Fear of 'Catastrophic' Crash Rising Despite Bull Market
Published: Friday, 18 Feb 2011
4:53 PM ET
By: John Melloy
In an unprecedented move, the number of investors fearing a catastrophic stock market crash is rising even with the stock market at 2 ½ year highs.
The unusual dislocation comes from two distinct reasons: a lack of trust in the U.S. financial markets following the so-called Flash Crash last May and the collapse of Lehman Brothers in 2007.
This means the Flash Crash Advisory Commission that met on Friday has a long way to go in restoring confidence to the point that will bring the individual investor back into a market still ruled by high frequency trading, exchange-traded funds and leveraged hedge funds.
The Yale School of Management since 1989 has asked wealthy individual investors monthly to give the “probability of a catastrophic stock market crash in the U.S. in the next six months.”
In the latest survey in December, almost 75 percent of respondents gave it at least a 10 percent chance of happening. That’s up from 68 percent who gave it a 10 percent probability last April, just before the events of May 6, 2010.
“Even though the market is firing on all cylinders, that fear of big losses still looms large for investors in a way that it didn’t prior to the last bear market,” wrote analysts from Bespoke Investment Group in a report citing the Yale data. “Clearly, the financial crisis and the collapse it caused has impacted investor psyche in a big way.”
In the past, fears of a stock market crash in the Yale survey rose as the market declined because investors lost confidence in the economy and companies as share prices declined, and expected a capitulatory end to a bear market. For example, in March 2009 close to 85 percent of investors gave a crash at least a 10 percent chance of occurring. That record high in distrust and low in confidence marked a 12-½ year low in the S&P 500.
The benchmark has doubled since that low, but investors are not worrying about the prospects for individual stocks as much now now. Instead they are worrying about the still-unchanged system set up by Wall Street and regulators in which equities trade.
The Flash Crash Commission – containing members of the CFTC and SEC – made a series of recommendations for improving market structure Friday, including single stock circuit breakers, a more reliable audit trail on trades, and curbing the use of cancelled trades by high-frequency traders. They still don’t know what actually caused the nearly 1,000-point drop in the Dow Jones Industrial Average in a matter of minutes.
“Nine months after the Flash Crash and the committee is just about getting around to discussing a few things,” said Joe Saluzzi, co-founder of Themis Trading and market infrastructure expert. “This is just the way the high-frequency trading community and their supporters like it. Grind that reform train to a halt. After all, the market has come roaring back and if you didn't sell on May 6th, then nobody got hurt.”
For the agile professional investor, fear of another crash is not really a concern right now. Surveys show bullish sentiment high among the pros. Hedge funds have increased leverage again to pre-Lehman levels. Wall Street banks paid out large year-end bonuses and are about to start paying dividends again. This professional confidence has been reflected in a steady stock market climb since the summer that’s barely experienced a major 1-day drop, let alone crash.
“Though we find the current steady, upward grind in the market to be very unusual, it is important to realize that these low volatility conditions can persist,” said Andrew Barber of Waverly Advisors, in a note. “For instance, from January 2004 to July 2007, 90 day realized volatility in the S&P 500 traded in a range roughly bounded by 7 percent to 13 percent, averaging just above 10 percent for most of that period. Yes, this is 3 1/2 years of volatility roughly equivalent to what we are seeing now.”
Overall volume has been very light in the market though, as the individual investor put more money into bonds last year than stocks in spite of the gains. Strategists said this has been one of the longer bull markets (starting in March 2009) with barely any retail participation. Flows into equity mutual funds did turn positive in January and have continued this month however, according to ICI and TrimTabs.com. Yet the fear of a crash persists.
“Belief in a coming Flash Crash is Chicken Soup for the Underinvested Soul," said Josh Brown, money manager and author of The Reformed Broker blog. “They aren't so much expecting one as hoping for one - so they can rationalize buying into a market that's left them behind.”
stocks
Showing posts with label stock market. Show all posts
Showing posts with label stock market. Show all posts
Friday, February 18, 2011
Sunday, May 9, 2010
You've Got that Sinkin Feeling: The Coming Stock Market Collapse (oh wait, didn't it already?)
nope
Stock market time bomb?
