Market Opens Year With The Worst Start Ever

Dow down 10% from its all-time high set in May of 2015

Is it time to panic?

A start to the year like we are having is attention grabbing. We have seen these events before and will see them again. You know Rutherford Investment Management as a long term investor and that has served our clients well over the years.

The markets and the economy were weak at the end of 2015 and getting weaker. The international monetary fund warned that the global economy was weakening; indeed they just downgraded global economic growth. The U.S. was finishing its 11th year of sub 3% growth. But on December 16, 2015, the Federal Reserve, citing an improving economy and incipient inflation, raised interest rates by 0.25 %, the first increase since June 2006.

To say they were backed into a corner would be polite. They had cornered themselves, by hawkish comments. If they had not raised rates, they would have lost credibility, but, at the end of the day, they had missed their opportunity and waited too long. By December, the U.S. and the global economies were slowing. No amount of gloss could make this sow’s ear a silk purse.

Almost immediately after the rate increase, the U.S. markets began to falter. Their end to the year was weak, and that weakness carried into the New Year.

Enter China: China is the second largest economy in the world, so it is significant when their economy slows. It has been slowing for some time. Indeed in August real weakness surfaced, and the Chinese and U.S. markets dropped sharply. The Chinese currency had just been admitted into a basket of world currencies by the IMF. This gave the Yuan new status and prestige. With their […]

January 13th, 2016|Categories: Comments from Bill|0 Comments

What In The World Is Going On?

In the last quarter we saw the market move 200 points or more 18 times. We saw it move over 400 points four days in a row. What is causing such gyrations? Surely the U.S, economy is not that volatile. While the economy is struggling, it is not careening as wildly as the equity markets.

The reason for the volatility can be summarized in one word: Europe. For over a year Europe has been dealing with a mounting sovereign debt crisis. The focus has been on Greece, but Italy, Spain and Portugal are also under scrutiny and France may not be far behind. The problem is that these countries, particularly Greece, will have difficulty paying their bills as they come due. Since many banks in Europe hold bonds issued by these countries, the fate of the banks is in doubt as well. This is what is being referred to as the contagion effect.

There are several obvious solutions to the problem, but none are very satisfactory. For instance Greece could default on their debt. But, because of the contagion effect, no one is quite sure where that would lead, and furthermore, it would set a precedent for bad behavior in the European Union, and many countries don’t like that prospect, particularly the Northern European countries.

Greece could be excused from the EU. Even that does not avoid default, and in addition it would be very difficult to do.

The likely outcome will be that the EU collectively will have to guarantee every bank in Europe and every country from insolvency, but that is unpopular too as it would be like you being asked to guarantee your neighbors, or partners, or fellow board members debts. Furthermore, the longer this crisis […]

Market Drop

The Dow and S&P dropped sharply today but pared their losses by about 50% by the end of the session. This was the worst market drop in a month. The cause of the drop was a downgrade of U.S. debt by Standard and Poor’s rating agency to negative from neutral.  S&P expressed concern over the management of the mammoth U.S. budget deficit and the ultimate ability of the US to repay its debts, or even continue to service the debt. Such statements were strong medicine for the markets but the market took it well to recover some at the end of the day.  Still the statement by S&P was a shot across the bow of the U.S. congress. It appears that Congress just does not understand the severity of the problems the U.S. faces with its debt. S&P gave them a glimpse of what could come.

At the same time the equity markets suffered, Treasury bonds remained stable and the U.S. dollar rallied. Bonds and the dollar were strong because traders had been shorting dollars, betting on a further decline but sentiment shifted in favor of the dollars, so all of those who had been on one side of the boat rushed to the other side.

I believe the S&P statement was constructive in spite of the market decline.  It should serve as a wake up call to congress. There is no doubt we have a difficult road ahead of us, which ever solution, Republican or Democrat that you chose. The question is not will the road be difficult, the question is what does the end look like?  Will it be worth the trip?

More On The Crash Of 2:45 PM

Both the SEC and congress have now undertaken a review of the events of 2:45 PM May 6, 2010.

I can’t prejudge their decisions, but I am sure that they must take drastic action or this event will certainly happen again.

Why will it happen again?  About 70% of trading on and off the NYSE is program trading done by computers using algorithmic codes.  Wall Street has lobbied congress and the SEC to allow this so called flash trading and “Dark Pools”. I first wrote about this phenomenon in August of 2009 and suggested it gives Wall Street firms an unfair advantage over other investors.  No wonder Goldman Sachs can brag that they made money trading every day last quarter. They know the cards in the deck and what everyone else is holding before they trade. In any casino, this would be known as an unfair advantage. The exchanges are supposed to be better than a casino.

This advantage was sold to Regulators on the basis that it provided liquidity to the market. However, it also sucks liquidity out of the system as last Thursday’s crash illustrates.

All the program trading and computers use the same logic.

Therefore, when they want to sell, they all want to sell, when they want to buy they all want to buy.  This adds volatility to the markets hence the wide swings we see more often. It also means,  in times of stress that the chances of an event such as we witnessed increases.

