Investing in a Market Crash

[Nbadan]

Remember when thousands of put options were placed on the stocks of United and American airlines by 'anonymous investors' immediately before 911? Does the recent increase in put options signal investor nervousness about the volitile market or does someone know something that the rest of us don't know? Yet...

More Investors Are Betting on Major Selloff in Stocks
Topics:Economy (U.S.) | Stock Market
By Jim Kingsland | 27 Aug 2007 | 09:13 PM ET


Not everyone on Wall Street is convinced that the worst is over.

In fact, some investors are betting tens of millions of dollars that the market is headed for a selloff -- a major selloff.

The reason: worries about a worsening credit crunch, along with speculation that the Federal Reserve may defy expectations and hold off on cutting interest rates at its Sept. 18 meeting.

So far, over $500 million in so-called put options have been purchased betting that the benchmark Standard and Poor's 500 index

To put it in perspective, a 5% drop in the Dow Jones Industrial Average would be the equivalent of 667 points. An 11% decline would equal 1,468 points. And a 52% drop? You don't even want to know.

The upshot is that some major investors are putting up big money that the market is facing a major decline.

"There is still fear and investors are buying crash protection," says Todd Salamone, senior vice president of research at Schaeffer's Investment Research.

Of course, there are always investors betting on big declines -- they're called bears. What's unusual is the amount of money being put up on such a doomsday scenario.

"The activity in those puts has been a lot more aggressive then we have seen in the past," said Bill Lefkowitz, options strategist at brokerage firm Finance Investments. "Part of it is the environment and volatility where the Dow Industrials can easily swing over a hundred points during the day, or session to session."

Salamone of Schaeffer's points out that the index options have been "put dominated over the last several months." And the bets may have as much to do with hedging portfolios -- basically an insurance policy you hope you don't need -- as much as outright speculation.

"We don't know who the end users of these options are and often they are specialists, pros looking at arbitrage plays, so the common man doesn't necessarily need to be concerned," adds Andrew Wilkinson, a senior market analyst at Interactive Brokers. "But it’s a legitimate build of people wanting protection against the next 10% down should it come."

Whatever the reason, Lefkowitz says worries about what the Fed will do about interest rates are spurring big investors to buy protection in case of a major market drop.

"If the Fed doesn't cut Fed funds, the options market is telling you that the overall stock market will come down hard," says Lefkowitz. "We could be quickly under the 1400 level of the S&P 500 if the Fed doesn't act."

Fed-fund futures and a variety of market pundits have been forecasting a 100% likelihood the Fed will lower the benchmark lending rate, now at 5.25%, meaning there's no room in the market from the Fed for a surprise.

Lefkowitz also says the activity isn't strictly driven by money managers looking to protect portfolios. The put options are tempting enough for speculators to jump in. He says even if the market doesn't fall to below S&P 1400, the put options could still easily rise in value by "20, 30, 40 percent if we saw another large down day."

© 2007 CNBC.com

[smeagol]

I smell a new conspiracy

[Holt's Cat]

Yeah, who would be shorting the market today? Obviously the Bilderbergers and the CIA.

[smeagol]

Yeah, who would be shorting the market today? Obviously the Bilderbergers and the CIA.
Unfortunately I work for a bank which does not allow it's employees to sell the market short. Otherwise, I would be part of the short-seller crowd.

[Holt's Cat]

What exactly is the conspiracy here? What does someone know that cannot be readily gleaned from the WSJ, FT or other financial media outlets, let alone what most institutional investors and hedge fund managers have access to?

[Nbadan]

A 52% drop? Be serious...this isn't just a 'correction' people are dumping their money into....

[Holt's Cat]

$500 mil? That's a drop in the bucket in the capital markets. Also, how much is invested in those options with strike prices signifying a 52% drop? Probably a mil or so just for the hell of it. The market would never sell off that bad and if it did because the asteroid the Masons didn't tell us about hit the Earth then we'd have worse things to deal with. My God this forum needs better threads.

[Nbadan]

...Dubya, and thus Cheney, have about a 5-6 month window left to bomb Iran.......There are wells in Southern Iran that need taking.....you do the math.....

[ChumpDumper]

Who is going to "take" the wells? We don't even have enough troops to sustain the surge past next spring. Do that math.