Monday, May 10, 2010
Arnaud de Borchgrave
UPI
Even the world's most savvy stock-market giants (e.g., Warren E. Buffett) have warned over the past decade that derivatives are the fiscal equivalent of a weapon of mass destruction (WMD) - potentially lethal. And the consequences of such an explosion would make the recent global financial and economic crisis seem like penny ante. But generously lubricated lobbyists for the unrestricted, unsupervised derivatives markets tell congressional committees and government regulators to butt out.
While banks all over the world were imploding and some $50 trillion vanished in global stock markets, the derivatives market grew by an estimated 65 percent, according the Bank for International Settlements. BIS convenes the world's 57 most powerful central bankers in Basel, Switzerland, for periodic secret meetings. Occasionally, they issue a cry of alarm. This time, derivatives had soared from $414.8 trillion at the end of 2006 to $683.7 trillion in mid-2008 - 18 months' time.
The derivatives market is now estimated at $700 trillion (notional, or face, value, not market value). The world's gross domestic product in 2009: $69.8 trillion; America's, $14.2 trillion. The total market cap of all major global stock markets? A mere $30 trillion. And the total amount of dollar bills in circulation, most of them abroad: $830 billion (not trillion).
One of the Middle East's most powerful bankers conceded recently that even after listening to experts explain the drill, he still does not understand derivatives and therefore doesn't trust them and won't have anything to do with them. And when that weapon of mass destruction explodes, he explained, "Our bank's customers, from all over the world, will be saved from the disaster."
What's so difficult to understand about derivatives? Essentially, they are bets for or against the house - red or black at the roulette wheel. Or betting for or against the weather in situations in which the weather is critical (e.g., vineyards). Forwards, futures, options and swaps form the panoply of derivatives. Credit derivatives are based on loans, bonds or other forms of credit. Over-the-counter (OTC) derivatives are contracts that are traded and privately negotiated directly between two parties, outside of a regular exchange.
All of this is unregulated. What happens between two parties - notably hedge funds - is like what happens between two individuals who bet on the final score of a football or baseball game. Congressional committees have been warned time and again about "ticking time bombs" and "financial weapons of mass destruction" - to no avail, demonstrating that both the U.S. government and the U.S. Congress are dysfunctional. The need for constitutional reform comes up frequently in Washington think-tank discussions, only to end with the observation that Democrats and Republicans would never agree on anything that momentous.
On May 16, 2006, for example, Richard T. McCormack, vice chairman of Bank of America's Merrill Lynch and former undersecretary of state for economic and agricultural affairs, told a Senate Banking hearing on derivatives and hedge funds in 2006, when the derivatives industry was in the $300 trillion range, "the increasing internationalization of finance and investment suggests the need for an ever-more-global approach to monitoring potentially dangerous problems."
Derivatives played a key role in camouflaging the multibillion-dollar Enron scam in 2001. Similarly, the Long-Term Capital Management (LTCM) hedge fund debacle of 1998 almost slayed the global monetary system. Yet its trading losses was a mere $5 billion. But this derivative-driven collapse seriously threatened the soundness of financial markets.
When the Russian ruble suddenly nose-dived without warning, LTCM found itself exposed with more than $1 trillion in foreign-exchange derivatives. It couldn't pay. The New York Federal Reserve Bank organized a consortium of companies (Bear Stearns, Merrill Lynch, Lehman Brothers) to buy out LTCM and cover its debts. LTCM shareholders were wiped out, but none of the creditors took losses. LTCM was a hedge fund with just 200 employees, but without the New York Fed's intervention, it would have caused a crash felt around the world.
