Rise of the machines sent Dow crashing 1,000 points

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<TABLE border=0 cellSpacing=0 cellPadding=0 width=452><TBODY><TR><TD vAlign=top width=452 colSpan=2>Published May 8, 2010

</TD></TR><TR><TD vAlign=top width=452 colSpan=2>Rise of the machines sent Dow crashing 1,000 points
All hell broke loose on Wall Street for several minutes on Thursday

(New York)

A BAD day in the stock market turned into one of the most terrifying moments in Wall Street history on Thursday with a brief 1,000-point plunge that recalled the panic of 2008.
It lasted just 16 minutes but left Wall Street experts and ordinary investors alike struggling to come to grips with what had happened - and fearful of where the markets might go from here.
At least part of the sell-off was first thought to be linked to trader error - a 'fat-finger trade' when a trader punched in, say, a billion instead of a million.
But the view as more information came in seemed to suggest something far more serious and worrying.
With markets already on edge with the debt crisis in Europe, some now think it was the blind logic of computer trading programs and systems feeding off each other in times of great market volatility that triggered the heart-stopping plunge in the Dow.
'We have a market that responds in milliseconds, but the humans monitoring respond in minutes, and unfortunately billions of dollars of damage can occur in the meantime,' said James Angel, a professor of finance at Georgetown University's McDonough School of Business.
Sensing the seriousness of the issue, market regulators have launched an inquiry into the plunge that left market participants shaken and also dented confidence in US markets around the globe.
The Securities and Exchange Commission and the Commodity Futures Trading Commission said they would 'review the unusual trading activity' and would 'take appropriate steps to protect investors'.
On the trading floor at the height of the panic, traders struggled to keep up as the Dow began its fateful plunge shortly after 2.30 pm - and then mostly rebounded in a matter of minutes.
For a moment, the sell-off seemed to overwhelm computer and human systems alike, and some traders began referring grimly to the day as 'Black Thursday'. But in the end, Thursday was not as black as it had seemed. After briefly sinking below 10,000, the Dow ended down 347.80 points, or 3.2 per cent, at 10,520.32.
But up and down Wall Street and across the nation, many investors were dumbstruck by the plunge. Afterall, how do you explain why a stock like Accenture at one point dived more than 90 per cent to a penny?
On the trading floor of the New York Stock Exchange, traders shouted or watched open-mouthed as the screens lit up with prices plummeting and as phones rang off the hook.
'It was almost like 'The Twilight Zone',' said Theodore Aronson of Aronson, Johnson & Ortiz, a money management firm.
But by noon yesterday it was business as usual more or less, with the Dow sitting about 73 points lower at 10,446.94. -- NYT, AFP
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<TABLE border=0 cellSpacing=0 cellPadding=0 width=452><TBODY><TR><TD vAlign=top width=452 colSpan=2>Published May 8, 2010

</TD></TR><TR><TD vAlign=top width=452 colSpan=2>Japan central bank to pump over US$20b into market

(Tokyo)

JAPAN'S central bank yesterday said it would inject more than US$20 billion in liquidity to calm markets in response to global turmoil triggered by the Greek debt crisis.
Prime Minister Yukio Hatoyama also vowed to take necessary steps as Tokyo stocks closed 3.10 per cent lower and the yen remained at relative highs against the euro following overnight panic selling on US markets.
'I am very concerned,' Mr Hatoyama told reporters. 'The government should take responsible measures,' he added, without specifying what steps his centre-left government was considering.
The Bank of Japan (BOJ) offered to provide two trillion yen (S$30 billion) in liquidity to financial institutions such as banks and brokerages against their collateral pooled at the BOJ, starting yesterday and ending on May 27.
It was the first move of its kind since December during Dubai's sovereign debt scare and the biggest since December 2008 when the financial crisis sparked by the Lehman Brothers collapse in September that year emerged.
'The Bank of Japan aims to increase a sense of security in the markets by providing ample funds,' said BOJ official Yuichi Adachi.
The injection into the short-term money market via a same-day operation was to boost liquidity as investors moved out of the euro, analysts said, before sentiment towards the single currency improved later in the day.
'It was a case of the central bank sending a message to show it was acting swiftly to respond to the market,' said Tsuyoshi Ueno, senior economist at NLI Research Institute.
Eurozone debt fears engulfed Asian markets after US shares on Thursday saw a spectacular intraday fall on deepening concerns that Greece's debt crisis would spread through Europe.
The BOJ said its cash injection aimed to support Japanese stocks by curbing the yen's rise and making financial market conditions more accommodative.
However 'what's underlying the Greek crisis is markets' deep-rooted distrust of the single currency, which global financial markets had never experienced before', Mr Ueno said.
Chief government spokesman Hirofumi Hirano told reporters that Japan must ensure that Greece's problems won't affect the Japanese economy, the world's second largest. He also said the government would make appropriate decisions on foreign exchange by watching market moves. -- AFP
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<TABLE border=0 cellSpacing=0 cellPadding=0 width=452><TBODY><TR><TD vAlign=top width=452 colSpan=2>Published May 8, 2010