[Holt's Cat]

The market wouldn't drop 50% even if that happens. Take off the tin foil and go for a walk.

[Nbadan]

Who is going to "take" the wells? We don't even have enough troops to sustain the surge past next spring. Do that math.

Isn't there a 150,000 private army just sitting on their hands in Iraq? Hmmm...not that they would do any of the really dangerous initial combat though...

[Holt's Cat]

Well, we'll find out soon enough if there is a payoff to the "Grays" and their Mormon friends.

[Nbadan]

The market wouldn't drop 50% even if that happens. Take off the tin foil and go for a walk.

Doesn't take a drop 52% to make money on these put options.....A lot of fundamental information coming out of the US is downright bearish to say the least and it is backed by tangible evidence. Most bullish sentiment are not qualified by evidence...... just 'trust me' type reassurance from the Dave Ramsey types....

Lets look at the Dow Jones weekly chart for the last decade. Hit a top six weeks ago and looks poised on the top of a rollercoaster. If it were to fall in the next week or so by another 15% and break major support at 11000 then the next target would be the support at 8000 and our man with the puts would be well in the money.

The rises in the stockmarkets over the last year or so have been unbelievable for many, the falls may do the same; however in the bigger picture this scenerio is well within the realms of the next month of two.....especially with things heating up in the M.E....as I have posted before in the past, war with Iran would lead to a currency collapse in the U.S.....

[Holt's Cat]

Doesn't take a drop 52% to make money on these put options

Well, if the market doesn't drop 52% by the expiration date then they're worthless. Otherwise, as each day passes by there is a much shorter timeframe for the market to dip by that amount, which all else held constant will lead to a drop in the price of those puts. Go look up the price of an option on any equity right now. The options with an exercise price farther out at the same exercise price are worth more. I wonder why...

Anyways, these are September puts. We'll find out soon enough if your conspriacy exists or if this is another Nbadan special.

[boutons_]

"We don't even have enough troops to sustain the surge past next spring"

dubya and dickhead didn't have enough troops in Mar 04, but that didn't stop them.

[ChumpDumper]

I don't have put options, but I'd probably buy in afterwards if the market drops 52%.

[ChumpDumper]

"We don't even have enough troops to sustain the surge past next spring"

dubya and dickhead didn't have enough troops in Mar 04, but that didn't stop them.Yeah, but they thought it could work and had a general that agreed with them. The numbers simply aren't there for an invasion of Iran.

[Wild Cobra]

I smell a new conspiracy
I thought it was recycling an old one?

[smeagol]

Anyways, these are September puts. We'll find out soon enough if your conspriacy exists or if this is another Nbadan special.

I'd say the latter

[Wild Cobra]

I didn't get the memo.

The market is crashing?

[Nbadan]

1929, 1987 and....

http://www.spiritoftruth.org/images/29-87-07.jpg

[ChumpDumper]

Why is the last graph from a completely different stock index?

[Nbadan]

The S & P 500 is used as a leading market indicator of large-cap stocks....

[Wild Cobra]

And you buy into that Dan?

DJIA 1929; 381 to 230. A loss of 39.6%

DJIA 1987; 2722 to 1738. A loss of 36.1%

DJIA today… Using S&P graph? You buy into this propaganda?
Numbers to right, about 1550 to 1380. A loss of 11.0%.

Is that any comparison?

Come on. Get real before quoting someone’s propaganda. The Dow fell 14.3% after 9/11 and we recovered just fine.

Now here is a recent Dow graph:

http://i181.photobucket.com/albums/x262/Wild_Cobra/DJIArecent.png

Notice the close on 7/19/07 is 14,000.41 if you look at historical. The low is 12,845.78 on 8/16/07. This is a drop of 8.2%. No wonder your propaganda artist switches to the S&P graph…

[Nbadan]

Is there really any comparison?

http://bigpicture.typepad.com/comments/images/2007/04/16/dow_8707_3.png

The fundamental are saying yes, yes, yes....

[ChumpDumper]

So what are you doing with your stocks, Dan?

[Wild Cobra]

Is there really any comparison?

http://bigpicture.typepad.com/comments/images/2007/04/16/dow_8707_3.png

The fundamental are saying yes, yes, yes....
LOL no they don't. How many other parts of the Dow history can you scale and find similar trends without the dramatic decline afterwards. According to the predicted graph, we should already be in severe decline.

Why does your current trend end in April 2007 when this is August? Does it stop tracking the 1986-1987 trend to support the propaganda?

[Nbadan]

So what are you doing with your stocks, Dan?

I have my money in water rights in the west....

[ChumpDumper]

So you're not buying put options? Don't you think it's a sure thing?

[Nbadan]

No, it could also be the markets reacting to try and force the FEDS to lower intrest rates through market volitility, and big-money pensions and other large investors maybe trying to cash in on this manipulation. However, another important story that went under the M$M radar yesterday is that the FEDS are bailing two of the biggest U.S. banks by waiving banking regulations....

Fed bends rules to help two big banks
If the Federal Reserve is waiving a fundamental principle in banking regulation, the credit crunch must still be sapping the strength of America's biggest banks. Fortune's Peter Eavis documents an unusual Fed move. (http://money.cnn.com/2007/08/24/magazines/fortune/eavis_citigroup.fortune/?postversion=2007082417)

[ChumpDumper]

You say it went under the mainstream media radar, and then post a story about it straight from AOL Time-Warner.

[Nbadan]

It's all about product placement chumpy......just like in a grocery store.......wanna report something but not report it, put it on page XX and don't make a big deal out of it...I mean, something like the FEDS bailing out 2 of our largest banks you would think would make the front page in bold letters....but we don't wanna start any hysterical bank-runs now do we? Let's ask Country Wide....

[ChumpDumper]

So it's on their radar, but they buried the story.

Why write the story in the first place?

And why are there two stories about banks in trouble on CNN Money's front page?

First one. (http://money.cnn.com/2007/08/28/news/companies/bank_pain/index.htm?postversion=2007082812)

Second one. (http://money.cnn.com/2007/08/28/news/companies/financial_banks.reut/index.htm?postversion=2007082811)

[ChumpDumper]

As for Countrywide, those "poor" people with half a million dollars in one money market account shouldn't be that stupid in the first place.

[ChumpDumper]

No, it could also be the markets reacting to try and force the FEDS to lower intrest rates through market volitility, and big-money pensions and other large investors maybe trying to cash in on this manipulation. However, another important story that went under the M$M radar yesterday is that the FEDS are bailing two of the biggest U.S. banks by waiving banking regulations....

Fed bends rules to help two big banks
If the Federal Reserve is waiving a fundamental principle in banking regulation, the credit crunch must still be sapping the strength of America's biggest banks. Fortune's Peter Eavis documents an unusual Fed move. (http://money.cnn.com/2007/08/24/magazines/fortune/eavis_citigroup.fortune/?postversion=2007082417)Are you really sure it's a bailout? Or in at least one case is it a move to allow BofA to bail out someone else (Countrywide!), while making over 20% profit on its initial investment in less than a week?

Aug. 23 (Bloomberg) -- Bank of America Corp., the second- biggest U.S. lender, is already up about $447 million on its $2 billion preferred stock investment in Countrywide Financial Corp.

This is "something of a sweetheart deal,'' David Hendler, an analyst at research firm CreditSights Inc. in New York, said in a report.

Bank of America, based in Charlotte, North Carolina, can convert the preferred stock to common shares at $18 each. If the preferred Countrywide shares were swapped for stock at the high today of $24.46, Bank of America would make a $700 million profit. Countrywide, the biggest U.S. mortgage lender, will also pay dividends of 7.25 percent on the preferred shares.

Countrywide, which lost half its market value after peaking on Feb. 2, rose 20 cents, or 0.92 percent, to $22.02 in New York Stock Exchange composite trading....

http://www.bloomberg.com/apps/news?pid=20601087&sid=aqHmmBljF9Ok&refer=home

[BradLohaus]

This is an article with a conspiratorial slant that appears on alot websites if you search for this topic.

http://www.rumormillnews.com/cgi-bin/forum.cgi?read=108416


THEORIES:
The following theories are being discussed widely within the stock and
options markets today regarding the enormous and very unusual activity
reported above and two stories below. Those theories are:

1) A massive terrorist attack is going to take place before Sept. 21 to
tank the markets, OR;
2) China, reeling over losing $10 Billion in bad loans to the sub-prime
mortgage collapse presently taking place, is going to dump US currency
and tank all of Capitalism with a Communist financial revolution.

