US Stock Markets: Wild Intraday Pendulum Swings

Remember the fantastic volatility in December marked by 2 round trips which led to a 6.5% intraday swing in the Phisix? Such astounding bout of volatility has been replicated in the US last night

The tale of two roundtrips.

The Dow Jones Industrial opened the session strongly, as shown in the above chart from Google Finance. It reached a zenith of 274 points (+1.5%), then gave up all those gains towards midday.

By the afternoon, the Dow was down 136 points (-.77%).

From the intraday high to the lows was a swing of 410 points!!!  And from the lowest point, the main US bellwether crept up by 109 points to end the day off by only 27 points.

The sum of the nearly two round trips was an stunning 793 points or a 4.4% pendulum swing!

It’s not just the Dow, all key equity benchmarks as shown above from stockcharts.com experienced similar sharp gyrations.

Such sharp bouts of volatilities are hardly about stability, but about deepening tensions between the bears and the bulls. Sharp volatility as these usually surface during inflection points.

Client Accounts Transfer from MF Global Holdings may trigger Market Volatility Next Week

Transfers of client accounts from bankrupt futures brokerage MF Global Holdings to new brokers may cause some market volatility next week due to possible liquidations on margin calls.

From FoxBusiness.com (bold emphasis mine)

--Ex-customers of MF Global are gaining access to frozen accounts moved to new clearing house

--Some traders fear new margin calls after the move

--Not all money backing current market positions moved with accounts

Some former customers of MF Global Inc. (MFGLQ) rushed Friday to sort through newly unfrozen funds--and awaited word on whether they will have to put up additional capital to back their market bets.

Friday, CME Group Inc. (CME) transferred about $1.45 billion in 15,000 customer accounts from MF Global's U.S. brokerage--roughly 30% of the 50,000 accounts to be moved--to new clearing firms. A group of 10 clearing firms received the bulk transfers throughout the day Friday and began contacting clients about the accounts.

For many of those new clients, the process was a nerve-wracking experience. Some said they were still unsure of when they would gain access to an active account, which is required to resume trading. Others who gained access rushed to sell some positions in order to meet what they expect will be margin calls due to bets that have turned against them over the past week.

For all open bets in the commodities markets, traders need to put up cash to back the position, known as posting margin. In order to keep holding those bets if the contract falls in value, traders are required to post additional cash with their clearing firm.

But confusion still reigns over much of the market and traders are unsure whether their new clearing firms will require them to post additional margins on their trades.

Reuters estimates that some $1 billion will need to be raised next week (bold emphasis added)

There was little sign yet of mass liquidations analysts feared may ensue as traders rush to raise up to $1 billion in additional margin with new brokers.

But with margins due Friday evening or later, forcible liquidation looming on Monday morning, and thousands of accounts still unsettled, dealers were jittery.

"It seems that without MF (Global) in there...no one wants to be held with big positions, if and when these accounts are allowed to trade. It's better to have a lighter position on, in the event that you get a move in the markets," Bill Raffety, senior analyst for futures brokerage Penson Futures in New York, said of the day's light trade in soft commodity markets.

MF Global holdings chief Jon Corzine, a former chief of Goldman Sachs and former governor of New Jersey, who resigned yesterday without his $12.1 million severance pay, made bet a huge bet in Euro debts in the belief that “Europe wouldn’t let these countries go down”, which obviously boomeranged.

Mr Corzine was apparently undone by his extreme faith in governments to deliver miracles and possibly on expectations of a MF Global bailout—both of which did not occur.The Bank of England (BoE) says that MF Global "posed too small a risk to financial stability to merit a bailout" (Bloomberg)

To add, many of major market participants, like Mr. Corzine, have been positioning based on expectations of the directions of political actions from policymakers and their possible ramifications. This validates my view of how politicized financial markets have been.

Yet our fundamental difference; Mr Corzine trusted governments too much (and was betrayed) while I am too deeply skeptical of each and every actions made by politicians and their wards.

Mark Mobius: Expect Market Volatility, But Capitalize On The Opportunity

From Franklin Templeton's July Emerging Markets Review

Feature of the Month: Q&A on Emerging Markets with Mark Mobius, Executive Chairman, Templeton Asset Management Ltd. (red highlights mine)

Is the recent rally in emerging market equities sustainable?

Although we are optimistic about the markets’ upside potential, it is important to realize that volatility is still with us and will be with us for a while. This means that there will be down markets as well as up markets. We therefore must pay attention to valuations and long-term earnings growth prospects in order to avoid buying or holding expensive stocks as a result of dramatic price rises that we have seen. Current valuations are below the five-year high valuations and thus are not excessive.

Emerging market equity funds resumed net inflows, recording a record $26.5 billion of investment in the 2nd quarter. Do you think emerging markets will continue to attract inflows?

In general, we expect inflows to continue, however, there could also be some volatility. We cannot expect to see net inflows every month or every week, but in general the trend should be positive. In the first seven months of 2009, net inflows (using weekly data from www.emergingportfolio.com) totaled US$34.5 billion. This is more than 85% of the approximate US$40 billion in outflows in 2008.