</TD></TR><TR><TD vAlign=top width=452 colSpan=2>Once again, greed turns into fear and panic

By R SIVANITHY
SENIOR CORRESPONDENT

THIRTEEN years ago, a collapse in the Thai baht sparked contagion in this part of the world and the Asian financial crisis. Today, it's a collapse in Greece.

<TABLE class=picBoxL cellSpacing=2 width=100 align=left><TBODY><TR><TD></TD></TR><TR class=caption><TD></TD></TR></TBODY></TABLE>The names and dates may be different but the outcome, motivation, emotions and backdrop are the same - complacency and greed eventually turn into fear and panic. And the end-game is, as always, to bail out - or a promise to bail out in the case of Greece.
Still, it would be fair to say the ferocity of selling this week in the wake of the Greek debt crisis took many by surprise. Few people predicted it. Just a fortnight ago, momentum in the major indices was upward, analysts were confidently forecasting 3,200- plus targets for the Straits Times Index (STI), and there was nary a mention of Greece as a possible spanner in the works.
If anyone needed confirmation that markets are hugely inefficient, the week just past provided ample evidence - almost every analyst glossed over the risks posed by Greece's defaults - problems that had been known for months. And all are now scrambling to cover their tracks as they rush for the exits.
On Thursday, the major US indices plunged alarmingly, though all managed to cut their losses to just over 3 per cent by the close. Interestingly, the US authorities were quick to try to calm nerves by attributing some of the pressure to error trades. You have to wonder whether they would have been just as quick if the move had been up and not down.
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</TD></TR><TR><TD bgColor=#fffff1><TABLE border=0 cellSpacing=0 cellPadding=0 width=124 align=center><TBODY><TR><TD vAlign=top>Just a fortnight ago, momentum in the major indices was upward, analysts were forecasting 3,200-plus targets for STI, and there was nary a mention of Greece as a possible spanner in the works.
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</TD></TR></TBODY></TABLE></TD></TR></TBODY></TABLE>Whatever the case, there is no deux ex machina that is usually present in theatrical Greek tragedies, no likelihood of supernatural intervention to enable a sudden resolution of the vexing problem that is Greece's finances. Germany, the euro zone's largest member, is hugely reluctant to dig into its coffers to bail Greece out, Greek citizens are recoiling in horror at the fiscal discipline a bailout demands, and throughout all the hand-wringing, Spain and Portugal are casting nervous glances over their shoulders.
Closer to home, one local broker on Thursday advised traders to position themselves that day for a quick, short-term bounce because it is highly unusual for the STI to fall for five consecutive days. As it turned out, this was one of those rare instances when the index did indeed weaken for five straight days, losing 153 points or 5.1 per cent to 2,821.11, of which 18.54 points were shed yesterday.
Genting Singapore has never been far from the top of the actives list in the past year, and yesterday the stock dropped half a cent to 94.5 cents with 138 million units traded. During the week, UBS Investment Research upgraded the counter from 'sell' to 'neutral' on the ground that mass market gamblers may well be more important than VIP gamblers, and that if this turns out to be the case, Genting will benefit.
In its May Global Equity Strategy on Thursday, Bank of America-Merrill Lynch said a 'buy' signal would come if the S&P 500 holds its 200-day moving average at 1,094; cash balances jump above 4 per cent; the European Central Bank announces a massive bond buying programme and German bond yields rise; China delays further tightening measures; and US payroll data validates US earnings per share hopes.
It also said the lessons to be learned from this week's sell-off are: 'The excess liquidity phase of the bull market is coming to an end; European deflation is a huge risk; market differentiation between creditors and debtors will grow; companies are safer than countries; best-of-breed stocks to outperform.'


