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David's Macro Blog

Analysis and commentary on business, economics, real estate, financial markets, and other fun topics


Tag: market timing

On Thursday May 6th the stock market took a unexplained and terrifying plunge down 10% during the day.

This highly unusual event called the “Flash Crash” can be seen in real time on CNBC as Erin Burnett is interviewing Jim Cramer on Street Signs.

There are many (some conspiracy) theories as to the cause of the “flash crash,” which call into question the robustness of our nation’s financial systems.

How robust and sound is our financial system when the stock market can fall 10% intraday or about one trillion dollars?

Here are a few of the reported potential causes and conspiracy theories that may have triggered the crash.

  • A trader made a “fat finger” error and pushed the wrong key on his keyboard selling a unusually large amount of contracts which exceeded the supply available. This is essentially a typo error.
  • There was a large legitimate sell order on the S&P e-mini futures contracts which caused all markets globally to react and recalibrate to a lower futures price.
  • Dow component Proctor & Gamble (PG) was either misquoted or mis-priced much lower than it should have been. (Cramer notices this on the video.)
  • The market makers on the NYSE shut down for a few minutes to pause and reflect on the day’s previous 3% fall in prices. This sent existing sell order to smaller exchanges which couldn’t find enough buyers and thus prices fell dramatically.

I bet you thought that was it. But wait there’s more!

  • There were fears over the European sovereign debt crisis and the crashing Euro.
  • Related to the European crisis were images on TV of Greek citizens rioting because of the new fiscal austerity measures placed upon them.
  • Computers trading with each other in fractions of a second all simultaneously decided to sell (similar to the October 1987 market crash). This isn’t so improbable as you might expect, because most of those system’s algorithms (“algos”) were programmed by a similar set of computer and math genius who went to similar schools and were taught similar economic and financial theories.
  • And finally, my favorite: The whole affair could have been orchestrated by TPTB (The Powers That Be) on Wall Street to fleece profits from the masses (triggering stop loss orders at low prices) AND scare Washington into diluting the Financial Reform Bill being debated on Capital Hill that very day.

Here’s what should bother and scare us:

First, no one knows what caused the crash.

Second, an incredible amount of wealth, greater than some nations’ GDP, vanished into thin air over 15 minutes. How safe and secure should we feel?

There are even other possible issues which could have caused this crash and they should cause us to thoroughly examine and rebuild our financial system to be better able to absorb shocks.

Perhaps we’ll find that, like most catastrophes, it was a combination of errors and systemic issues that caused the 10% intraday stock market plunge. The stock market could handle and has handled issues in the past of similar magnitude to those listed above. However, if a few of these occurred during one day, it is doubtful order could be maintained with the current systems in place.

P.S. Does anyone still believe in the efficient market hypothesis and that stocks are ALWAYS perfectly valued?

How about the theory that “there is a buyer at every price point?”

See the 13-page report below for my predictions for 2010 and more:

  • Stock Market
  • Real Estate Market: The next wave of ARM defaults? Is it time to buy yet?
  • Interest Rates: Stay low or heading higher?
  • Currency
  • Precious Metals
  • Commodities
  • Political: Will real reform be passed?
  • The Blame Game
  • Wild Cards
  • What’s the real problem and what are the potential solutions?
  • What would really shock me?

David’s 2010 Predictions

Related Post: 2009 Year in Review

One of the most obvious signs of the market cycle being at its peak is when new people enter the market with no experience and DO WELL.

During the stock market bubble ending in 2007/2008, Lenny Dykstra, a baseball player known for tough play but limited intelligence had become a respected financial anaylst and investment guru (even endoursed by Jim Cramer).

Naturually there was no substance to Dykstra’s investment genius, just the tail wind of a massive credit bubble and rising stock prices.

Watch these 2 segments of the Daily Show below about Dykstra’s rise and fall as an “investment guru”.


Note the spots in the video where Dykstra says that he doesn’t read books because they hurt his head and where Cramer calls him “brilliant.”

