As the investor roller coaster ride continues, some are wondering if they can just get off the dizzying ride. For those who can’t deal with the pain any more, no amount of data that is trotted out about going to cash will change their minds. With that said, there are a bunch of investors who are hunkering down and making peace with the bear market.
Let’s start with yesterday’s dismal performance. Now that investors are not consumed with the melt-down of the entire financial system, they are turning their attention to the economy. Given the past year, you can’t blame people for fearing the worst—and the worst would be a lengthy and deep recession accompanied by massive job losses (unemployment rate is projected to reach at least 7.5-8%). As a result, the Dow Jones Industrial Average posted its seventh-biggest point drop in history, plummeting 514.45 points, or 5.7%, to close at 8519.2, a level not seen in nearly five years. The Dow re-tested previous lows, but rallied before the bell. Still, the index has given back 746 points over the last two sessions. The day followed steep losses overseas, as many emerging markets tumbled 10%.
The recession fears spilled into commodities markets, led on the downside by crude oil. The reasoning is simple: if economic growth is going to slow, then the demand for raw commodities will fall. Crude dropped $5.43, or 7.5% a barrel to $66.75, its lowest point since June 2007 and drop of 54% since July 3. Gold futures declined sharply on the back of a strengthening dollar. Gold dropped below important technical chart levels, which accelerated selling pressure. December gold fell $32.80, or 4.2%, to settle at $735.20 an ounce. Other metals that are more sensitive to economic cycles—copper fell to its lowest level since 2005.
So where does that leave those who are still on the investment roller coaster? Well a bit nauseous, but still breathing. This tireless bunch is able to look to the future and recognize that when the government puts massive dollars into the system, it will eventually help out. The two trillion plus dollars (the bailout plus AIG, Bear Stearns and the commercial paper facility) as well as rate cuts should resuscitate the system -- eventually. Once banks are revived from their lending comas, they will actually lend again. Long term investors know that stimulus takes six to 18 months to have its effect on the economy. Additionally, there is a bunch of cash (estimates run over $10 trillion) sitting on the sidelines as investors take comfort in money market funds and T-bills. This money needs to grow and in a zero interest rate environment the money is likely to find itself back into the stock market.
None of this will happen immediately, but as we become more accustomed to the daily gyrations and the Dow Jones Industrial Average firmly ensconced below that 10,000 level, long term investors are bearing down and hunkering down for a long haul. They are likely to be rewarded for their patience.
Showing posts with label extremes in the market. Show all posts
Showing posts with label extremes in the market. Show all posts
Thursday, October 23, 2008
Monday, September 22, 2008
Just when you thought it was safe…
Last week ended on a high note—stock markets rallied to virtually unchanged on the week, after the announcement of the proposed $700 billion government bailout of the financial sector. Many were breathing a bit easier over the weekend, but then yesterday, just when you thought it was safe…well, you know the rest. I know you don’t want this to happen—nobody does! We all wish that we never got here, but instead, we are forced to swallow a $700 billion bitter pill and at the same time, deal with the reality that this is likely to be a lengthy and messy process.
Yesterday, as investors slowly recognized this fact, they also had to contend with a sinking dollar and soaring oil prices. Crude oil prices spiked more than $25 at their intraday high and finished with a gain of $16.37, or 16%, at $120.92 a barrel. (Expiration of contracts for October delivery added volatility to the market, but some thought it also could have been hedge fund liquidation.) The less-than-rosy news drove investors to the sidelines. The Dow plummeted 372.75 points, or 3.3%, to 11015.69, down 17% on the year; the Nasdaq Composite Index dropped 4.2% to end at 2178.98, down 18% on the year and the broader based S&P 500 plunged 3.8% at 1207.09, down 18% on the year. The one bright asset class was gold—the December contract jumped $44.30, or 5%, to $909, as investors sought a safe-haven.
Perhaps you thought that the bailout would prevent these kinds of days, but in fact, the plan was a bitter reminder that something this big had to happen to prevent a total seizure of the credit and financial markets. “If we have to live through more of these days, then maybe I think I speak for taxpayers across the country when I say that I would rather not shell out these big bucks,” noted one friend. In the abstract, that might be the case, but we know for certain that doing nothing could have resulted in a financial calamity, so maybe a few 3% swings isn’t the worst thing in the world. In other words, a fence at the top of a cliff is better than an ambulance at the bottom. There will be plenty of time to point fingers and beat our chests about how unfair this whole situation has been, but let’s get things stable before the ambulance arrives.