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<TABLE border=0 cellSpacing=0 cellPadding=0 width=452><TBODY><TR><TD vAlign=top width=452 colSpan=2>Published May 8, 2010

</TD></TR><TR><TD vAlign=top width=452 colSpan=2>The dark side of high-speed trading
Thursday's 1,000-point plunge in the Dow brings into focus a worrying trend in the US stock market trading system

(New York)

THE glitch that sent US markets tumbling on Thursday was years in the making, driven by the rise of computers that transformed stock trading more in the last 20 years than in the previous 200.
The old system of floor traders matching buyers and sellers has been replaced by machines that process trades automatically, speeding the flow of buy and sell orders but also sometimes facilitating the kind of unexplained volatility that roiled markets on Thursday.
'We have a market that responds in milliseconds, but the humans monitoring respond in minutes, and unfortunately billions of dollars of damage can occur in the meantime,' said James Angel, a professor of finance at Georgetown University's McDonough School of Business.
In recent years, what is known as high-frequency trading - rapid computerised buying and selling - has taken off and now accounts for 50 to 75 per cent of daily trading volume. At the same time, new electronic exchanges have taken over much of the volume that used to be handled by the New York Stock Exchange (NYSE). In fact, more than 60 per cent of trading in stocks listed on the NYSE takes place on other, computerised exchanges.
The Securities and Exchange Commission and the Commodity Futures Trading Commission are examining the cause of the unusual trading activity.One official said they identified 'a huge, anomalous, unexplained surge in selling, it looks like in Chicago', at about 2.45pm.
The source remained unknown, but that jolt apparently set off trading based on computer algorithms, which in turn rippled across all indexes and spiralled out of control. Many firms have computers that are programmed to automatically place buy or sell orders based on a variety of things that happen in the markets. Some of the simplest triggers are set off when a stock drops or rises a certain per cent in the trading day, or when an index moves a specific amount.
But these orders can have a cascading effect. For example, if enough programs place sell orders when the overall market is down, say, 4 per cent in a single day, those orders could push the market down even more - and set off programs that do not kick in until the market is down 5 per cent, which in turn can have the effect of pushing stocks down even more.
Some circuit breakers do exist, a legacy of the reforms made following the 1987 stockmarket crash, but they only kick in after a huge drop - and only at certain hours. Before 2pm, a 10 per cent drop in the Dow causes the NYSE to halt trading for one hour.
Between 2pm and 2.30pm, the pause shrinks to a half-hour and after 2.30, there is no halt in trading. If there is a 20 per cent drop, trading stops for two hours before 1pm and by one hour between 1pm and 2pm. After 2pm, the market closes.
Glitches in individual stocks have happened before - what was different on Thursday was the scale of the problem. -- NYT
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<TABLE border=0 cellSpacing=0 cellPadding=0 width=452><TBODY><TR><TD vAlign=top width=452 colSpan=2>Published May 8, 2010

</TD></TR><TR><TD vAlign=top width=452 colSpan=2>Show me the money
</TD></TR><TR><TD vAlign=top width=452 colSpan=2>Some theories to navigate the Greek crisis
As Greece's plight begins to morph into a global problem, investors here in Asia might want to review their strategy

By TEH HOOI LING
SENIOR CORRESPONDENT

WILL the Greek debt crisis cause a repeat of the 2008 market carnage? Will it be as bad as the Asian financial crisis of 1997-98? These questions were discussed during a dinner on Wednesday last week among a few savvy investors.