Mr. McCormack pleaded with congressional banking experts to correct any structural or technical problems that could increase the likelihood of systemic risk in the event of future shock to the financial system, such as the Russian default (i.e., debacle) in 1998. No response.
On Feb. 28, 2006, when he was president of the New York Federal Reserve Bank, Treasury Secretary Timothy F. Geithner outlined challenges to financial stability posed by derivatives. No response.
The 2007 U.S. subprime mortgage global disaster was also derivatives-driven - and provoked the biggest financial and economic disaster since the Great Depression.
Mr. McCormack, then a senior fellow at the Center for Strategic and International Studies, explained to the Banking Committee how Italy had secured entrance into the euro by purchasing exotic derivatives that "obscured the true financial condition of the country until after they were admitted" to the new European common currency. No reaction.
The same thing happened with Japan when some banks "purchased derivative instruments, which disguised the actual catastrophic state of their balance sheets at the time." No action.
Today's massive new derivatives bubble is driving the domestic and global economies, far outstripping the subprime-credit meltdown.
Hopefully not belatedly, Congress is considering legislation to curb the use of derivatives and other methods that artificially boost returns. But 13 members of Congress or their wives used derivatives to magnify their daily moves. And one measure proposed by Sen. Blanche Lincoln, Arkansas Democrat, would bar banks from trading in derivatives. This, in turn, would push almost $300 trillion beyond the reach of regulators. Derivatives would become still more opaque. Some say abolish derivatives trading in the U.S. and push it offshore.
The now-bloody Greek tragedy over its debt crisis is echoing through the Federal Reserve and the halls of Congress. Greece's public debt exceeds 100 percent of its economy versus 90 percent (at $13 trillion) for the United States. If you add unfunded U.S. liabilities for Social Security, Medicare and Medicaid, the long-term shortfall is $62 trillion, or about $200,000 for each American. At least that's the estimate of the Peter G. Peterson Foundation. And Peter Peterson himself says he's now in the business of promoting awareness about public borrowing.
With probable trader error plunging the Dow Jones into a 1,000-point tailspin and back up in 16 minutes, economic and financial prognostication made astrology look respectable. Could Greece be a harbinger of ugly things to come for the rest of the world? Prominent investor Marc Faber, hedge fund manager Jim Chanos and Harvard's Kenneth Rogoff told Bloomberg China's economy will slow and possibly "crash" within a year as the nation's property bubble is set to burst.
stock market
Stock market time bomb?
Monday, May 10, 2010
Arnaud de Borchgrave
UPI
Even the world's most savvy stock-market giants (e.g., Warren E. Buffett) have warned over the past decade that derivatives are the fiscal equivalent of a weapon of mass destruction (WMD) - potentially lethal. And the consequences of such an explosion would make the recent global financial and economic crisis seem like penny ante. But generously lubricated lobbyists for the unrestricted, unsupervised derivatives markets tell congressional committees and government regulators to butt out.
While banks all over the world were imploding and some $50 trillion vanished in global stock markets, the derivatives market grew by an estimated 65 percent, according the Bank for International Settlements. BIS convenes the world's 57 most powerful central bankers in Basel, Switzerland, for periodic secret meetings. Occasionally, they issue a cry of alarm. This time, derivatives had soared from $414.8 trillion at the end of 2006 to $683.7 trillion in mid-2008 - 18 months' time.
The derivatives market is now estimated at $700 trillion (notional, or face, value, not market value). The world's gross domestic product in 2009: $69.8 trillion; America's, $14.2 trillion. The total market cap of all major global stock markets? A mere $30 trillion. And the total amount of dollar bills in circulation, most of them abroad: $830 billion (not trillion).
One of the Middle East's most powerful bankers conceded recently that even after listening to experts explain the drill, he still does not understand derivatives and therefore doesn't trust them and won't have anything to do with them. And when that weapon of mass destruction explodes, he explained, "Our bank's customers, from all over the world, will be saved from the disaster."