Either scenario is bad and the clock is ticking. The drop-dead date of
these contracts is September 21. Whatever is going to happen MUST take
place between now and then or the folks involved in these contracts will
lose over $1 billion for having engaged in this activity.

I think someone is betting on theory #2 happening, minus all the Communist revolution stuff. Here's a good article from a month ago that explains why that may be a good bet.

http://www.gold-eagle.com/editorials_05/dony072307.html


After over five years of relentless decline, the worlds reserve currency appears now set to break the last important price support of $0.80. This level has proven several times in the past to provide well-needed support whenever the dollar has reached that line. Since the 1980s, the dollar has hit $0.80 six times and then strongly bounced from that level. However, technical evidence now indicates that the Greenback is likely to penetrate this line-in-the-sand for the first time over the next few weeks...

My Conclusions:
Long standing fundamental evidence has pointed to weakness with the American currency since 2000. Technical data now suggests that the last key price support line of $0.80 is likely to be broken soon. As there are no established price support levels below $0.80, the percentage of decline maybe unpredictable.

The US dollar index sits at 80.60 right now. The Fed is pulling out all the stops to keep the stock market from experiencing a hard landing, and this bailout comes at the price of the value of the dollar. The problem is, the dollar sits at the edge of a cliff that it has never been down before, and nobody knows how deep it goes. Meanwhile, Wall Street is asking for even more rate cuts, which means more inflation and more downward pressure on the dollar. I would not be surprised if the Chinese have a plan to automatically diversify largely out of dollar securities if the dollar falls into uncharted territory - below the 80 level.

Since this investment group is risking 1 billion to gain 2 billion, my guess is that they have reason to believe that there is a better than 1 in 3 chance that both of these things will happen in just under a month:
1.) The dollar index falls below 80 for the first time since the index was established in 1973, after all ties of the dollar to gold were cut.
2.) The Chinese have planned to make a large move away from the dollar when that happens.

The odds of those 2 things happening very soon is far from impossible. Some people with a billion dollars to spare think the odds are alot better than that. That is a scary thought.

If anybody doesn't know exactly what the dollar index is, wikipedia gives a short but good enough explanation. http://en.wikipedia.org/wiki/US_Dollar_Index

[Wild Cobra]

The US dollar index sits at 80.60 right now.
Now world economics is not my strong point, but isn't that a good thing that our dollar is down? Would I be wrong to say I want to see it even lower?

A) Make imports more expensive helping the US worker.

B) makes exports cheaper for other countries helping the US worker.

C) these combined (A & B) make it more viable for corporations to stay USA based.

Am I right or wrong?

[Nbadan]

A) Make imports more expensive helping the US worker.

Yeah...If we still had a manufacturing base....but you can't export waiters...and we still can't compete with .38 cents a hour....

[Nbadan]

makes exports cheaper for other countries helping the US worker.


See above....

[Nbadan]

these combined (A & B) make it more viable for corporations to stay USA based.

Why? labor is cheaper in China, Mexico and they don't have to declare those pesky foreign net-profits sitting in the Cayman Islands ....

[Nbadan]

One effect a cheaper dollar will have for sure is more expensive fuel.....middle east countries will be called upon to help insure our nations continued addiction to over-spending, buying lavish homes, and paying for a war on them, ironically, by buying more U.S. notes, but thanks to Bernaki, there are many more dollars out there...so ME countries will want more dollars for their finite supply of oil, regardless of what oil supply does.....

[Nbadan]

Well...it seems that while BradLohaus has been on the button about the delicate economic balance between the FEDS printing too much money and the financial downfall of the credit market thanks largely to credit derivatives, his timing may have been just a little off...

August 29, 2007
The Predicted Financial Storm Has Arrived
By Gabriel Kolko


Contradictions now wrack the world's financial system, and a growing consensus exists between those who endorse it and those who argue the status quo is both crisis-prone as well as immoral. If we are to believe the institutions and personalities who have been in the forefront of the defense of capitalism, we are on the verge of a serious crisis-if not now, then in the near future.

The International Monetary Fund (IMF), the Bank for International Settlements, the British Financial Services Authority, the Financial Times, and innumerable mainstream commentators were increasingly worried and publicly warned against many of the financial innovations that have now imploded. Warren Buffett, whom Forbes ranks the second richest man in the world, last year called credit derivatives-only one of the many new banking inventions-"financial weapons of mass destruction." Very conservative institutions and people predicted the upheaval in global finances we are today experiencing.