As Robert Jenkins, the chairman of Investment Management Association said last week, “The crisis arose from the combination of greed, imprudence and leverage. Greed is not new. Reckless lending is not new. Imprudent borrowing is not new. What is new and what distinguishes this credit crunch from past excesses is the unprecedented level of leverage. We will not outlaw greed and cannot legislate against stupidity. But regulators can and must address the issue of leverage.” And indeed we all hope that regulators will refocus and become proactive in the future. But for now, I know that I speak for most investors when I say that all we want is a few days where we can escape history-making headlines or game-changing deals. We just want a few moments of calm, when we can dip our toes in the water without fearing the next massive wave.
Yesterday, as investors slowly recognized this fact, they also had to contend with a sinking dollar and soaring oil prices. Crude oil prices spiked more than $25 at their intraday high and finished with a gain of $16.37, or 16%, at $120.92 a barrel. (Expiration of contracts for October delivery added volatility to the market, but some thought it also could have been hedge fund liquidation.) The less-than-rosy news drove investors to the sidelines. The Dow plummeted 372.75 points, or 3.3%, to 11015.69, down 17% on the year; the Nasdaq Composite Index dropped 4.2% to end at 2178.98, down 18% on the year and the broader based S&P 500 plunged 3.8% at 1207.09, down 18% on the year. The one bright asset class was gold—the December contract jumped $44.30, or 5%, to $909, as investors sought a safe-haven.
Perhaps you thought that the bailout would prevent these kinds of days, but in fact, the plan was a bitter reminder that something this big had to happen to prevent a total seizure of the credit and financial markets. “If we have to live through more of these days, then maybe I think I speak for taxpayers across the country when I say that I would rather not shell out these big bucks,” noted one friend. In the abstract, that might be the case, but we know for certain that doing nothing could have resulted in a financial calamity, so maybe a few 3% swings isn’t the worst thing in the world. In other words, a fence at the top of a cliff is better than an ambulance at the bottom. There will be plenty of time to point fingers and beat our chests about how unfair this whole situation has been, but let’s get things stable before the ambulance arrives.
As Robert Jenkins, the chairman of Investment Management Association said last week, “The crisis arose from the combination of greed, imprudence and leverage. Greed is not new. Reckless lending is not new. Imprudent borrowing is not new. What is new and what distinguishes this credit crunch from past excesses is the unprecedented level of leverage. We will not outlaw greed and cannot legislate against stupidity. But regulators can and must address the issue of leverage.” And indeed we all hope that regulators will refocus and become proactive in the future. But for now, I know that I speak for most investors when I say that all we want is a few days where we can escape history-making headlines or game-changing deals. We just want a few moments of calm, when we can dip our toes in the water without fearing the next massive wave.
Friday, September 19, 2008
Giddy Up
Remember on Seinfeld when Kramer was so excited that he exclaimed, “Giddy Up”? Well markets decided to saddle up yesterday and see what it’s like to trade higher—certainly a novel idea as “the most significant financial crisis since the Great Depression” continues to unfold (Note to the networks—love the new graphics!)
After being down 150 points at 1:00 pm or so, stocks meandered to the unchanged line. Then at approximately 3:00 pm, something happened…all of the sudden, buyers piled into equities, as reports emerged that the federal government was about to take steps to create the mother of all bailouts. While there were few details available, the simple notion that the government was going to do something BIG, allowed investors to breathe a sigh of relief. The surge was lead by financial companies as the Dow Jones Industrial Average swung in a 567-point range from the low of the day to the close, ending 410.03 points higher, up 3.9%, at 11019.69. The S&P 500 Index climbed 4.3%, its biggest daily percentage gain in nearly six years, to end at 1206.33 and the Nasdaq Composite Index leapt 4.8%, its biggest daily move in more than five years, to end at 2199.10 as big technology companies posted solid gains. Gold had closed before the bailout news hit, so it is likely that yesterday’s nearly $50 move up will be erased today.
