Thursday, August 09, 2007

Recent global market activity

I found an interesting quote in a Bloomberg piece this evening regarding Asian markets:

``There are indiscriminate sell orders from panicked investors,'' said Liu Juming, a fund manager at Ta Chong Investment Trust Corp., which manages $1.1 billion of assets. ``The old saying in the investment world that `cash is king' came about because of days like today.''

Referring to US markets, Marketwatch says
"Stocks got crushed Thursday, plunging right out of the gate; and every attempt to buy on the day's dips was met with even stronger waves of selling pressure. Renewed fears about credit risk, this time from across the pond, prompted investors to take a deeper look at the severity of the ongoing subprime problem and the difficulties that diminishing liquidity is having on banks and brokers to accurately value assets...The news out of Europe prompted a 50-basis point jump in Libor (London Interbank Offered Rate) to its highest level in six years and prompted the ECB to inject nearly 95 bln euros ($130 bln) into money markets. The Fed also chimed in by adding $24 bln in banking reserves. Such attempts to temporarily ease the pain of a possible credit crunch, however, were viewed with a glass half empty and merely exacerbated the worst of liquidity fears."

I made a few comments regarding asset valuation at my Hedge Fund Failometer page, specifically in regard to the BNP Paribas events.

The liquidity moves by the ECB and the Fed are intended simply to prevent panicky actions by banks; the extra funds availability will likely be very short-term. Today's situation is precisely what central banks are set up to handle. The extra funding will be pulled back by the central banks once their member banks get a handle on what their true market positions are. With the volatility that we've seen, I see it as humanly impossible for financial institutions to keep up with the market fluctuations. The central bank actions reassure their member banks that funds will be available, so the banks can review their positions without feeling the need to take rash actions.

I don't have a link for a quote, but I recall seeing a comment on a discussion thread suggesting that the spike in LIBOR rates could mean that banks didn't have confidence in their own balance sheets and thus were looking to get capital quickly, which would of course drive up the rates. This clearly prompted the central bank actions. Today would seem to be a red letter day in that we have seen an actual short term credit crunch. It doesn't happen that often.

I just spotted a great quote over at
Calculated Risk:

"So, today the monetary base in the North Atlantic economies is 7% higher than it was yesterday--an annualized growth rate of 2100% per year.This is indeed a significant liquidity event...Professor DeLong, August 9, 2007 "

The calculation provided by Dr. DeLong is eye-popping; however as I said previously the extra liquidity will be out there for a short time period only. Clearly the central banks aren't going to add funds every day at the same rate that they did today.

I would definitely check out Calculated Risk's postings today; the posts as a whole pretty much sum up the global economic situation as it stands today.

Here are the NASDAQ charts for the last 5 days and the last 3 months:

As you can see the 5 day chart starts and ends at about the same position, with wild swings in between. This is what I would expect to see when investors realize that their assumptions may be without merit, and so you see a variety of reactions from market participants leading to volatility. I see volatility as indicating that investors as a group have diverse opinions on the direction of the securities making up the market. However, a big chunk of the trading volume is due to algorithm driven computer trades, as Calculated Risk notes in a discussion of how investors using this trading method are faring.
To sum up, we are seeing an inflection point in global markets. Investors of all sizes and outlooks are rethinking their strategies and are experiencing the pain of leverage.

No comments: