October 25, 2008 "Information Clearinghouse" -- Things are getting worse. On Friday morning, futures trading was halted for the first time ever after futures plunged more than 5 percent. The sell-off came after another 500-plus down day on the Dow followed by steep declines in equities markets across Europe and Asia. Japan's benchmark index, the Nikkei, slipped more than 9.5 percent after Toyota and Samsung reported disappointing earnings. The news was equally bad in Europe where shares were battered across the continent on fears of a global recession. Since September, $16 trillion has been erased from global stock market value. Losses in the US--where the financial turmoil originated--have been much smaller than other, more vulnerable markets. The Dow is down less than 40 percent from its peak of 14,000, whereas Hong Kong, Poland and China have all tumbled more than 60 percent. Its a bloodbath.
The Chicago Board Options Exchange Volatility Index, "the Fear Index", surged to 79.13 on Friday, the highest in its 18-year history, while the Dow clawed its way back from 500 points down to a 312 point loss on the day. The massive blow-off in stocks is mainly the result of ongoing deleveraging among the hedge funds which are dumping shares in at a record pace to cover the dwindling value of their asset base. According to the New York Times: "Hedge funds lost an estimated $180 billion during the last three months and some are near collapse. Investors are demanding their money back, and Wall Street is bracing for a shake-out in the $1.7 trillion industry." If a large fund, like Citadel, goes down, it will create a black hole in the financial system, similar to the loss of Lehman Bros. and, once again, the US Treasury will have to come to the rescue by providing a multi-billion dollar taxpayer bailout.
The dislocations caused by the unwinding of the hedge funds creates the possibility that US markets will have to be closed while assets are dumped on the market. New York University Professor Nouriel Roubini summed it up like this:
"Policy makers may soon be forced to close financial markets as the panic selling accelerates.
Indeed, we have now reached a point where fundamentals and long term valuation considerations do not matter any more for financial markets. There is a free fall as most investors are rapidly deleveraging and we are on the verge of a a capitulation collapse. What matters now is only flows - rather than stocks and fundamentals - and flows are unidirectional as everyone is selling and no one is buying as trying to buy equities is like catching a falling knife. There are no buyers in these dysfunctional markets, only sellers and panic is the ugly state of this destabilizing game.
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http://www.informationclearinghouse.info/article21090.htm
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