News round-up: 24 Oct 2008

Where can we start? There is so much news – all of it negative, I have news coming out of my ears. Let me do this news round-up a bit more like a live-blogging session then.

All of this started, in my opinion, because credit markets seized up and a lot of international banks needed to roll over their dollar-denominated debt. That meant dollar demand went through the roof. The dollar started to go way up.

At the same time, people started to realize that Europe and Asia and the Emerging Markets were looking as bad as the U.S. and that interest rate cuts were coming. Translation: no carry trade for anyone. So, the Japanese started buying Yen like made because they wanted out of foreign currencies where they had been investing at higher yields. This is why the Yen is increasing even more dramatically than the dollar.

This was then followed by a realization that the real ecoomy fallout was not only going to be large, but also global. A number of smaller countries were collapsing and needed an IMF bailout: Hungary, Iceland, Argentina, Ukraine and Pakistan at a minimum.

The long and short of it all is that people expect a deep, deep global recession and we are seeing a wholesale crash and rush out of risky assets.

My inkling is that this selloff we are seeing is an unwind of leveraged positions by he hedge fund community. These people are forced sellers because of redemptions.

My news synopsis follows. Expect heavy editing.

News synopsis
This is pure panic. It’s time to start hiding under the desk. Yesterday looked so promising — what happened?

The global markets are chaotic with declines beginning in Asia and continuing into Europe. Most equity markets have been down 7-11%. People are fleeing risk everywhere. The S&P Futures are limit down -60 meaning that they will open at a steep loss over 6%. Dow futures are trading at -550 limit down. Nasdaq futures are -85, limit down. (See pre-market data here.)

Watch relative sector performance for a read on what is actually happening here. I expect technology, financials, materials, and consumer cyclicals to underpreform signaling a deep recession. Strong companies like Microsoft or Nestle, which both posted good earnings recently, should outperform.

The S&P ETF is trading at -8.9%. That means we will open with an hour Level 1 halt of trading on the NYSE.

From the NYSE website:

NYSE Circuit Breakers
In response to the market breaks in October 1987 and October 1989 the New York Stock Exchange instituted circuit breakers to reduce volatility and promote investor confidence. By implementing a pause in trading, investors are given time to assimilate incoming information and the ability to make informed choices during periods of high market volatility.

Rule 80B
Effective April 15, 1998 the SEC approved amendments to Rule 80B (Trading Halts Due to Extraordinary Market Volatility) which revised the halt provisions and the circuit-breaker levels. The trigger levels for a market-wide trading halt were set at 10%, 20% and 30% of the DJIA, calculated at the beginning of each calendar quarter, using the average closing value of the DJIA for the prior month, thereby establishing specific point values for the quarter. Each trigger value is rounded to the nearest 50 points.

The halt for a 10% decline would be one hour if it occurred before 2 p.m., and for 30 minutes if it occurred between 2 and 2:30, but would not halt trading at all after 2:30. The halt for a 20% decline would be two hours if it occurred before 1 p.m., and between 1 p.m. and 2 p.m. for one hour, and close the market for the rest of the day after 2 p.m. If the market declined by 30%, at any time, trading would be halted for the remainder of the day.

Under the previous Rule 80B trigger points (in effect since October 19, 1988) for a market-wide trading halt, a decline of 350 points in the DJIA would halt trading for 30 minutes and a drop of 550 points one hour. These trigger points were hit only once on October 27, 1997, when the DJIA was down 350 at 2:35 p.m. and 550 at 3:30, shutting the market for the remainder of the day.

Currency markets are where the action is with the Euro seeing its biggest move down against the dollar ever. The Pound has had its biggest decline to the dollar ever since floating currencies began. Denmark actually has raised rates from 5 to 5.5% to keep its currency from falling.

The Yen is the only currency rising against the dollar as Japanese investors are absolutely panicked about the unwind of the carry trade.

The latest I heard at 809AM ET was that the dollar strength had declined approximately 1 big figure against Sterling and Euro and had risen 1 big figure against the Yen. We are seeing HUGE bid -ask spreads in currency markets. This speaks to the volatility and fear.

Other currencies looking weak include the Polish, South African and Hungarian.

Treasuries are being seen as a safe-haven and the 30-year is now at its lowest ever since it began to be issued in 1977. The 10-year is up 1 and a half points and the yield is now 3.50% signaling deflation.

Commodity markets are getting crushed with oil, gold, agricultural commodities all falling. Brent crude is down 7%. Now WTI crude is down below $64 despite OPEC production cuts of 1.5 million barrels. I had said in private conversations that I was a buyer at below $64-65, but the price action speaks to free fall and I wouldn’t buy until selling pressure subsides. All energy markets are in free fall suggesting an expected collapse in energy demand from a deep, deep global recession.

The UK released GDP stats and the news was negative. They are in recession.

AIG has said that they need more money. This should impress upon people that much more money will be needed to bailout the financial sector.

Now, recently there has been a lot of talk about hedge fund redemptions with an expected tsunami coming by December 1st. Given these moves, I would anticipate much of the panic we are seeing is hedge-fund related. I can only imagine that this reinforces the sense that deregulation and lack of regulation is responsible for much of the problem we are witnessing.

Treasury Secretary Paulson is looking to take a stake in a number of regionals. Plans to be released today.

The New York Times debt is now lowered to junk status and Gannett has seen a 30%+ decline in earnings as ad revenue is getting killed.

  1. Anonymous says

    This looks like a global financial earth quake, so there will be lot of after-effects ?

    I am wondering if we should catch a bottom here – may be buy companies like GE for value play?

    will it take few more days to play out the real-crash.

  2. Edward Harrison says

    If we weren’t crashing I would buy but the panic selling means prices will go lower. Only when the panic selling ends can we get in there and not take an immediate loss.

Comments are closed.

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