May 6, 2010
QuickLinks: A Rough Day On A Skittish Street
First Published: May 6, 2010 2:00 PM
Comments from "Plugged In" Readers
Good thing I'm only vested in frisco RE, heh, heh :)
Posted by: 45yo hipster at May 6, 2010 2:52 PM
It was a trading error! SF medians will stay on their upward trend!
[Editor's Note: Medians Are Up, But Don’t Confuse That With Increasing "Prices".]
Posted by: J at May 6, 2010 3:09 PM
NEW YORK, May 6 (Reuters) - The biggest intraday point drop ever in the Dow Jones Industrial Average may have been caused by an erroneous trade entered by a person at a big Wall Street bank, multiple market sources said on Thursday.
The so-called "fat finger" trade apparently involved an exchange-traded fund that holds shares of some of the biggest and most widely traded stocks, sources said. The trade apparently was put in on the NASDAQ Stock Market, sources said.
Several sources said the speculation is that the trade was entered by someone at Citigroup . A Citigroup spokesman said it was investigating the rumor but that the bank currently had no evidence that an erroneous trade had been made.
Posted by: SFLooking at May 6, 2010 3:17 PM
^ dat funny.
BTW, I was dead serious in my first post. Currently making just shy of 8% ROI on my SF rentals. Took a modest equity loss from 2007 highs, but still way up from orig purchase value. I'm just riding things out, waiting for inflation to kick in 1-2 years from now...
Posted by: 45yo hipster at May 6, 2010 3:25 PM
i'm smiling too. sold much of my stock portfolio last week in order to pay down my SF mortgage and refi. Even before today's meltdown, the Vegas-style volatility in the stock market had become too much for me.
Posted by: sanfrantim at May 6, 2010 4:18 PM
I should have learned by now that I'm a contrarian indicator. I made some (very modest) purchases last week on the first dip. Ha!
Posted by: curmudgeon at May 6, 2010 5:03 PM
Curmudgeon- so are you up or down on those? Don't you also have SF rental property? I recall you saying so on your posts many moons ago on craigslist housing form ( I haven't looked at that in a long, long time.)
Posted by: 45yo hipster at May 6, 2010 5:30 PM
I've said this for a while. Anybody "investing" in the stock market recently is looking for pain.
Many people have foolishly believed the "green shoots v shaped recovery" baloney. However, not many people who really analyze markets believed this. They played it for what it was: a liquidity driven mini-bubble in stocks.
The markets moved up 70% over the last year on so-so economic information at best (in other words, no economic rationale for it), and the markets are virtually controlled by quant funds and electronic trading.
The retail investor (in other words, regular people) has been absent from the market for a LONG LONG time.
This was probably just computers playing with computers. the "fat finger" explanation is unlikely IMO (to be kind). more likely: there is significant strain in the various markets in Europe. their banks are in even worse shape than ours are (and that's saying something).
My guess is that somebody somewhere had to unwind something. when they did it, it triggered a bunch of automatic electronic trades, causing cascading sell orders. This probably triggered a bunch of automatic "stops" and so on.
to make matters worse: nobody really believed in this technical 70% rally, and so everybody was ready to exit as soon as possible.
people saw the drop, and acted accordingly.
Luckily, our masters will decide which trades are "real" and which trades are not, so many of these trades were reversed.
(not that I disagree with this... stocks like Accenture went from nearly $40 to 1 penny in like 15 minutes).
this is what happens when you concentrate all of our economic activity in Too Big To Fail institutions, and then you give them government backstops and incentivize them to gamble with other people's money. then when they gamble and fail we bail them out without changing anything.
I've said this for a LONG time. We have not done anything to solve the structural problems in our economy or our markets.
lastly: my personal tinfoil hat explanation: it is also possible in my opinion that this was triggered by the terrorists that are Goldman sachs. Dare to go after them? watch what they can do in 10 minutes. They can turbo our market easily due to their position as a market maker.
Posted by: ex SF-er at May 6, 2010 5:44 PM
all that said:
tomorrow is another day. I wouldn't be surprised if we see a progression of this downtrend that has been in place for a little while now (about 2 weeks).
I also wouldn't be surprised if we see heavy manipulation of the markets tomorrow with a smart snap-back... nice big rally don't ya know. calm down the sheep investors
regardless: who cares? the market is not for investing. It is for gambling. Step right up! Wager yer bets! only a fool would think otherwise.