What are the reasons?

A return of confidence in emerging markets, the desire for higher returns, an increase in investor risk appetite, the search for undervalued companies and most importantly, attractive valuations in emerging market companies drove the inflows.

Within the emerging markets universe, where do you see the most attractive opportunities at this juncture?

Since it’s usually possible to find at least a few bargains in most markets, all emerging market regions are looking exciting. Currently, our largest exposures are to Brazil, Russia, China, India and South Africa. In terms of sectors, commodity stocks also look good because some of them have declined significantly below their intrinsic worth and we expect the global demand for commodities to continue its long-term growth. Consumer stocks are also favored. With rising per capita income and strong demand for consumer and other goods, the earnings growth outlook for these stocks is positive.

The World Bank recently said that reduced capital inflows from exports, remittances and foreign direct investment means “increasingly grave economic prospects” for developing nations. Do you share the view and is it something to worry about?

The World Bank is normally "behind the curve" when it comes to economic projections. Economists tend to look through the rear view mirror and not ahead. While reduced capital inflows from exports, remittances and foreign direct investment could have a negative impact on emerging markets, we can expect to see increased inflows resulting from consumer and infrastructure spending growth compensate for this. This could allow markets to record positive economic growth. This is especially the case in markets such as China and India.

Are you still optimistic about Asia ex-Japan? Which markets are you most positive about?

Yes, Asia is the largest emerging market region in the world. Asian countries are also growing relatively fast. They include countries like China and India with very large populations whose per capita income is growing, and capital markets in those countries are undergoing rapid development. Economic growth remains relatively high, per capita incomes have been rising, valuations remain attractive and reforms continue, thus improving the region’s business and investment environment. Our largest exposures are to China, India, South Korea and Thailand.

What are your views on the BRICs bloc? Is it a good investment proposition?

Yes, we remain optimistic about the long-term future of the BRIC markets. The BRIC countries are among the fastest growing economies in the world. Moreover, foreign exchange reserves in all four countries remain high. The four markets together account for more than 40% of the world population. Domestic demand growth also remains robust. China and India continue to register significant positive GDP growth rates in spite of the global slowdown China continues to take great strides towards becoming a major global player. The Chinese economy is expected to grow about 8% in 2009 and its foreign reserves have surpassed US$2 trillion. Moreover, Brazil and Russia are resource rich countries and although commodity prices have declined from their peak, the longer trend for commodity prices is up and these countries will benefit from global demand for oil, steel, aluminum, pulp, and other commodities.

Commodity prices have rebounded strongly and this has augured well for emerging markets. What are your views on commodities going forward?

The outlook for commodities remains positive. Strong demand from emerging markets coupled a more inelastic supply could lead to higher prices in the future. In general, we expect commodity prices to maintain a long-term uptrend. However, this will not be without corrections along the way. A number of emerging markets are major suppliers of various commodities as well as big consumers. For example, Brazil is one of the world's largest suppliers of iron ore, Russia is the largest supplier of natural gas, and so forth. Also, since emerging markets have the most people in the world the potential demand for commodities in those countries is also great. It is no surprise therefore that interest in such commodities is important..

I'd like to add that Dr. Mobius recently reemphasized the volatility factor.

According to Bloomberg (bold highlights mine), “When you have these rapid increases, almost without correction, you will definitely have a correction at some point, so we can expect a lot of volatility,” Mobius, the executive chairman of Templeton Asset Management Ltd., said in an interview in Kuala Lumpur today. “Increases of 70 percent can be followed by decreases of 20 to 30 percent.”

The so-called correction “can happen anytime, probably this year,” Mobius said. “It may not be all at once, you may not see a decrease of 20 percent suddenly, it could be 10 percent here, and a rise of 5 percent then another 10 percent, you’ll see this kind of volatility in the markets.” He added that he was referring to shares “globally.”

Nonetheless he would use the correction to add positions...

Again from Bloomberg, ``The biggest risk for global stocks is the increase in initial share sales and bond issues, Mobius said today. Investors will be “selling to take up new stocks, that will impact the prices,” he said. Mobius, who oversees about $25 billion, on July 29 said he plans to double Templeton Asset Management’s emerging-market assets within two years."

Since he doesn't think its a bubble...

Again from Bloomberg, “I don’t think it’s a bubble” because “you don’t have the irrational exuberance so to speak that you would normally find in a bubble activity,” Mobius said. The government’s policies to rein in bank lending are a “good thing,” he said.

Living In Interesting Times

Financial markets today have been experiencing bouts of irrationality if not plain insanity.

To consider, instead of getting compensated by loaning money to the US government via the purchase of US Treasuries, lenders LOSE money!

Chart from Bespoke Investment

Three month T-Bill yields have turned Negative!