<TABLE class=picBoxL cellSpacing=2 width=100 align=left><TBODY><TR><TD></TD></TR><TR class=caption><TD>GETTING TOUGH
Riot police cordoning off Greece's parliament during an anti-government rally in Athens on Thursday as tens of thousands of people protested against the drastic austerity cuts approved by lawmakers</TD></TR></TBODY></TABLE>When one opined that he did not think things would get as bad as the two previous crises, another countered: 'Are you saying that Lehman Brothers is bigger than the country of Greece?'
The latter said he would be selling everything in his portfolio the next day. 'We've all seen in the past few crisis that it doesn't matter how good a stock is fundamentally,' he said. 'When the market is gripped by fear and uncertainty, the selling will be indiscriminate. Even solid companies can go down by 40, 50 per cent if not more.'
Markets rebounded last week as signs emerged that Greece would get a rescue package. But this week they were hit by yet another bout of panic. The fear is that even with the rescue package, Greece may end up insolvent. And then there is the bigger fear of contagion, of the crisis denting confidence in the bonds of other weaker European countries, sparking another sovereign debt crisis, infecting the global financial system and derailing economic recovery.
Consequently, there was massive sell-off of risky assets worldwide this week. Not helping was the 1,000-point plunge in the Dow Jones Industrial Index on Thursday.
According to The New York Times, amid the rout, one of the biggest fears of the financial markets is becoming a reality. New signs of stress have emerged in the credit markets. European banks seem to be growing wary of lending to one another, suggesting the debt crisis is entering a more dangerous phase, it reported.
'There is a recognition that the Greek crisis has morphed into not only a European crisis but is going global,' the chief executive of money manager Pimco, Mohamed A El-Erian, was quoted as saying.
The scale of the current stage in the crisis was evident in the news yesterday that the Bank of Japan was offering two trillion yen (S$30.17 billion) in short-term loans to commercial banks to boost liquidity after the US dollar tumbled. 'We would like to ensure stability in financial markets by providing ample funds to banks,' Bank of Japan official Yuichi Adachi said. He declined to elaborate.
In a commentary in the Financial Times, Mr El-Erian mapped out how the Greek crisis can be transmitted to the rest of the world. 'The transmission mechanisms involve trade, capital flows and the very functioning of markets; and the consequences range from the certain to the balanced, and to the truly unpredictable,' he wrote.
'It is certain that the Greek crisis will undermine aggregate demand and, therefore, trade flows - directly and, more importantly from a global perspective, by imparting an additional fiscal drag to other European countries.
'This will strengthen the structural headwinds that are already weakening what has been a robust global cyclical recovery. It will also complicate the much-needed hand-off from temporary drivers of growth (government stimulus and inventories) to more sustainable ones (components of private final demand).
'This is most consequential for countries that export heavily to the eurozone. Some are neighbouring countries, such as Norway, Sweden, Switzerland and the UK. Others are further away, such as Singapore and Russia.
'The second transmission mechanism pertains to capital flows and is more nuanced. Several countries, led by the US, stand to benefit from a re-allocation of capital away from the eurozone as investors react to both the deterioration in sovereign risk and the surge in volatility. As for the capital that flows just within the eurozone, there will be an even greater differentiation in favour of the solid core countries, particularly Germany.
'These flows are already happening. They will become even more pronounced in the weeks and months ahead as institutional investors revise their investment guidelines to exclude highly volatile government exposures from their 'interest rate' bucket.
'The third transmission mechanism is the most unpredictable. Over the next few months and years, we should expect politically-driven changes to regulations that aim to lower the risk of contagion and dampen cross-border capital flows. And for the next few days, we should worry about cascading disruptions in the European banking system as interbank activities are undermined by renewed uncertainties about each institution's exposures to peripheral European names.
'The Greek crisis has already morphed into a regional (eurozone) shock. It now stands on the verge of morphing into a more global phenomenon.'
While the scenarios painted are decidedly grim, nobody knows for sure how the crisis will play out. In the mean time, here are a few theories to help readers better navigate events.
The world has a vested interest in not ending. This is the observation made by James Dondero, co-founder of Highland Capital Management. A solution will be thrashed out, sooner or later. But of course, things may get worse before they get better. And while this could prove to be another buying opportunity, be sure to space out your deployment of cash. Market softness may be the order of the day for the next three months, until after the World Cup in July.