What's so difficult to understand about derivatives? Essentially, they are bets for or against the house - red or black at the roulette wheel. Or betting for or against the weather in situations in which the weather is critical (e.g., vineyards). Forwards, futures, options and swaps form the panoply of derivatives. Credit derivatives are based on loans, bonds or other forms of credit. Over-the-counter (OTC) derivatives are contracts that are traded and privately negotiated directly between two parties, outside of a regular exchange.
All of this is unregulated. What happens between two parties - notably hedge funds - is like what happens between two individuals who bet on the final score of a football or baseball game. Congressional committees have been warned time and again about "ticking time bombs" and "financial weapons of mass destruction" - to no avail, demonstrating that both the U.S. government and the U.S. Congress are dysfunctional. The need for constitutional reform comes up frequently in Washington think-tank discussions, only to end with the observation that Democrats and Republicans would never agree on anything that momentous.
On May 16, 2006, for example, Richard T. McCormack, vice chairman of Bank of America's Merrill Lynch and former undersecretary of state for economic and agricultural affairs, told a Senate Banking hearing on derivatives and hedge funds in 2006, when the derivatives industry was in the $300 trillion range, "the increasing internationalization of finance and investment suggests the need for an ever-more-global approach to monitoring potentially dangerous problems."
Derivatives played a key role in camouflaging the multibillion-dollar Enron scam in 2001. Similarly, the Long-Term Capital Management (LTCM) hedge fund debacle of 1998 almost slayed the global monetary system. Yet its trading losses was a mere $5 billion. But this derivative-driven collapse seriously threatened the soundness of financial markets.
When the Russian ruble suddenly nose-dived without warning, LTCM found itself exposed with more than $1 trillion in foreign-exchange derivatives. It couldn't pay. The New York Federal Reserve Bank organized a consortium of companies (Bear Stearns, Merrill Lynch, Lehman Brothers) to buy out LTCM and cover its debts. LTCM shareholders were wiped out, but none of the creditors took losses. LTCM was a hedge fund with just 200 employees, but without the New York Fed's intervention, it would have caused a crash felt around the world.
Mr. McCormack pleaded with congressional banking experts to correct any structural or technical problems that could increase the likelihood of systemic risk in the event of future shock to the financial system, such as the Russian default (i.e., debacle) in 1998. No response.
On Feb. 28, 2006, when he was president of the New York Federal Reserve Bank, Treasury Secretary Timothy F. Geithner outlined challenges to financial stability posed by derivatives. No response.
The 2007 U.S. subprime mortgage global disaster was also derivatives-driven - and provoked the biggest financial and economic disaster since the Great Depression.
Mr. McCormack, then a senior fellow at the Center for Strategic and International Studies, explained to the Banking Committee how Italy had secured entrance into the euro by purchasing exotic derivatives that "obscured the true financial condition of the country until after they were admitted" to the new European common currency. No reaction.
The same thing happened with Japan when some banks "purchased derivative instruments, which disguised the actual catastrophic state of their balance sheets at the time." No action.
Today's massive new derivatives bubble is driving the domestic and global economies, far outstripping the subprime-credit meltdown.
Hopefully not belatedly, Congress is considering legislation to curb the use of derivatives and other methods that artificially boost returns. But 13 members of Congress or their wives used derivatives to magnify their daily moves. And one measure proposed by Sen. Blanche Lincoln, Arkansas Democrat, would bar banks from trading in derivatives. This, in turn, would push almost $300 trillion beyond the reach of regulators. Derivatives would become still more opaque. Some say abolish derivatives trading in the U.S. and push it offshore.
The now-bloody Greek tragedy over its debt crisis is echoing through the Federal Reserve and the halls of Congress. Greece's public debt exceeds 100 percent of its economy versus 90 percent (at $13 trillion) for the United States. If you add unfunded U.S. liabilities for Social Security, Medicare and Medicaid, the long-term shortfall is $62 trillion, or about $200,000 for each American. At least that's the estimate of the Peter G. Peterson Foundation. And Peter Peterson himself says he's now in the business of promoting awareness about public borrowing.