Markets had been trading higher earlier in the day on Thursday after the Fed authorized a $180 billion expansion of its swap lines with other world central banks. But soon that was not enough, so Henry Paulson and Ben Bernanke, (the President and Vice President of our economy), determined that something bigger was necessary. The plan is to create some sort of government agency that would purchase distressed mortgages at deep discounts from banks and other financial institutions. This is something along the lines of the Resolution Trust Corp. (RTC), which was a key tool to liquidating holdings of failed savings and loans in the late 1980s and early 1990s. Created in 1989, the RTC disposed of bad assets held by hundreds of crippled savings and loans that had been burned in the eighties real estate boom. The RTC closed or reorganized 747 institutions holding assets of nearly $400 billion. By 1995, the S&L crisis had passed and the RTC was folded into the FDIC. The difference is that the 2008 version of the RTC would have the government taking over the distressed assets, not the entire institutions.
Beyond the RTC-like plan, before the opening bell today, the government unveiled a plan to shore up money-market funds, which experienced massive redemptions as one fund “broke the buck” and fear intensified earlier this week. There is likely to be some sort of federal insurance for investors in money market funds (which total $3.4 trillion), akin to the coverage offered by the FDIC for bank accounts. Finally, the SEC (remember them?) is reinstating the temporary ban on short-selling of hundreds of financial stocks. The move comes a day after the UK’s Financial Services Authority (FSA) announced that it was banning short selling on financial stocks until the end of the year. Put all of this together and it looks like another up day for stocks…giddy up!
After being down 150 points at 1:00 pm or so, stocks meandered to the unchanged line. Then at approximately 3:00 pm, something happened…all of the sudden, buyers piled into equities, as reports emerged that the federal government was about to take steps to create the mother of all bailouts. While there were few details available, the simple notion that the government was going to do something BIG, allowed investors to breathe a sigh of relief. The surge was lead by financial companies as the Dow Jones Industrial Average swung in a 567-point range from the low of the day to the close, ending 410.03 points higher, up 3.9%, at 11019.69. The S&P 500 Index climbed 4.3%, its biggest daily percentage gain in nearly six years, to end at 1206.33 and the Nasdaq Composite Index leapt 4.8%, its biggest daily move in more than five years, to end at 2199.10 as big technology companies posted solid gains. Gold had closed before the bailout news hit, so it is likely that yesterday’s nearly $50 move up will be erased today.
Markets had been trading higher earlier in the day on Thursday after the Fed authorized a $180 billion expansion of its swap lines with other world central banks. But soon that was not enough, so Henry Paulson and Ben Bernanke, (the President and Vice President of our economy), determined that something bigger was necessary. The plan is to create some sort of government agency that would purchase distressed mortgages at deep discounts from banks and other financial institutions. This is something along the lines of the Resolution Trust Corp. (RTC), which was a key tool to liquidating holdings of failed savings and loans in the late 1980s and early 1990s. Created in 1989, the RTC disposed of bad assets held by hundreds of crippled savings and loans that had been burned in the eighties real estate boom. The RTC closed or reorganized 747 institutions holding assets of nearly $400 billion. By 1995, the S&L crisis had passed and the RTC was folded into the FDIC. The difference is that the 2008 version of the RTC would have the government taking over the distressed assets, not the entire institutions.
Beyond the RTC-like plan, before the opening bell today, the government unveiled a plan to shore up money-market funds, which experienced massive redemptions as one fund “broke the buck” and fear intensified earlier this week. There is likely to be some sort of federal insurance for investors in money market funds (which total $3.4 trillion), akin to the coverage offered by the FDIC for bank accounts. Finally, the SEC (remember them?) is reinstating the temporary ban on short-selling of hundreds of financial stocks. The move comes a day after the UK’s Financial Services Authority (FSA) announced that it was banning short selling on financial stocks until the end of the year. Put all of this together and it looks like another up day for stocks…giddy up!
Friday, July 11, 2008
Stopping the madness—on the way up and down
One of the hardest things to control in the investment world is the movement to extremes. Sometimes asset classes go parabolic, exploding higher, which leads everyone scrambling to find ways to force a more gradual ascent. Conversely, when the high-fliers take a nose dove, everyone wants it to be a gradual descent, not a crash. Right now, there are dual efforts to limit both the upside and downside in financial markets.