Don't believe everything you read. There are a lot of trades in the bonds or derivative markets that will benefit from the market volatility. As Mr Dondero noted: 'There is market manipulation that happens in the derivative and debt markets overall which is not illegal. It is, however, illegal in the equity market - you can't buy positions in stocks or have short positions and then spread rumours or innuendoes.' Given that, one must be vigilant of the fact that some of the comments on the macro market may have other ulterior motives.

A crisis is the best time to pick up good-quality blue chips. In normal times these stocks trade at a premium to the market. Only market-wide panic reduces their prices to levels that are appealing to value investors.

Finally, there's a conspiracy theory out there that tries to explain what's happening in the global financial market today. The theory goes like this: The US is now in a weak financial position. China has been gaining economically. The US will not sit back quietly and watch as the East rises. By triggering a debt crisis in Greece, the US is killing several birds with that proverbial one stone.
One, it is dealing a blow to Chinese foreign reserves held in euros. China has been selling its US-dollar holdings and switching to euros.
Two, in the ensuing panic, the US dollar strengthens because it is seen as the more stable currency. This, as noted by Pimco's Mr El-Erian, is already happening.
And three, the US could have already placed bets against the euro or eurozone instruments. The crisis is an opportunity for it to refill its coffers - just as it did during the Asian financial crisis.
While most conspiracy theories are eventually proved to be more fiction than fact, they do make for interesting dinner conversations.
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<TABLE border=0 cellSpacing=0 cellPadding=0 width=452><TBODY><TR><TD vAlign=top width=452 colSpan=2>Published May 8, 2010

</TD></TR><TR><TD vAlign=top width=452 colSpan=2>Surviving a fragile market
As new storm clouds gather, fund managers and bankers give their views of what investors can do to ride out the uncertain environment. By Genevieve Cua

JUST when you begin to heave a sigh of relief that markets seem to be on the mend after the nerve- wracking crisis of 2008, storm clouds appear to have gathered yet again.