Unless, of course, you think it "prudent" to invest in a "market" where the valuation of a company can drop from $40 to 1 penny in minutes... all because of some imaginary "fat finger" that hit "Billions" instead of "millions".
hmmm... hope s/he doesn't hit "zillions" by accident next time... or for God's sake hope s/he doesn't hit "google"! that's a healthy market, when a person can accidentally sell a gazillion shares causing wholesale market slaughter!
ROFL. fat fingers... they kill me with this stuff.
Posted by: ex SF-er at May 6, 2010 7:09 PM
You mean they were using their Blackberry to make the trade?
Posted by: Salarywoman at May 6, 2010 9:11 PM
Markets are always volatile, that is why you get the risk premium for investing in them. What is riskier, putting your savings in a company with a track record of producing things of value, or leaving it in a bank account in a fiat currency, whose value is entirely determined by The Fed and Treasury?
It is good to diversify though: I am starting to figure out how to invest in the "Ultimate Plan B" which is some rental property in a foreign country with a good track record of a stable government, rule of law, good natural resources and hopefully not too terribly expensive, so I don't have to tie everything up to get it.
So far I have Chile and Australia on that list, any other suggestions?
Posted by: NoeValleyJim at May 6, 2010 10:05 PM
You've put it rather succinctly. If this huge, supposedly liquid market, is this fragile....we have problems. This more like the night session in some thinly traded commodity.
I've recently been in Chile, I like it, and believe it to be the best SA has to offer.
Posted by: jon at May 7, 2010 7:08 AM
With dub dub's Lazy Indicator and GOOG sub-500, are we in for a double-dipping?
Posted by: lol at May 7, 2010 7:17 AM
ex SF-er's theory that market would follow their trend again today seems to realize. So much for the Fat Fingers.
Posted by: lol at May 7, 2010 7:31 AM
It's worth mentioning that companies can (and do) dilute their stock equity as easily as the Fed/Treasury can the currency. And in many cases (e.g., google) a common shareholder has no practical voting power (no claim to retained earnings, etc), so what one "owns" in that case is rather abstract. It's almost like playing fantasy football.
In contrast, our fiat currency is additionally backed by the full faith and credit of our military industrial complex and the govt's tax collecting ability, the latter ultimately reinforced by the former.
Posted by: dub dub at May 7, 2010 8:03 AM
^ saved me the trouble of typing the same thing.
Also, share prices, are technically priced in fiat currency.
Posted by: J at May 7, 2010 8:13 AM
NVJ-try Costa Rica, a bit more expensive than Chile, but cheap realtive to Mexico. It has what you're looking for.
You can go to International Living website and they have plenty of information to help you make a decision.
I have property in Costa Rica, with no problem renting it out, and it's much easier to visit than Chile
Posted by: marko1332 at May 7, 2010 8:15 AM
Double-Dip, here we come.
Was anyone doubting that the run-up in stock prices was driven by the huge capital injections of the recovery packages?
Did anyone actually believe that the price run-up was driven by a resurgence in underlying demand? Really?
Listening even to the BBC's commentary on PRI yesterday gave me a sense of déja vù: the commentator was saying that Spain, Portugal and Greece had been "profligate" in their spending", which explained the "rational" markets and the "reasons" speculators were targeting them. Spain, as we know, had a significant primary surplus until 2008 and is less indebted than most other EU countries, including Germany. I guess there's a strong will to believe that the EU monetary policy doesn't include France or Germany, but starts at the border with Spain.
It reminded me of the housing collapse here in the US, when RE "professionals" claimed that prices would collapse in Modesto and other poor, outlying areas, but not in the "real" SF, where we're obviously savvy investors. As though Fannie and Freddie stopped at the SF border, and shady mortgage practices that endangered the entire system might leave SF immune.
I think we're seeing a run on the Euro that isn't going to stop any time soon. I also think we'll see a run on the pound. When investors realize how bad this is for the already fake recovery in the US, stocks in this country will be pounded again.
I hope I'm wrong, but I think the second dip of this great recession could see a lot more distress selling and even sharper deflation in RE.
Posted by: Embarcadero at May 7, 2010 8:21 AM
Nice bond rally! Lots of ways to invest besides long stocks and real estate, both of which remain in bubble territory.
Posted by: A.T. at May 7, 2010 8:46 AM
I'd be careful with Chile. Pretty tame now, but remember Pinochet was "president" up unti 1990! thus, it doesn't have a very long history of true stability IMO.
most of the uber-doomers I know have pegged Paraguay as where they're moving and buying arable land etc. Theoretically it has a very stable democracy, relatively good infrastructure, and sound currency policies. I've not researched it myself... but it's where the majority of the libertarians I know wish to move to.