On the upside, there have been Congressional efforts to create more stability in the soaring commodities markets. Lawmakers have discussed everything from banning pension funds from commodities markets (this seems a bit extreme and unlikely to pass) to increasing reporting requirements to setting speculation limits on over-the-counter trading. Yet sometimes the simplest solutions are buried in the conversation.
When I started my career, my stock-trading father marveled at the low margin requirements in the commodity futures and options markets. While poor ol’ Dad had to slap down 50% to trade stocks on margin, my friends and I were only required to put down less than 10% for our trades. I think it’s probably time to increase the margin requirements for commodity futures traders. To that end, Senator Byron Dorgan (D., N.D.), is trying to rally support for raising margins to 25% for any energy traders that aren't commercial producers or purchasers. This would clearly reduce speculative activities, although that does not mean that the price of oil, or any other commodity, will fall. But it might slow down the ride up.
There are also those who believe that evil short sellers are responsible for the current bear market in stocks. I don’t think this is the case, but there has been a significant change in trading rules over the past year. On July 6, 2007 Rule 10a-1 of the SEC 1934 Act, the so-called “Uptick Rule” was eliminated and in my mind, this was a bad decision and has led to increased downside volatility in markets.
The 70 year old regulation attempted to constrain short selling in declining markets by requiring that listed securities be sold short only at a price above their last different sale price. The rule was adopted in response to negative sentiment toward short sellers (sound familiar?) and was enacted to prevent short selling from being used to drive down stock prices in so-called “bear raids” and to limit short sellers from accelerating declines in securities.
The SEC in all of its infinite (and short-sighted) wisdom abolished the rule after determining that it was not necessary. Of course the regulators took this action after a five-year period of rising stock prices and abnormally low volatility. Given the current market conditions, it would seem reasonable to reconsider this decision. With short sales at record levels, rumors swirling on a daily basis and the SEC fighting for its relevancy, it’s time to bring back the Uptick Rule. This action, along with increasing margin requirements, will not stop excesses, but they will help slow them down.
On the upside, there have been Congressional efforts to create more stability in the soaring commodities markets. Lawmakers have discussed everything from banning pension funds from commodities markets (this seems a bit extreme and unlikely to pass) to increasing reporting requirements to setting speculation limits on over-the-counter trading. Yet sometimes the simplest solutions are buried in the conversation.
When I started my career, my stock-trading father marveled at the low margin requirements in the commodity futures and options markets. While poor ol’ Dad had to slap down 50% to trade stocks on margin, my friends and I were only required to put down less than 10% for our trades. I think it’s probably time to increase the margin requirements for commodity futures traders. To that end, Senator Byron Dorgan (D., N.D.), is trying to rally support for raising margins to 25% for any energy traders that aren't commercial producers or purchasers. This would clearly reduce speculative activities, although that does not mean that the price of oil, or any other commodity, will fall. But it might slow down the ride up.
There are also those who believe that evil short sellers are responsible for the current bear market in stocks. I don’t think this is the case, but there has been a significant change in trading rules over the past year. On July 6, 2007 Rule 10a-1 of the SEC 1934 Act, the so-called “Uptick Rule” was eliminated and in my mind, this was a bad decision and has led to increased downside volatility in markets.
The 70 year old regulation attempted to constrain short selling in declining markets by requiring that listed securities be sold short only at a price above their last different sale price. The rule was adopted in response to negative sentiment toward short sellers (sound familiar?) and was enacted to prevent short selling from being used to drive down stock prices in so-called “bear raids” and to limit short sellers from accelerating declines in securities.
The SEC in all of its infinite (and short-sighted) wisdom abolished the rule after determining that it was not necessary. Of course the regulators took this action after a five-year period of rising stock prices and abnormally low volatility. Given the current market conditions, it would seem reasonable to reconsider this decision. With short sales at record levels, rumors swirling on a daily basis and the SEC fighting for its relevancy, it’s time to bring back the Uptick Rule. This action, along with increasing margin requirements, will not stop excesses, but they will help slow them down.
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