In the current instance, when a single trader entered a large order for $12 Billion, the computers saw this and instantly sold, starting a run.  The NYSE shifted into “slow mode” the effect of which was to shift the orders to […]

The Crash Of 2:45 PM

On investing and the markets

On Thursday May 6, 2010, at 2:45 PM, the Dow Jones Averages crashed.  In the space of a few moments the Dow fell 650 points.  There was no explanation at the time and apparently not one yet. Six minutes later the market recovered.  We have had many market crashes before, but none of this velocity and none of this duration.

The crash came with the backdrop of a credit crisis in Greece.  The markets were already nervous.   And then the market began to fall without resistance, in huge numbers. In later analysis, traders on the floor said that a huge $12 billion sell order in Proctor and Gamble, one of the most stable names in the market, hit the market and overwhelmed it. Then other sell orders poured in and there were no bids. Sell orders came from every direction. The market was in freefall, and there seemed no explanation. Procter fell by over 40%, by itself at one point, accounting for 150 points of the Dow fall. For a full two minutes not a single share of P&G traded on the stock exchange.

At that moment CNBC flashed a chart of Proctor on the screen, showing it was down 40%, the light bulb went off.  This could not be true!  Indeed it was not true. Jim Cramer who was being interviewed at the time correctly said, something is wrong, the system has broken down.  Buy now.  It was obvious that something was broken, but no one knew what.

In the after market analysis there were rumors of a trade error coming from a big trading house, but no one could confirm it.  Further there seemed to have been a great deal of trading […]

Pre-Market Report

The market has taken a sharp tumble in the past few days.  The S&P has closed at its lowest point since April 14, 1997. This brings the average Large Cap Growth manager and Multicap Growth manager down about 50% on the year.  (We are beating the markets)

The economic news is grim and the Fed believes the recession, which they now recognize, will last into the first half of next year.  Others think the recession will last longer.  Historically the market has turned up about six months in advance of the end of the recession.

Markets are also suffering a lack of confidence.  We have one president with his bags packed and another yet to assert himself.  Obama should act now, or face much tougher problems when he takes office. Treasury Secretary Paulson seems to have a new game plan each day, so it is no wonder that investors are confused.

Is this the end of the world as we know it?  Not likely.  Government regulation, and involvement in business will grow, but the economy will recover.  So far the government has thrown (literally) about 2 Trillion dollars at this problem.  We have seen some results-credit markets are starting to work again-but not all of the results. […]

Market Update

Yesterday the market just had its second largest up day ever; up 889 points. This rise came in spite of historical lows in the consumer confidence index (backward looking and volatile) and a nationwide drop in home prices of 16.6% (a real threat to the economy). The Fed is yet to weigh in with a rate cut which will almost certainly happen today. In the meantime, the Fed has increased the money supply by 25% in the last three weeks, a truly astonishing number.  The rally occurred toward the end of the day, with banks stocks getting a big lift in the last two minutes of trading. No doubt this was short covering and therefore not a sustainable rally.  Volume was very heavy (a good sign).

I do not know if this is the market bottom, although the October 13 bottom has now been tested twice and held both times.  I frankly expect at least one more test of the bottom, and of course any more BIG bad news could send the market lower.  (There is plenty of bad news in the market valuation already, news that a few weeks ago would have been considered big bad news, but has now become commonplace-the market has become inured to a degree). […]

Post-Market Comments From Bill

Stocks plummet as U.S. Government takes hard line

In its biggest drop since 9/11 stocks plummeted today in the wake of a Bankruptcy filing by Lehman Brothers, the venerable 158 year old investment Bank. The Dow was down 505 points.

Television cameras in New York City filmed thousands of Lehman employees streaming out of their building carrying personal effects and family photos.

The Lehman filing continues the wave of problems that have hit the financial sector as the housing market has crumbled after years of low interest rates and substandard lending practices inflated home prices. Next on the list of troubled companies is AIG, Washington Mutual, Wachovia and others in the financial sector. A bright note: Bank of America bought Merrill Lynch, taking them off the troubled list in a stock for stock deal, at a 40% premium to Friday’s close. At this writing shares of Bank of America tumbled 21% in the wake of the deal, and Merrill shares have risen only a penny from Friday’s close suggesting that the market does not believe in the deal.

Several mutual funds held shares of Lehman all the way down. Value funds were particularly involved. Also required to own shares were Index Funds because the S&P Index funds are required to own all companies in the index-Lehman being one.

The crisis has been brewing for some time, but came to a head Friday at 6:00PM when the Treasury summoned 30 Wall Street Executives to a meeting at the Fed’s offices in lower Manhattan. At the meeting Secretary Paulson told the executives there would be no Federal bailout and to get busy. Frantic discussions ensued throughout the weekend, but in the end Lehman filed for Bankruptcy at 11:59 […]

September 15th, 2008|Categories: Comments from Bill|0 Comments