Archive for May, 2010
After the “Flash Crash”, the Market Continues to Soar
Posted by Jody Eisenman | Filed under Uncategorized
It’s been quite a week! After Thursday’s 1000 point inter-day slide where the DJIA dropped briefly below 10,000, we have now rebounded to almost 10,900 in just four trading days. Of course, the European Unions’ bailout of Greece had a lot to do with this. Investors and many economists now believe that we are coming out of a recession and moving quickly towards a recovery. Although the unemployment rate is still high, low interest rates and a good first quarter of earnings has helped the equity markets continue to move higher.
I would be remiss if I did not discuss the gold situation. The price of gold is generally thought to be tied to economic crisis situation. The way the theory goes, if the world situation is unstable politically or economically, people will flock to gold. However, it seems strange that the price is rising in the face of a supposed economic recovery. Gold closed today around $1240 per ounce. A year ago it was around $900. Five years ago it was just over $400. There is clearly a strong sentiment toward this precious metal as either a hedge or potential safeguard against economic disaster.
I am currently at a conference in Palm Beach. Here is how one conversation went with a woman I will call Sandy:
Sandy: The dollar could go to zero, so people like to hold physical gold (as opposed to a gold fund or ETF).
Me: Do you really think the dollar could go to zero?
Sandy: I don’t know. Maybe.
Me: If the dollar went to zero, don’t you think there would be riots in the streets, and the most valuable commodity would be a gun?
Sandy: I guess you’re right.
I don’t have a strong opinion on gold.
The Fat Finger Revisited
Posted by Jody Eisenman | Filed under Uncategorized
After Thursdays’ trading debacle, the regulators are continuing to investigate just what caused the mysterious market sell off. As such, they have decided to cancel all trades that were executed 60% away from the market. In spite of this, there seems to be no consensus on what exactly caused this mysterious drop. My own thoughts on this are as follows:
1. I don’t believe the “fat finger” theory. Every firm that I know of, including my own, has trading limits in place. No one can enter an order over a certain amount in order to prevent one trade putting a firm out of business. It is inconceivable to me that Citi (where this trade supposedly originated) did not have the same limitations in place. In addition, the firm denies this ever happened.
2. As for the rumor that a large hedge fund was being liquidated, I don’t buy this either. No sophisticated investment firm would dump all their positions in a market order this way.
So what really happened? It’s my belief that the trading technology of the NYSE failed. The orders kept coming, but the system showed no bids to receive them. As such, some of these trades were executed at ridiculous prices. Why don’t they admit it? I think that they don’t wish to admit that this could happen, as this can really spook investors. Investors are already shaken up, and this would just make it worse.
As expected, Friday was chaotic, with the market swinging back and forth all day. At the close, we fell an additional 140 points, which wiped out all gains for the year. The VIX volatility index soared to over 40, which is more than a double from where we closed on Monday. Quite a week!
Right now, all eyes turn to Europe, as the EU debates on whether to approve the Greek bailout. I believe it will finally get done, (which could lead to a bounce) but the volatility in the markets may continue for some time.
Wow! The Fat Finger Story
Posted by Jody Eisenman | Filed under Uncategorized
After my comments yesterday, I was not surprised by the continued selloff. However, in over 25 years of working on Wall Street, I have never seen a day like today. See Chart:http://www.google.com/finance?q=INDEXDJX:.DJI
The Dow plunged about 700 points in an incredible 15 minutes. It then proceeded to recover 500 points in another 20 minutes. After touching 10,000, we finally rallied back to close at 10,520, a loss of “only” 347 points. What happened? Well, the original trigger was and continues to be the debt crisis in Greece. Greece has roughly $400BB in outstanding debt. As rates keep on rising, their debt service (meaning the interest they pay of these bonds is increasing). As such, the day of reckoning is rapidly approaching. In order to stay solvent, they must accept a bailout from the International Monetary Fund (IMF) and the European Union (EU), which is looking increasingly likely. However, the lenders are demanding an austerity program to ensure that expenses are cut. Predictably, the bill was accompanied by riots in the streets of Athens. Many economists are frightened that these debt issues could spread to Italy, Ireland, Portugal and Spain.
While all this was going on, the futures began to plunge and the stock market went with it. The rumor is that some trader at Citi meant to enter an order for 15 million, and hit the wrong key and made it 15 billion. The matter is currently under investigation, and Citi denies that it happened. There were also rumors that a large hedge fund collapsed. However, what is unquestionable is that as we move more and more toward electronic trading and remove human involvement, there is no one to question any orders, or to “slow down” the process. As such, the trades were executed at insane prices. To give you an idea of what that means, CTL opened today at 34.48, closed at 33.52, yet traded down inter day to 11.16. PG (Proctor and Gamble) lost $25 at one point on no news. Accenture (ACL) closed over $40, yet traded as low as a penny! For that matter, so did G and CNP! There are going to be a lot of very unhappy investors tomorrow morning. The VIX exploded over 40 at one point and finally closed at 32.80.
There is no question that the overall volatility in the markets has increased dramatically. I’m pretty confident in stating that unless some changes are made, this could very easily happen again. I am actually looking for buying opportunities here, but for the average investor, I would remain very cautious until the action returns to normal (whatever that means!) I expect the volatility to continue in the near term.
