Markets Drop Across the Board: What's Going On?
Yesterday markets dropped across the board: some slowly sank (stocks), some were whacked early (bonds), some simply plunged and kept plunging through the day (precious metals). What's going on?
We have to wonder whether the whole Deutsche Bank debacle has spooked investors. On Monday, we spoke of DB's troubles and referred to "the U.S. government (via the Department of Justice) reducing the previously announced $14 billion fine it levied." It turns out that was rumor. If a settlement is being considered, it's not being proffered so far. And thus the bounce in the price of DB stock has now proved to be of the "dead cat" variety. Germany's biggest bank remains on shaky ground, even with all the hints of pending support from central banks and governments should the shakiness turn into a passing out. That's a bit disturbing.
So perhaps the lack of definitive help or rescue has left markets in a tizzy. And as prices fall across the board, as result, we're likely looking at the leveraged players (e.g., hedge funds) who use margin (i.e., the borrow money to buy) facing demands from their brokers to meet margin calls. As one fund sells this and another that (these guys buy just about anything with borrowed money to increase their returns), it translates to one market taking a hit, then another, then another.
For example, if I bought gold mining shares on margin to take advantage of their spectacular rise since February, and those shares plunge, I get a margin call: Hey, pal, you need to put up more cash to meet your margin requirement. Fork it over or we'll sell those miners to raise the cash ourselves. Naturally, you don't want that to occur. It will just drive down the price of your positions, creating an even larger margin call, and so forth. You're certainly not going to sell the shares yourself. And you likely don't hold sufficient cash - if you hold any at all. So you need to sell something to raise cash.
Now take that scenario and spread it across funds that hold a variety of positions in a variety of asset classes. With everything going down, no matter what you sell, it's going to contribute to the general tanking of prices as selling accelerates. We're guessing that's what happened.
(By the way, of such action full-blown market crashes are born.)
For those of us who don't use leverage, who have even held a portion of our portfolios in cash, it's frustrating to suffer from the foolishness and greed of these leveraged players as we watch everything we own go down to some degree. All attempts at balance simply won't provide the support we'd prefer. Then again, markets rarely do what we'd prefer, so what's new?
So we lick our wounds and await the inevitable bounce back, suffering in silence, reminding ourselves not to overreact and do something stupid like selling our positions now that they've been subjected to the whims of a panicked market. Experience tells us we need to assess our allocation and if it makes sense, stick with it. The only other choice would be to hold cash only - but it's a bit late for that, isn't it?
And now we look forward wondering how the DB saga will unfold, steeling ourselves for either more bad news, or for some big, bold announcement of a grand rescue plan that will send prices back up again. Yet another whipsaw in the making? We don't know. But placing bets either way comes down to gambling, and that's not something we like to do with our hard-earned money.
If nothing else, we're relieved we held on to our cash in whatever percentages we hold it. Be grateful for what you got.
We have to wonder whether the whole Deutsche Bank debacle has spooked investors. On Monday, we spoke of DB's troubles and referred to "the U.S. government (via the Department of Justice) reducing the previously announced $14 billion fine it levied." It turns out that was rumor. If a settlement is being considered, it's not being proffered so far. And thus the bounce in the price of DB stock has now proved to be of the "dead cat" variety. Germany's biggest bank remains on shaky ground, even with all the hints of pending support from central banks and governments should the shakiness turn into a passing out. That's a bit disturbing.
So perhaps the lack of definitive help or rescue has left markets in a tizzy. And as prices fall across the board, as result, we're likely looking at the leveraged players (e.g., hedge funds) who use margin (i.e., the borrow money to buy) facing demands from their brokers to meet margin calls. As one fund sells this and another that (these guys buy just about anything with borrowed money to increase their returns), it translates to one market taking a hit, then another, then another.
For example, if I bought gold mining shares on margin to take advantage of their spectacular rise since February, and those shares plunge, I get a margin call: Hey, pal, you need to put up more cash to meet your margin requirement. Fork it over or we'll sell those miners to raise the cash ourselves. Naturally, you don't want that to occur. It will just drive down the price of your positions, creating an even larger margin call, and so forth. You're certainly not going to sell the shares yourself. And you likely don't hold sufficient cash - if you hold any at all. So you need to sell something to raise cash.
Now take that scenario and spread it across funds that hold a variety of positions in a variety of asset classes. With everything going down, no matter what you sell, it's going to contribute to the general tanking of prices as selling accelerates. We're guessing that's what happened.
(By the way, of such action full-blown market crashes are born.)
For those of us who don't use leverage, who have even held a portion of our portfolios in cash, it's frustrating to suffer from the foolishness and greed of these leveraged players as we watch everything we own go down to some degree. All attempts at balance simply won't provide the support we'd prefer. Then again, markets rarely do what we'd prefer, so what's new?
So we lick our wounds and await the inevitable bounce back, suffering in silence, reminding ourselves not to overreact and do something stupid like selling our positions now that they've been subjected to the whims of a panicked market. Experience tells us we need to assess our allocation and if it makes sense, stick with it. The only other choice would be to hold cash only - but it's a bit late for that, isn't it?
And now we look forward wondering how the DB saga will unfold, steeling ourselves for either more bad news, or for some big, bold announcement of a grand rescue plan that will send prices back up again. Yet another whipsaw in the making? We don't know. But placing bets either way comes down to gambling, and that's not something we like to do with our hard-earned money.
If nothing else, we're relieved we held on to our cash in whatever percentages we hold it. Be grateful for what you got.
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