Doug Kass
This story originally appeared on RealMoney Silver on Aug. 1, and is being reprinted as a bonus for TheStreet.com readers.
At about 5 a.m. EDT Wednesday, a well-regarded CNBC commentator suggested that, as in times past, the market has often recovered from abrupt and large down moves like we saw yesterday. (She seemed to be implicitly stating that buying the dip is a good idea.) And, Tuesday, many commentators on RealMoney.com and elsewhere suggested that investors were ignoring the positive news -- citing past earnings growth, past share appreciation, etc. (basically a lot of pasts were used in this analysis) -- and were saying that the market's selloff was unjustified. The short squeeze (which quickly disappeared) in IndyMac Bancorp(IMB Quote - Cramer on IMB - Stock Picks) was even used as an example of overdone negative sentiment that could have broad and positive market implications. I disagree on all counts. What is the favorable news? Why should stocks have a Pavlovian move higher and reverse this morning's weakness? And what bearing does one stock (i.e., IMB) have on the whole? The reality is that credit markets have (predictably) seized up and the credit cycle is in the process of normalizing. I have been concerned with this since December 2006, when I penned an editorial that described the bubble in credit availability in Barron's. For a time, there was a disconnect between widening credit spreads and stocks. No more. Risk is being repriced, the carry trade is being dissolved, illiquid assets are being forced to mark to market, hedge funds have started to be disintermediated and we are witnessing a worldwide margin call. And the folly of partial and conformational analysis of sentiment is being uncovered. This is all occurring in what I have described as a tightly (and levered) financial system -- and why I thought on July 23 "It's Time to Panic."
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