The IMF has taken the lead in criticizing the new international financial structure, and over the past three years it has published numerous detailed reasons why it has become so dangerous to the world's economic stability. Events have confirmed its prognostication that complexity and lack of transparency, the obscurity of risks and universal uncertainty, especially regarding collateralized debt and loan obligations, will cause a flight to security that will dry up much of the liquidity of banking. "…Financial innovation itself," as a Financial Times columnist put it, "is the problem". The ultra-creative system is seizing up because no one understands where risks are located or how it works. It began to do so this summer and fixing it is not very likely.

It is impossible to measure the extent of the losses. The final results of this deluge have yet to be calculated. Even many of the players who have stakes in the countless arcane investment instruments are utterly ignorant. The sums are enormous.

Only a few of the many measures give us a rough estimate:

The present crisis began-it has scarcely ended there--with subprime mortgage loans in the U.S., which were valued at over $1.3 trillion at the beginning of 2007 but are, for practical purposes, worth far, far less today. We can ignore the impact of this crisis on U.S. housing prices, but some projections are of a 10 percent decline-another trillion or so. Indirectly, of course, the mortgage crisis has also brought many millions of people into the larger financial world and they will get badly hurt.

What the subprime market did was unleash a far greater maelstrom involving banks in Germany, France, Asia, and throughout the world, calling into question much of the world financial system as it has developed over the past decade.

Investment banks hold about $300 billion in private equity debts they planned to place-mainly in leveraged buy-outs. They will be forced to sell them at discounts or keep them on their balance sheets-either way they will lose.

The near-failure of the German Sachsen LB bank, which had to be saved from bankruptcy with 17.3 billion euros in credit, revealed that European banks hold over half-trillion dollars in so-called asset backed commercial paper, much of it in the U. S. and subprime mortgages. A failure in America caused Europe too to face a crisis. The problem is scarcely isolated.

The leading victim of this upheaval are the hedge funds. What are hedge funds? There are about 10,000 and, all told, they do everything. Some hedge funds, however, provided companies with capital and successfully competed with commercial banks because they took much greater risks. A substantial proportion is simple gamblers; some even bet on the weather--hunches. Many look to their computers and mathematics for models to guide their investments, and these have lost the most money, but funds based on other strategies also lost during August. The spectacular Long-term Capital Management 1998 failure was also due to its reliance on ingenious mathematical propositions, yet no one learned any lessons from it, proving that appeals to reason as well as experience fall on deaf ears if there is money to be made.

Some gained during the August crisis but more lost, and in the aggregate the hedge funds lost a great deal-their allure of rapid riches gone. There have been some spectacular bankruptcies and bailouts, including some of the biggest investment firms. Investors who got cold feet found that withdrawing money from hedge funds was nigh on impossible. The real worth of their holdings is hotly contested, and valuations vary wildly. In reality, there is no way to appraise them realistically-they all depend largely on what people want to believe and will take, or the market.

We are at an end of an era, living through the worst financial panic in many decades. Now begins global financial instability. It is impossible to speculate how long today's turmoil will last-but there now exists an uncertainty and lack of confidence that has been unparalleled since the 1930s-and this ignorance and fear is itself a crucial factor. The moment of reckoning for bankers and bosses has arrived. What is very clear is that losses are massive and the entire developed world is now experiencing the worst economic crisis since 1945, one in which troubles in one nation compound those in others.

All central banks are wracked by dilemmas. They have neither the resources nor the knowledge, including legal powers, to remedy the present maelstrom. Although there is clamor from financiers and assorted operators to bail them out, the Federal Reserve must also weigh the consequences of its moves, above all for inflation. Then there is the question of "moral hazards." Is the Federal Reserve's responsibility to save financial adventurers from their own follies? Throughout August the American and European central banks plunged about a half-trillion dollars into the banking system in an attempt to unfreeze blocked credit and loans that followed the subprime crisis-an event which triggered a "flight to safety" which greatly reduced banks' willingness to loan. In effect, the Federal Reserve relied on banks to restore confidence in the financial system, subsidizing their efforts.

