Go to Original
By VIKAS BAJAJ and LOUISE STORY
It has become the scariest hour on Wall Street.
On Wednesday, in what has become an almost daily occurrence, the stock market lurched at 3 p.m. — this time, down.
What had been a bad day ended as one of the worst in history, with the Dow Jones industrial average plummeting 733 points, or nearly 8 percent.
The late-day move — the Dow shed nearly 400 points in the last 45 minutes of trading — mirrored the market’s pattern over much of the last week. On Friday, the Dow plummeted more than 500 points in the last hour of trading. On Monday, it soared about 300 points.
Market experts offered a variety of explanations for the late sell-off on Wednesday. Some pointed to gaping losses at hedge funds, among them the Citadel Investment Group, the big fund run by Kenneth C. Griffin. Others cited margin calls that forced investors and executives to dump shares into a falling market. Still others saw panicky selling by individuals and money managers.
There was also a simpler explanation: the economy is in trouble and the recession may be longer and deeper than initially feared. Those concerns were reinforced on Wednesday morning by a report that showed that retail spending declined in September, and in the afternoon by downbeat comments by the Federal Reserve chairman, Ben S. Bernanke.
“This sell-off is about the economy and it will be exacerbated by margin calls,” said Todd Steinberg, head of global equities and commodity derivatives at BNP Paribas. “The primary reason for the sell-off today is the realization that the impact on the real economy will be greater and longer than people had anticipated.”
Whatever the cause, it is clear that this is one of the worst bear markets in postwar history. The Dow Jones industrial average closed at 8,577.91, and the broader Standard & Poor’s 500-stock index fell 90 points, or 9 percent, to 907.84. It was one of the worst days for both indexes. The last two days have erased most of their 11 percent rally on Monday.
The S.& P. 500 is now down 42 percent from its Oct. 9, 2007, peak. The downdraft has hit many big investors, including executives and hedge funds. In a letter sent to its investors on Wednesday, Citadel said it lost 16 percent in September alone.
But given the market’s moves over the last week, the final hour of trading is coming under scrutiny on Wall Street. Many analysts are asking the same question: Why is the market moving so violently between 3 p.m. and 4 p.m.? While trading often spikes in the last hour, according to a review of stock exchange data, the pattern has been much more pronounced in recent days.
One explanation, analysts say, is that brokers typically demand that clients pay down margin loans by the end of the day. As some of those clients begin to sell to raise money to cover those loans, prices fall further, forcing others who bought on margin investors to sell as well.
“This smells like that sort of forced selling, the margin calls and liquidations, that you get in the midst of a bear market,” said Barry Ritholtz, chief executive of Fusion IQ and author of the popular blog the Big Picture.
Evidence is mounting that some executives are being forced to sell stock to meet margin calls.
Bruce A. Smith, the chief executive of the Tesoro Corporation, a oil refiner, disclosed in a securities filing late Tuesday that he had to sell 251,000 shares because of a margin call by Goldman Sachs, the investment bank. Shares of his company fell more than 18 percent after his sale was made public.
Top executives at the Scholastic Corporation, the publisher and Boston Scientific, the medical device company, also disclosed forced sales this week.
Still, banking executives said they did not think the margin calls on their own were leading to the drop in stock prices.
Forced selling always increases when the price of stocks and bonds falls, but by and large, they said, the selling was driven by the bearish attitude of investors.
“I have not seen any waves of fund selling because of systematic changes in margin levels,” said Alex Ehrlich, global head of prime services for UBS. “It’s more like climbing down a ladder, rather than falling down a cliff.”
Hedge funds, which control nearly $2 trillion in assets and are big users of borrowed money, were also among those forced to sell, say analysts and industry officials, though it remains unclear how big a role they are playing in the recent sell-off.
Banks like Goldman Sachs and Morgan Stanley had been increasing the rates they charge hedge funds to borrow all year long, but in the last three weeks, Wall Street firms increased those rates aggressively, according to some officials. That was partly because the banks themselves were paying more to borrow money.
For hedge funds, the added pressure could not come at a worst time. Hedge funds are down 17 percent for the year, with most of the losses coming since the end of August, according to Hedge Fund Research. At the same time, investors are withdrawing billions of dollars from the funds, which has also caused managers to sell.
In his letter to Citadel’s investors, Mr. Griffin said the firm’s losses in September could be traced in part to its use of a strategy involving convertible bonds, an approach that requires money managers to short-sell shares they do not own in the hopes of buying them back later at a lower price. Mr. Griffin said he began increasing his holdings of convertible bonds in the middle of summer, taking more risk in an area where he has a lot of experience while reducing his positions in “poorly performing strategies.”
But the strategy became a big money loser after the Securities and Exchange Commission temporarily banned short-selling in nearly 1,000 shares. The S.E.C. said it put the ban in place temporarily. On Wednesday night, it said it would extend a requirement that big investors disclose their short positions to the agency until August 2009.
“Regretfully, I did not foresee the financial disaster that was to unfold in September,” Mr. Griffin wrote. “In the weeks to come, I expect we will continue to see significant volatility in our earnings as the world manages through the unfolding crisis.”
Citadel is hardly the only troubled hedge fund. Scores of hedge funds have lost money since Lehman Brothers, the investment bank, filed for bankruptcy protection in early September. Greenlight Capital, a fund run by David Einhorn, was down 12 percent in September, and Harbinger Capital Partners, one of the big winners of 2007, was down 18 percent for the month, according to a report by HSBC, the bank.
Many individual investors are also suffering, of course. Edward W. Gjertsen II, a vice president for Mack Investment Securities outside Chicago, said his clients appeared to be more unnerved this week than they were last week, when the market fell day after day without pause.
“I have started to see the first signs of worry today amongst clients relating to both the markets and the economy,” he said.
Mr. Gjertsen has taken to staying up late to watch trading in Asia and Europe on CNBC and Bloomberg TV. He said he was watching for signs that the market had hit bottom so he could put more of his clients’ money into the market. He said he was hopeful a bottom was close but he was not comfortable enough to tell his customers to buy.
“My wife has been asking me, ‘What are you doing?’ ” he said about his market watching. “I say, ‘I am absorbing.’ ”
The sell-off continued in Asia. In early trading Thursday, markets in Japan were down more than 9 percent, and in Australia they were down about 6 percent.
As stocks fell, investors sought safety in government debt. The benchmark 10-year Treasury bill rose 1 2/32, to 100 14/32, and the yield, which moves in the opposite direction from the price, was 3.95 percent, down from 4.08 percent late Tuesday.
No comments:
Post a Comment