<TABLE class=picBoxL cellSpacing=2 width=100 align=left><TBODY><TR><TD></TD></TR><TR class=caption><TD>WHAT TO DO NOW?
Market players leaving the New York Stock Exchange after the closing bell on Thursday. Experts recommend that investors stay liquid and diversified
</TD></TR></TBODY></TABLE>Greece's debt crisis has been on the boil in the last few months and it has won a bailout package. But concerns have intensified over the question of contagion in Europe - that is, whether countries such as Spain, Portugal, Italy and Britain could suffer a similar debt crisis.
As if that was not enough, the US market plunged 1,000 points briefly on Thursday before whipsawing back up. While it was reported that the gyrations could be caused by human error or a trading glitch, US regulators have offered little clarity.
What should you as an investor do? Here is a round-up of expert views.
Jennifer Tay, Citi Private Bank managing director and head of investment advisory and sales unit (Asia Pacific)
'The overnight steep drop was a confluence of a few factors: There are no 'circuit breakers' for the electronic exchanges in the US. The reported electronic mishap led to an almost 1,000-point drop in the market at one stage on Thursday. The decline to advance of 6 to 1 was unprecedented. The drop was probably precipitated by a nervous market, already worried about the possible Greek debt crisis contagion effect and slowdown fears in China.
'We have been communicating with our clients to give them some perspective of the overnight situation and to update them on the impact on their portfolios. Our clients are generally well diversified and we have been cautious. Thus they have not panicked or suffered much in the current situation. For clients looking to get back in, we advise them to stay on the sidelines till the dust settles, when there'll be opportunity to pick up good value. The markets are probably still nervous and subject to event risk. Any bad news will spook a market already on tenterhooks.
'Since the beginning of the year, we have advocated that clients take money off the table when they have made good money, to switch into value situations and to hold appropriate hedge funds.'
Al Clark, Schroder Investment Management Asia-Pacific head of multi asset
'Thursday night highlights the reality that global markets remain fragile. Although blamed on trader error, the steep declines demonstrate there is still a lot of nervousness around risk. This is predominantly due to the ongoing concerns on sovereign default risk in Europe and the threat of contagion from Greece to other markets. Large imbalances still exist in the global system and the trend of increasing government debt to meet the latest required bailout only increases the imbalances. While interest rates remain low, this dynamic is likely to continue and so it is unlikely that we are embarking on a major correction. We believe the primary catalyst will be an increase in rates in the major markets, something not evident on Thursday night.
'We are advising clients to remain liquid and well diversified - the same advice we have given since the crisis began in 2007. Given the persistent global imbalances, we have been wary of investment markets and expected periods of increased volatility. Thursday night does not really come as a surprise, although the scale of some of the losses at the worst point were surprising.'
Christian Nolting, Deutsche Bank Private Wealth Management lead strategist (Asia-Pacific) and regional head of portfolio management
'In such a market environment, instead of speculating on market levels, it is very helpful to have the right asset allocation going into a market correction. To this end, (our investment committee's) portfolio does not have a very high exposure to risky assets which is clearly helpful. This also leaves us enough room to manoeuvre in volatile markets.
'The current market environment further emphasises the need for diversification and dynamic asset allocation. Potentially, the asset allocation approach has been found to be one of the most effective in managing clients' wealth over the long term.'
Emil Wolter and Dylan Cheang, RBS
'Against a rapidly deteriorating financial situation in Europe, we have to acknowledge that the risk of systematic pressures on the global financial system is rising. In this context, the rapid upward moves in Libor and gold are not good signs.
'We have been of the view that Asia and emerging markets will underperform their developed peers. This remains our stance, given elevated valuations, widespread ownership (illustrated by strong fund inflows) and the markets' high sensitivity to changing risk premiums (through dependence on foreign capital flows).
'We believe the risk-reward for telecoms remains the most compelling of all the sectors, with very limited downside and good upside from dividends . . . We believe high dividends are the principal attractions of utilities, Malaysia, Singapore and New Zealand.'
Hartmut Issel, UBS Wealth Management Singapore head of research
'The nervousness was mostly triggered by fear of contagion in Europe and financial infection (although Chinese tightening also had an effect). Heightened risk aversion with investors pulling out of risky assets ensued.We believe that part of the issue is that European governments as well as the ECB have been procrastinating. This indecision is probably the biggest risk factor and if it continues, it could mean another 5-10 per cent downside.
'The problem needs to be contained. Otherwise the risk is that investors may focus on the UK and US, which are also not in great financial shape. A signal from policy makers towards bond monetization (e.g. the ECB buying government bonds in the secondary market) would provide relief and in all likelihood stabilise markets.
'On a different note, the recovery is still strengthening and for some countries like Germany the risk is even to the upside as the weak euro helps exporters. Other than southern European bonds we do not generally believe we should sell at these levels, even though the road is bumpy. We continue to focus on high dividend yield stocks to cushion returns.
'Interestingly, from a technical point of view, fear gauges such as the VIX volatility indices indicate a level of concern and some markets look oversold, but more direction from policy makers is probably needed to support a discernible bounce back.'
Paul Leo, UOB Private Banking head of investment products and advisory
'It is definitely potentially very serious when more than one country or a whole region threatens to be impacted . . . Markets will only stabilise if investors are convinced that Greece and other distressed countries have the determination and tenacity to follow through an austerity drive like what Sweden did previously.
'About two weeks ago when there were early signs that the situation was not about to improve, we advised clients to take partial profits. Not knowing how deep the correction is going to be, it is prudent to take some profits off the table so that when the time is right, clients can get back in. If you have not done anything, then you should sit tight and ride this out.'

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<TABLE border=0 cellSpacing=0 cellPadding=0 width=452><TBODY><TR><TD vAlign=top width=452 colSpan=2>Published May 8, 2010

</TD></TR><TR><TD vAlign=top width=452 colSpan=2>Adult supervision needed?
Frayed nerves, trader error and sudden panic produced one of the wildest days ever in financial markets this week

By FLOYD NORRIS
(New York)