With probable trader error plunging the Dow Jones into a 1,000-point tailspin and back up in 16 minutes, economic and financial prognostication made astrology look respectable. Could Greece be a harbinger of ugly things to come for the rest of the world? Prominent investor Marc Faber, hedge fund manager Jim Chanos and Harvard's Kenneth Rogoff told Bloomberg China's economy will slow and possibly "crash" within a year as the nation's property bubble is set to burst.
stock market
Saturday, May 8, 2010
Obama and the Stock Market
Paging George Soros. Four attempts at killing Americans, an economy that continues to worsen (unemployment that is going nowhere but down and the April-May reports to the contrary because the federal government hired more than a half-million people to do the Census ... and this fiasco, coupled with a massive oil spill in the Gulf, an administration that was not on top of things and did not act quickly enough, were so cavalier they were on holiday in Arizona, an administration more concerned about making nice with Mexicans in the US than upholding national immigration and federal laws. One fiasco after another. And this one ... a mistake, an error ... signals the loss of how much wealth - about $1 trillion, wiped out for a period of time. A trillion dollars, and it wasn't because someone pushed the wrong button.
You want to regulate something - here is the perfect opportunity and it won't require you taking over any industry.
CNBC's Bartiromo: 'That is Ridiculous. This Really Sounds Like Market Manipulation to Me'
Network reports 8 stocks went to one penny or zero, which contributed to freefall and drawing ire of 'Closing Bell' anchor.
By Jeff Poor
Business & Media Institute
5/6/2010 6:00:04 PM
While everyone is scratching their heads and trying to figure out how the Dow Jones Industrial Average (DJIA) lost nearly 1,000 points before rallying back to lose only 347 points – it appears not to be limited to just one stock.
On CNBC’s May 6 “Closing Bell,” correspondent Matt Nesto explained that investigators for both the stock exchanges and for Citigroup, the firm that some are pointing fingers at for a so-called trader error, have narrowed it down to a futures index called the E-mini S&P 500.
“A person familiar with the Citi investigation said one focus of the trading probes were the futures contracts tied to the S&P 500 stock index known as the E-mini S&P 500 futures and in particular that two-minute window in which 16 billion of the futures were sold,” Nesto said. “Again, those sources are telling us that Citigroup’s total E-mini volume for the entire day was only 9 billion, suggesting that the origin of the trades was elsewhere.”
Nesto named eight stocks that were hit with the supposed computer error/bad trade, if that’s indeed what happened, that went all the way down to zero or one cent, including Exelon (NYSE:EXC), Accenture (NYSE:ACN), CenterPoint Energy (NYSE:CNP), Eagle Material (NYSE:EXP), Genpact Ltd (G), ITC Holdings (NYSE:ITC), Brown & Brown (NYSE:BRO), Casey’s General (NASDAQ:CASY) and Boston Beer (NYSE:SAM)
“Now according to someone else close to Citigroup’s own probe of the situation, the E-Minis trade on the CME,” Nesto continued. “Now Maria, I want to add something else just in terms of these erroneous trades that Duncan Niederauer, the NYSE CEO was just talking about. I mean, we’ve talked a lot about Accenture, ACN. This is a Dublin-based company. It's not in any of the indexes. If you look in the S&P 500, for example, I show at least two stocks that traded to zero or one cent – Exelon and CenterPoint. If you look in the Russell 1,000, I show Eagle Materials, Genpact, ITC and Brown & Brown, also trading to zero or a penny, and also Casey's General Stores, as well as Boston Beer trading today, intraday, to zero or a penny. So those have at least eight names that they're going to have to track down on top of the Accenture trade, where we have the stock price intraday showing us at least, we'll assume, a bogus trade of zero.”