And investors have been piling on, this from Marketwatch.com ``The Treasury Department sold $32 billion in four-week bills Tuesday at a yield of zero, implying investors purely wanted the assurance that they would get their principal back. Investors bid $128 billion at the auction, more than four times the amount available. Yields on one-month debt have plunged from about 1.80% in June. "I have never seen this before," said Michael Franzese, head of government bond trading at Standard Chartered. "It's all about capital preservation for the turn of the year, not capital appreciation.”

From our end, this remarkable development implies of a bubble at work.

Next, stock market volatility in the US is at record levels if one measures volatility from the perspective of absolute daily changes!

Chart from Bespoke

This from Bespoke Invest, ``Up until the start of 2008, a daily move of 4% in a 50-day period was noteworthy. From 1945 through 2007, the S&P 500 had 49 one-day moves of 4% or more, which is an average of less than one per year. This year we've had 28! For a market as big as the United States to average a 4.02% daily change over a 50-day period is truly astounding. This is the type of volatility that we see in frontier and emerging markets -- not the biggest, most developed market in the world. The volatility bubble won't last forever, and being long it at this stage of the game is a very risky bet.” (emphasis mine)

It’s been a wild rollercoaster ride out there.

Next, following the first official “rally” or “bounce” in US equities markets, Bespoke Invest says this had been the third worst bear market.

Chart from Bespoke

Again from Bespoke Invest, ``As shown, the bear market that ran from 10/9/07 to 11/20/08 is the third worst ever with a decline of 51.93%. The bears that ended in June of 1932 (-61.81%) and March of 1938 (-54.47%) are the only two that had bigger declines without a rally of 20%.”

All these seem to indicate that we are in some sort of a crossroad.

Global Markets: A Wild, Wild October!

Floyd Norris of the New York Times put out some great market statistics backed by impressive charts. (Charts From New York Times, Emphasis on quotes all mine)

Here are Mr. Norris’ observations on October’s rollercoaster period:

-October was the worst month for the Standard & Poor’s index of 500 stocks in 21 years — since the 1987 stock market crash.

-The final week was the best week for the market in 34 years.

-The most volatile in the 80-year history of the S.& P. 500.

-The huge gains of the final week were reminiscent of the sharp recoveries from bear market lows in 1974 and 1982. Both of those moves came while the economy was mired in recession, as it almost certainly is now.

Mr. Norris’ observations on market volatility or number of days in which an index closes up or down at least 4 percent:

-In normal times, the market goes years without having even one such day. There were none, for instance, from 2003 through 2007. There were three such days throughout the 1950s and two in the 1960s.

-In October, there were nine such days.

-The accompanying chart shows the months, from 1928 through the present, when the S.& P. 500 had at least five days with 4 percent moves. Most of them were during the 1929 crash and the Great Depression. (oops!-my comment)

-Until now, September 1932 held the record for the most days with big moves, at eight. (more oops!-my comment)

-Two days during October ended with the index leaping more than 9 percent, something that had happened only nine times in the previous 80 years.

-For the week, the S.& P. 500 was up 10.5 percent, the best weekly gain since a 14.1 percent rise in the week that ended Oct. 11, 1974.

-For the month, the S.& P. 500 was still down 16.9 percent, the worst showing for the index since it fell 21.8 percent in October 1987. The Dow fell 14.1 percent, and the Nasdaq index lost 17.7 percent…

-All of the big days in September and October came after Lehman Brothers was allowed to fail. That Lehman was not deemed important enough to save signaled to investors that there was risk where they thought there was none and caused a sharp tightening of credit for many borrowers, despite efforts by central banks to push interest rates down.

On Global Contagion:

-Many countries, among them Britain, Japan, India and Brazil, also showed more volatility than the United States.

-That volatility was so high everywhere was an indication of how linked markets have become in the age of globalization. It is not just that most industrial countries appear to be in recession, or close to it. Another factor is that investors now own portfolios of shares from around the globe, and in times of stress may sell what they can, instead of just what they want to unload.

On a Possible Bottom:

-If Monday’s stock market lows prove to be the low prices for this cycle, the bear market will have ended with the S.& P. 500 down 46 percent from the peak it reached in October 2007. That would make the bear market almost, but not quite, as bad as the 1973-74 bear market, which ended with the index down 48 percent.

-In the 2000-2 bear market, the fall was 49 percent.

-If the rebound this week indicated that the bear market of 2007-8 had ended, it lasted just over a year and hit bottom on Monday, at 848.92. It recovered to 968.75 by week’s end. There were similar moves in most major indexes. The Dow Jones industrial average ended the week up 11.3 percent, at 9,325.01, and the Nasdaq composite climbed 10.9 percent, to 1,720.95.

My Additional Comments:

It’s a mixed message from the market, although definitely representative of bear market violence.

On the optimistic note, last week’s sharp recovery could be reminiscent of the 1973-1974 “bottom” paradigm.

BUT, from the pessimist side, looking at the market volatility aspect, it could also signify the movements during the Great Depression especially IF we see MORE of the same degree of intense gyrations in the coming sessions.