Central banks' efforts succeeded only very partially but, in the aggregate, they failed: banks and investors now seek security rather than risk, and they will sit on their money. The Federal Reserve privately acknowledges its inability to cope with an inordinately complex financial structure. European central bankers are in exactly the same dilemma: they simply don't know what to do.

But this scarcely touches the real problem, which is structural and impinges wholly on the way the world financial structure has evolved over the past two decades. As in the past, there is a critical split in the banking and finance world and each has political leverage along with clashing interests. More important, central banks were not designed to cope with today's realities and have neither the legal powers nor knowledge to control them.

In this context, central banks will have increasing problems and the solutions they propose, as in the past, will be utterly inadequate, not because their intentions are wrong but because it is impossible to regulate such a vast, complex economy-even less today than in the past because there is no international mechanism to do so. Internationalization of finance has meant less regulation than ever, and regulation was scarcely very effective even at the national level.

Not only leftists are naïve but so too are those conservatives who think they can speak truth to power and change the course of events. Greed's only bounds are what makes money. Existing international institutions-of which the IMF is the most important--or well-intentioned advice will not change this reality.

ZMag (http://www.zmag.org/sustainers/content/2007-08/29kolko.cfm)

[BradLohaus]

Now world economics is not my strong point, but isn't that a good thing that our dollar is down? Would I be wrong to say I want to see it even lower?

A) Make imports more expensive helping the US worker.

B) makes exports cheaper for other countries helping the US worker.

C) these combined (A & B) make it more viable for corporations to stay USA based.

Am I right or wrong?

There are benefits to a weaker dollar in theory; basically what you said. But with the situation that the US economy is in, those benefits are far outweighed by the costs. In theory a weaker dollar will help US exporters, as they will then earn higher profits, expand their operations and hire more workers. In reality, like Dan said, our manufacturing base is largely outside the country. Wage differentials are so huge between the US and these Latin American and Asian countries that no significant changes will occur. Europe will buy more US goods; that's about the only real gain from a weaker dollar.

The reality is this: we import far, far, far more than we export. The US worker is going to be paying more for everything. The gains from any expansion in exports will be dwarfed. Our huge trade deficit and the world wide dollar standard is what makes the standard theory void. If the world still operated on the gold standard then you points would be correct.


Well...it seems that while BradLohaus has been on the button about the delicate economic balance between the FEDS printing too much money and the financial downfall of the credit market thanks largely to credit derivatives, his timing may have been just a little off...

I was waiting on you to call me on that... I am seriously worried about my 10-20 year prediction. Still I don't think that we are about to see THE crash - the collapse of the dollar standard.

Some economist once said that even when the inevitability of a large macroeconomic event becomes obvious, it still takes much longer to play out than most of the people who understand it realize.

[Nbadan]

I was waiting on you to call me on that... I am seriously worried about my 10-20 year prediction. Still I don't think that we are about to see THE crash - the collapse of the dollar standard.

Some economist once said that even when the inevitability of a large macroeconomic event becomes obvious, it still takes much longer to play out than most of the people who understand it realize.

Really, about the only thing we can do now is delay the inevitable, sooner or later all those sub-prime backed securities will have to be depreciated or taken off the books, but for now it looks like Dubya is ready to take on a suggestion recently posted here to alleviate some of the pressure on the markets by simply jaw-boneing banks and mortgage companies into not foreclosing so many homes so quickly....

Lowering the Federal funds rate, which I don't think will happen on Sept 18 or sooner, would only add more timber to the inevitable fire....plus place more downward pressure on the teetering dollar....

[L.I.T]

What I would like to see is real fundamental analysis of the capital adequacy of the banks that are holding these risky assets. Right now, a lot of these articles that I'm seeing are "irrational" in the sense that they are spouting off doomsday scenarios without any real fundamental analysis of the defaulting of these loans on bank's balance sheets and capital adequacy ratios. Now, I'm not saying that doomsday predictions are false, there is enough worry in the markets to indicate this is a likely scenario, but essentially, what is the effect of failure on the integrity of these banks loan portfolios.

Over the last few years international banks have been having to switch their risk management techniques to fit the new Basel II framework. So, in the context of their overall portfolios, what is the actual risk impact of holding these asset-backed securities?

And I still maintain that governments are going to have to take on some of the risky assets via SPVs (or whatever the local regulatory equivalent is).