Nesto calling these trades “bogus” drew backlash from the host and CNBC veteran Maria Bartiromo, who said those trades sounded like “market manipulation” to her.
“ That is ridiculous,” Bartiromo replied. “I mean this really sounds like market manipulation to me. This is outrageous.”
According to Nesto, these are frequent occurrences, at least at the NASDAQ exchange and if you make a trade a lose money, there’s no recourse.
“It happens a lot, Maria. It really does. I mean, we could probably ask the NASDAQ, they may not want to say how often it happens, but it happens frequently. And they go back and they correct. And the thing that stinks is if you in good faith put in a trade and made money and then lost it, you lose it. And there's no recourse and there's no way to appeal
market
You want to regulate something - here is the perfect opportunity and it won't require you taking over any industry.
CNBC's Bartiromo: 'That is Ridiculous. This Really Sounds Like Market Manipulation to Me'
Network reports 8 stocks went to one penny or zero, which contributed to freefall and drawing ire of 'Closing Bell' anchor.
By Jeff Poor
Business & Media Institute
5/6/2010 6:00:04 PM
While everyone is scratching their heads and trying to figure out how the Dow Jones Industrial Average (DJIA) lost nearly 1,000 points before rallying back to lose only 347 points – it appears not to be limited to just one stock.
On CNBC’s May 6 “Closing Bell,” correspondent Matt Nesto explained that investigators for both the stock exchanges and for Citigroup, the firm that some are pointing fingers at for a so-called trader error, have narrowed it down to a futures index called the E-mini S&P 500.
“A person familiar with the Citi investigation said one focus of the trading probes were the futures contracts tied to the S&P 500 stock index known as the E-mini S&P 500 futures and in particular that two-minute window in which 16 billion of the futures were sold,” Nesto said. “Again, those sources are telling us that Citigroup’s total E-mini volume for the entire day was only 9 billion, suggesting that the origin of the trades was elsewhere.”
Nesto named eight stocks that were hit with the supposed computer error/bad trade, if that’s indeed what happened, that went all the way down to zero or one cent, including Exelon (NYSE:EXC), Accenture (NYSE:ACN), CenterPoint Energy (NYSE:CNP), Eagle Material (NYSE:EXP), Genpact Ltd (G), ITC Holdings (NYSE:ITC), Brown & Brown (NYSE:BRO), Casey’s General (NASDAQ:CASY) and Boston Beer (NYSE:SAM)
“Now according to someone else close to Citigroup’s own probe of the situation, the E-Minis trade on the CME,” Nesto continued. “Now Maria, I want to add something else just in terms of these erroneous trades that Duncan Niederauer, the NYSE CEO was just talking about. I mean, we’ve talked a lot about Accenture, ACN. This is a Dublin-based company. It's not in any of the indexes. If you look in the S&P 500, for example, I show at least two stocks that traded to zero or one cent – Exelon and CenterPoint. If you look in the Russell 1,000, I show Eagle Materials, Genpact, ITC and Brown & Brown, also trading to zero or a penny, and also Casey's General Stores, as well as Boston Beer trading today, intraday, to zero or a penny. So those have at least eight names that they're going to have to track down on top of the Accenture trade, where we have the stock price intraday showing us at least, we'll assume, a bogus trade of zero.”
Nesto calling these trades “bogus” drew backlash from the host and CNBC veteran Maria Bartiromo, who said those trades sounded like “market manipulation” to her.
“ That is ridiculous,” Bartiromo replied. “I mean this really sounds like market manipulation to me. This is outrageous.”
According to Nesto, these are frequent occurrences, at least at the NASDAQ exchange and if you make a trade a lose money, there’s no recourse.
“It happens a lot, Maria. It really does. I mean, we could probably ask the NASDAQ, they may not want to say how often it happens, but it happens frequently. And they go back and they correct. And the thing that stinks is if you in good faith put in a trade and made money and then lost it, you lose it. And there's no recourse and there's no way to appeal
market
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