief over the years. His answer to most any problem is "more liquidity."

However, he doesn't deserve the blame for this one. Given the specifics of what the former Fed Chair said, as well as the timing of his commentary, it is doubtful he had much impact.

First off, Greenspan didn't say anything that was off consensus. His damaging quote?

"While, yes, it is possible we can get a recession in the latter months of 2007, most forecasters are not making that judgment and indeed are projecting forward into 2008 ... with some slowdown."

Those ain't exactly fightin' words.

Then there's the timing issue. His comments were made early Monday morning over satellite to a group of Hong Kong investors. It was subsequently reported by Bloomberg and others. By 6:49 am on Monday morning, I had already blogged it, noting tongue in cheek that "Greenspan Forecasts Recession (Market Expected to Rally)."

As noted above, Chinese markets rallied, and the US markets were flat on Monday. So to blame what happened Tuesday on Greenspan's comments hardly makes sense.

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