Earlier this month, we described the "Great Margin Call of 2008" where investors worldwide sell not because they want to, but because they have to.  Those margin calls took US stock indexes to levels last seen in October 2002 on October 10th and 16th, though each time stocks rallied back, including an 11% rally on October 13th.

This morning, we're set for another round of forced selling in the US, with Asian markets already down 8.3-10.5%, and European markets down 7.1-8.0%.  This sell-off will occur despite a number of positive factors:

·         Oil is now below $64/barrel, down from $147 in mid July.  US consumers will save about $630 billion/year relative to the peak price.

·         Overnight LIBOR is back to normal, and three month LIBOR is more than half way back to normal.  LIBOR is the rate that banks lend to each other so the reduction in rate reflects the reduction of stress in the international banking system.

·         The US Treasury has invested $250 billion directly into 9 US banks through the purchase of preferred stock.  An additional $450 billion will flow to banks over the next several months as the treasury implements its TARP program to buy distressed securities.

·         The Treasury implemented a "Temporary Guarantee Program for Money Market Funds" on October 7th to prevent further disruptions in that sector.

·         The Treasury will implement a program to buy commercial paper on 10/27 should high quality borrowers such as General Electric have problems.

·         The Federal Reserve will cut rates to 1.0% on 10/30, possibly even to 0.75%; other central banks are also aggressively cutting rates.

·         Worldwide, central banks are pumping trillions of dollars and Euros into their banking systems to offset the capital destroyed over the last year by losses on mortgage backed securities

·         Earnings for US corporations have held up reasonably well.  Even if we aggressively discount forward earnings, stock valuations remain at steep discounts given low interest rates.

·         World GDP is slowing, and might even turn negative, but is not crashing.

None of this seems to matter to leveraged investors, particularly the hedge funds.  These funds have been hit hard by redemptions and are selling every asset class, not only US and International stocks, but also corporate bonds, municipal bonds, preferred stock, and commodities.  About 30% of these funds will be out of business by year end, but until they stop selling, it's hard for other investors to feel confident about buying.