“From the beginning yesterday, the market was clearly in for a tough day. Futures contracts on the S&P 500 index plunged to steep discounts from the value of the index itself, triggering sophisticated traders’ sales of large baskets of blue-chips stocks. But selling by others quickly became so chaotic that this so-called program selling was sharply curtailed. How chaotic? Because of order imbalances, 11 of the 30 stocks in the Dow Jones Industrial Average didn’t open for about an hour after trading began. By late afternoon, the Big Board’s transaction tape – capable of handling 900 trades a minute – was running two hours and 15 minutes late. When the dust finally settled, the ratio of Big Board stocks declining in price was an unprecedented 40 to 1 over gainers; a 3-to-1 ratio is considered a rout. Mr. Phelsen said that at least five factors contributed to the records decline: The fact that the market had gone five years without a large correction; inflation fears; whether justified or not; rising interest rates; the conflict with Iran; and the volatility caused by ‘derivative instruments’ such as stock-index options and futures.”Sound familiar? The previous quote wasn’t from a recent publication, but rather from the Wall Street Journal article from Oct. 20, 1987 titled, “The Crash of ’87” from Tim Metz, Alan Murray, Thomas E. Ricks and Beatrice E. Garcia. Ladies and gentlemen, it appears the conditions that caused Black Monday are poignantly similar to the conditions that have caused market disruptions nearly 20 years later. Word.Today problems in the credit markets coupled with a sharp drop in equity markets have affected many hedge fund returns. As many managers in the loosely regulated $1.75 trillion industry suffer more losses in August, speculation mounts that more funds could be on the brink of shutting down. Drum roll please. Hedge fund managers this year had to add a new category to their investment calls. In addition to ‘Buy,’ ‘Sell’ and ‘Hold’ there is ‘Apologize.’ Moody’s Investor Service said this week the global credit crunch could become serious enough to trigger a big hedge fund collapse (too late). Albeit, wasn’t it was also Moody’s that inaccurately rated a certain infamous hedge fund’s (cough…Bear Stearns) securities investment-grade, when indeed they were HIV-positive? Every day I pick up the paper, more and more funds are collapsing and deteriorating right in front of our very eyes. We are witnessing history every day and the ongoing contamination of sub-prime mortgages continues to knock on the doors of investors (previously employed) around the world. Knock knock…
The SMU Intelligent Investor is a daily investment advisor and educator, leveraging comprehensive institutional research to provide you with the news you need to know. The SMU Intelligent Investor is dedicated to delivering you news that matters, furthermore news that you can act upon. Take control of your investment life right now. The SMU Intelligent Investor is written by senior economics major Ben Brown. He can be reached at [email protected].