<TABLE class=picBoxL cellSpacing=2 width=100 align=left><TBODY><TR><TD></TD></TR><TR class=caption><TD></TD></TR></TBODY></TABLE>COMBINE one part nervous traders, one part Greek crisis and one part trader error. Stir in one part central bank complacency. Bring to boil. Panic.
That combination produced one of the wildest days ever in financial markets, with the Dow Jones industrial average, at one point, down almost 1,000 points while the euro sank to its lowest level in more than a year. There were substantial declines in emerging markets, whose economies had seemed to be booming, and in developed markets fearful of renewed recessions.
Even though a substantial part of the worst plunge appeared to be linked to a trader error - one US$40 stock fell for a time to one penny - prices had fallen around the world even before such mistakes began to happen.
It appears that investors are again growing more hesitant to own assets like stocks and bonds, particularly since many now cost far more than they did only a few months ago. Another sharp retrenchment by investors, consumers and businesses could threaten the current global recovery by choking off financing and new orders for companies.
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</TD></TR><TR><TD bgColor=#fffff1><TABLE border=0 cellSpacing=0 cellPadding=0 width=124 align=center><TBODY><TR><TD vAlign=top>The wild gyrations serve as a reminder that the efficient markets hypothesis is not a very good model of what actually happens. Markets were far too optimistic in 2006, and ridiculously pessimistic in early 2009.
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</TD></TR></TBODY></TABLE></TD></TR></TBODY></TABLE>For much of the last 14 months, the prices of risky assets around the world have been rising rapidly. That recovery, from lows reached in March 2009 amid talk of a new Great Depression, both reflected and encouraged a revival in economic activity. Manufacturers in most countries this week reported rapidly growing order books.
The most recent recession was made in the United States, and to a large extent it was unmade there as well. If it was the sub-prime mortgage market and other credit excesses that sent markets reeling, it was also a willingness of the American government, including the Federal Reserve Board, to plough in money when fears were at their highest that helped to bring those markets and economic activity back.
For the last several months, worries have been alternately rising and receding that the next crisis would be made in Europe, where Greece has faced the possibility of default. Europe and the International Monetary Fund have announced plans for a bailout, but there have also been riots in Greece amid anger over the steep budget cuts being forced on the country.
On Thursday, Jean-Claude Trichet, the president of the European Central Bank, said at a news conference that the bank's governing council had not even discussed the possibility of buying government bonds. That was taken as a disappointment by some traders, who had hoped the central bank would follow the Fed's lead in spreading liquidity around if conditions grew worse.
Instead, fears are growing that Europe, which is worried that the crisis in Greece could be followed by ones in Portugal and Spain, will follow the pattern laid down by the US government in 2007, when officials offered frequent reassurances that the sub-prime mortgage problem was 'contained' but delayed taking the bold action that finally did stop the panic.
The height of panic on Thursday was reached shortly after lunchtime in the United States. First some currencies began to fall rapidly, with the euro suffering especially against the Japanese yen.
That could have been an indication that some large traders were unwinding positions. It has been popular to borrow yen at low interest rates and then use the money to speculate in higher yielding assets denominated in other currencies. Anyone unwinding such a trade would buy yen to repay the loan.
Then, within a few minutes, the US stock market appeared to be collapsing. Some of the decline was real, but another part of it was simply trading gone awry.
Obstacles in Europe
Temporary plunges in the price of Procter & Gamble and 3M cost the Dow about 300 points, and appeared to be the result of errors, not intentional sell orders. Similarly, consulting firm Accenture fell from more than US$40 a share to one penny.
By the close of the day, the Dow was down 347.8 points, or 3.2 per cent, to 10,520.32.
There were also substantial declines in most major European and Asian indexes. In Greece, however, the stock market put on a small rebound after falling to a 13-month low on Wednesday.
Europe faces many obstacles in trying to deal with the growing crisis there. The European Central Bank, which handles monetary policy for the 16 countries in the eurozone, has fewer powers than the Fed does, and there is no Europe-wide government with powers to act quickly. Even now, after months of talking, the Greek bailout has not been approved by all whose approval is needed. The German parliament was expected to approve it yesterday.
Moreover, the American crisis developed before budget deficits spiralled upward. Coming up with cash now would be harder, a fact Mr Trichet pointed to when he called on European governments to cut their budget deficits.
Spending large amounts of cash to bail out European governments is unlikely to be popular with voters in countries that are not in trouble, but a failure to do so could threaten many financial institutions around the continent.
A traditional way to reduce debt is to devalue currencies, which leaves the outstanding debt worth less. Countries in the euro zone cannot do that, which is one reason Greece is in such difficulty.
But some investors seem to expect that eventually worldwide inflation will form a significant part of the solution, enabling governments and other debtors to pay back loans with currencies worth less than when the loans were made. In the last few days, while the Standard & Poor's 500-stock index has lost 6 per cent of its value, the price of 30-year inflation-indexed Treasury security has risen by almost 4 per cent.
There is no way to know whether this week's jitters will be put aside as more good economic news is released, or whether Europe's woes will create a repeat of the growing panic that engulfed American markets not that long ago.
In the second case, this could be another one of those times when markets move from one extreme to the other. In the autumn of 2008, the collapse of Lehman Brothers sent investors fleeing. The following spring, hopes that the bailouts and stimulus plans were working helped to begin a strong bull market in nearly every asset category.
If this is another turning point, some of the winners will be those who, by luck or vision, managed to sell securities while the selling was easy. On Tuesday, Beazer Homes, a builder that was almost given up for dead in 2009 - when its shares traded for less than 25 US cents - managed to raise US$350 million selling new shares and new bonds. The money will go to refinance debt that otherwise could have forced the company into bankruptcy.
Public hostility
By the close on Thursday, investors who bought shares at that offering, paying US$5.81, had lost almost 10 per cent of their money as the stock closed at US$5.25.
All this is taking place as the US Senate debates financial reform amid considerable public hostility to banks. That no doubt will lead some on Wall Street to say that the markets are warning against making regulation too harsh, but the wild gyrations also serve as a reminder that the efficient markets hypothesis is not a very good model of what actually happens.
Markets turn out to be very bad at assessing values under some circumstances. They were far too optimistic in 2006, and ridiculously pessimistic in early 2009.
That is not a reason to get rid of markets, if only because any alternative, like letting judges and government officials set values, would likely be worse. But it does serve as a counterpoint to the infatuation with markets that led to the creation of a virtually unregulated shadow financial system. Those who believe in regulation will point to that, and say that if this wild ride continues, it will provide further evidence that markets need adult supervision. -- NYT<SCRIPT language=javascript> <!-- // Check for Mac. var strAgent; var blnMac; strAgent = navigator.userAgent; strAgent.indexOf('Mac') > 0 ? blnMac = true:blnMac = false; if (blnMac == true) { document.write('
'); } //--> </SCRIPT>
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[halsey02]