Posted by: ex SF-er at May 7, 2010 9:10 AM
This should be no surprise; many of us have mentioned these sovereign debt issues before. The magicians in NYC/DC are concerned for obvious reasons - we're the world's largest borrower, and anything that strains global liquidity can ultimately increase our borrowing costs and dampen our engineered economic "recovery" and government-endorsed real estate bubble. For those who prefer to take a micro perspective, that means artificially low mortgage rates will have to rise, artificially low underwriting standards will likely need to be raised to quasi-reasonable levels again, and the fake stability in our pretend-resilient real estate market will be trumped by another wave of meaningful price drops. I.e. reality sucks.
We'll see how this plays out. Not to dimish the severity of European sovereign issues, but I'm more interested in what happens when the Chinese equity and real estate bubbles pop. They are, after all, one of our biggest lenders, and have basically enabled the nationalization of our real estate market through the Fannie & Freddie bailouts and FHA. Wonder if their desire/ability to burn yuan in our money pit is dimished when Joe Liu Pijiu decides to dump his 10 spec condos in Huangpu. Stay tuned.
Posted by: Legacy Dude at May 7, 2010 9:13 AM
NoeValleyJim: I think you are a few years too late as far as Australia is concerned. I was there recently (Sydney and Melbourne) and the cost of living and real estate is mind boggling high. Seriously it was a joke. $20 dollars for mixed drinks at a decent bar...Yikes!
Posted by: Willow at May 7, 2010 10:23 AM
My impression is that Australia had a bigger housing bubble than here, largely due to the extremely high commodities prices of a few years ago. A friend of a friend lived in a mining community (where things were the bubbliest) and formerly $80K houses were going for $800K in some cases.
Posted by: sfrenegade at May 7, 2010 11:57 AM
So you can either leave your money in the bank and get less than a percent in interest payments while inflation at 2.5% eats away at the real value of your money.
Or go long on government bonds at 4% but take a real risk that inflation will take off and destroy the value of your savings in the long run.
Or buy corporates and get a few percentage points higher but risk both inflation and default risk.
Or speculate on some commodities, hoping that they will go up faster than the dollar loses value.
Or invest in some income producing real estate, in a market that we all agree is being heavily propped up by government intervention.
Or buy some California Munis, which are paying a decent 6% tax free, but take on all the political risk that this implies.
Or take a flyer on the stock market, which is at the same level it last was in 1998.
Stocks are effectively a claim on future corporate earnings, and your overall return should approximate the real growth of the economy, plus inflation, plus the return of capital that stocks through off in the form of dividends. This *should* be depressed, because one of the inputs to that equation is definitely down, which is the long term growth rate of the economy. Historically, it is a long, slow slog to recover from debt fueled bubbles and as ex-SFer points out, we have not yet made the changes to ensure that it doesn't happen again. But even at 2% growth, plus 3% inflation, plus 3% dividend yield is a pretty decent 8%.
And there is the slight risk that there will be economic collapse, or revolution or we will lose a war or something. Just look at the German or Japanese stock market in the 30s for historical examples. It is probably worthwhile to invest globally, for this and other reasons.
I personally have some of all of the above. Passive investment will never make you rich and you should not expect it to, but it can finance a very comfortable retirement, as long as you don't blow it by doing stupid things like pulling your money out at market bottoms.
Retail investors aka "dumb money" is probably the worst indicator of where you should be putting your cash. All that money on the sidelines is going to get tired of only getting 0.1% in savings and money market accounts and will move to one of the other asset classes, most likely stocks.
I try not to time the market too much, though if I keep a small amount of trading cash in reserve to pick up things that are seriously mispriced. I wish I had gotten those $30 share of Proctor and Gamble! I am going to buy some $3 face value California Muni Tobacco Bonds (zeros) maturing in 2047. For $3k you can buy bonds with a face value of $100k. This is about 9% tax free and I know there is a lot of risk in there, but worth a shot, I think. I won't buy very much - 1 or 2 percent of net worth at most.
Posted by: NoeValleyJim at May 8, 2010 10:03 AM
amazing how we've come full circle. Three years ago, "rich foreigners" were going to "save" SF real estate. Now everyone with money in the US seems to be heading for foreign countries.
Could that be what's happening in the stock market - everyone was thinking this could be the very last rally for a very long time, and when it was over, they were going to take their capital elsewhere? It started diving and everyone thought "this is the end of this rally, I'm out". Who knows - not me certainly.
Posted by: tipster at May 8, 2010 6:22 PM
I am hardly planning on going anywhere. It is a good idea to diversify, that is all. I would never have all my wealth locked up in one earthquake and fire prone peninsula, the way 45yo hipster does.
Hey dude, we are the same age now! How did that happen, did you stop having birthdays or something?
I was preaching the virtues of emerging markets way back before it was trendy. Now even the WSJ says that 20% of your portfolio should be in emerging markets, something I have tried to do from the beginning (which for me was 1995 or so).
Posted by: NoeValleyJim at May 8, 2010 11:16 PM
"I was preaching the virtues of emerging markets way back before it was trendy."
Sing it, brother Jim. I still have to convince people of this on occasion. Generally, a lot of people are more timid when it comes to international investing in general. And it used to be a lot harder to do in the past.
People are giving up a ton of upside by not investing internationally, especially in emerging markets. One of my friends may have said it best when he suggested that an index of stocks in India probably has more potential for growth in the aggregate than domestic equities.
Posted by: sfrenegade at May 10, 2010 11:29 AM
"Heads of the biggest U.S. trading venues meeting with the Securities and Exchange Commission today could provide no clear reason for last week’s stock-market selloff, two people with knowledge of the talks said.
The chief executive officers of NYSE Euronext, Nasdaq OMX Group Inc., Bats Global Markets Inc., Direct Edge Holdings LLC, International Securities Exchange Holdings Inc. and CBOE Holdings Inc. saw no evidence that a mistaken order caused the plunge, according to the people, who asked not to be named because the discussions were private."
Posted by: SocketSite at May 10, 2010 2:41 PM
Ex-SFer - Here's a contrary viewpoint from someone who made a billion dollars by taking a contrarian view on CDOs:
(John) Paulson is now bullish on the U.S. economy, expecting a V-shaped recovery as the housing market rallies.
On Monday, Paulson said U.S. house prices could climb 3% to 5% in 2010. Next year, prices could rally 8% to 12%, he added.
Home ownership in the U.S. is the most affordable it's been in 50 years, Paulson also said. Based on median home prices and the cost of mortgages versus median household income, houses are roughly 60% more affordable than they were at the peak of the housing bubble in 2005, Paulson said.
"My advice to all Americans -- if you don't own a home today now's the time to buy one," Paulson said. "If you already own one, now's the time to buy another one. If you already own two, it's time to help your children buy a home."
A solid housing market should "cement" stronger-than-expected economic growth, Paulson said, forecasting GDP to expand 4% to 5% in 2011.
This should also help the stock market, he argued. The Standard & Poor's 500 Index has rallied strongly, but it's still 41% below its peak. In contrast, the U.S. economy is likely to recoup its previous levels of activity and companies have cut costs. That should fuel bigger corporate profits, Paulson explained.
"We're looking for a very strong period of corporate earnings growth," he told investors during Monday's conference call.
If price-to-earnings ratios also recover, "then certainly there's a lot of upside for U.S. markets," he added.
Posted by: huh? at May 10, 2010 3:50 PM
And the market bounces right back:
Stocks surge as Wall Street cheers European Union move
Indexes win back 2010 gains; Nasdaq Composite adds triple digits
SS editor, stick to subjects you are good at reporting on, or, if you aren't any good, atleast post the whole story, not just the doomsday downturn on the 6th but the recovery the following week.
Posted by: auden at May 10, 2010 4:36 PM
Wow, that Paulson statement sounds as if it is intended to pump the market.
"If you already own two [homes], it's time to help your children buy a home."
really ? How far should we leverage ?
"Next year, prices could rally 8% to 12%, he added."
I will go on record stating that next year, prices _could_ rally up to 120%. Regardless what happens, it is hard to prove this statement as wrong, even if prices drop, they _could_ have risen.
Also, next year we _could_ find a giant golden nugget in the shape of Michael Jackson's pet chimp bubbles buried at the bottom of the bay. Oh wait, that's already in the SFMOMA.
Posted by: The Milkshake of Despair at May 10, 2010 5:15 PM
Sounds like Paulson trying to talk his book as usual. Seriously? Buy two, and if you already have two, buy your children a house? It sounds like something from The Onion.
Posted by: sfrenegade at May 10, 2010 5:37 PM