STI component stocks, mostly "members" companies...

Question: If you had spotted the share on Dow Jones at that particular seconds that fell to US$.01cts, you buy 1,000 lot ( lot of 100), will that trade be honoured?, or the contract will be cancelled?

Just asking the experts on Down Jones out there!

 

[johnny333]

Question: If you had spotted the share on Dow Jones at that particular seconds that fell to US$.01cts, you buy 1,000 lot ( lot of 100), will that trade be honoured?, or the contract will be cancelled?

Just asking the experts on Down Jones out there!

No expert, but I heard they are going to disallow trades that were carried out during the glitch.

 

[chobolan]

b-u-m-p.........

 

[Taishi Ci]

Stock brokers in front of a board displaying the German shared index DAX. Fears are increasing over the instability of the eurozone and the escalating Greece's debt crisis. - AFP

 

[Taishi Ci]

A youth writes "I will burn you" below an arrow pointing at the Greek Parliament during a protest. - AFP

 

[chobolan]

A Greek riot policeman runs away from a fire after a group set fire with a molotov cocktail, during a May day protest in Athens. - AFP

 

[lolabunny]

Jennifer Tay, Citi Private Bank managing director and head of investment advisory and sales unit (Asia Pacific)
'[COLOR="_______"]The overnight steep drop was a confluence of a few factors: There are no 'circuit breakers' for the electronic exchanges in the US.[/COLOR] The reported electronic mishap led to an almost 1,000-point drop in the market at one stage on Thursday. The decline to advance of 6 to 1 was unprecedented. The drop was probably precipitated by a nervous market, already worried about the possible Greek debt crisis contagion effect and slowdown fears in China.

THERE ARE CIRCUIT BREAKERS.

The trigger point just wasn't hit so the circuit breaker wasn't triggered.

How did Jennifer Tay get to be MD?