It should come as little surprise that Dykstra has now filed for bankruptcy, is multiple millions of dollars in debt, and has dozens of lawsuits filed against him.

As a side note, Lenny Dykstra was endorsed and promoted by Jim Cramer who said Dykstra is “one of the great ones in this business.” That should have been a clue that there was probably no substance. Watch Cramer on video tape admitting to manipulating stock prices: Jim Cramer on The Daily Show.

Calculated Risk also posted about this story in this post – Daily Show: Financial Guru?

What do you think? Comment below and let me know.

Probably the biggest fundamental truth to any market is that markets rarely remain in perfect equilibrium Instead, markets (such as the real estate market from 1998 through 2009 or the stock market from 1996 through 2003) move through different stages of asset price levels, participant psyche, and fundamental value.

The following are what I observe to be the 6 changing stages of any market.

Stage #1: Pricing Supported by Fundamentals

  • Asset prices are in-line with historic norms.

Stage #2: Speculation Starts

  • Market participants identify the current trend and project that it will continue indefinitely — speculation starts.

Stage #3: “New” Pricing Justified

  • Asset prices are so distant from historic norms that they are justified by new economic theories.
  • For example, during the 1990’s tech bubble, higher price-earning ratios were justified and main stream media proclaimed that we were in a “new economy”.

Stage #4: Mania

  • When more and more buyers / speculators want to get in on the action, asset prices go through the roof.
  • Consequently, even “junk” sells as easily as quality assets as unsophisticated buyers are taken advantage of by deal promoters in sometimes fraudulent schemes.
  • Transaction volume and pricing reach levels that cannot be explained rationally.
  • For example, during the tech bubble many internet companies with no real revenue and/or profit went public with ridiculously high valuation (and failed quickly).  During the 2006 peak of the real estate market, “liar loans” and “flipping” were rampant.

Stage #5: Crash and Burn

  • There are few new buyers and no more “greater fools” so buying demand drops and asset prices fall rapidly and dramatically.

Stage #6: Never Again

  • Lessons are learned and new regulations are proposed or implemented to curb the abuses that “caused” the market crash.
  • Assset prices may be below long term economic value of the underlying asset.


Despite many visible and memorable booms and busts, the odds are that we will NOT remember that market cycles exist; instead, most market participants will get caught up and participate in the next bubble.

“There is NO doubt that sometime in the future, we are going to have this conversation again.  It will not be for quite a period of time, but it will occur because the flaws in human nature are such that we can not change that.  It doesn’t work.”

– Alan Greenspan speaking in reference to the simultaneous collapse in the credit, stock and real estate markets in 2008.

Start over at Stage #1 and repeat the cycle.

What do you think?

Do you agree with the 6 stages I’ve identified?  What stage do you think we are in the real estate, stock or other markets you know of?  What are some market cycles you have observed in your lifetime?

Please comment and share your opinion.

From the WSJ: If Corporations Don’t Buy Stocks, Who Will?

Share repurchases by components of the Standard & Poor’s 500-stock index fell to lowest level in the fourth quarter of 2008 since the third quarter of 2004, according to S&P, as companies retreated into a hole, preserving cash as the market tanked.

According to the Federal Reserve’s flow of funds data, released quarterly, the biggest buyers of shares in the 2005-2007 period were U.S. corporations, coming at a time when households and mutual funds were net sellers of U.S. equities. The frenzy hit a peak in the third quarter of 2007, according to Standard & Poor’s, when $171.95 billion in repurchases took place – dovetailing neatly with the market’s peak.

So basically corporations were horrible market timers. They bought their own stock during a big multi-year rally in 2005-2007. Then, when their shares where on sale in 2008-2009 they didn’t buy their own shares at a huge discount.

Thinking about this, a true investor really has to be contrarian. In this case preserving cash in 2005-2007 and then spending that cash when equity prices were cheap starting in 2008. Often the “experts” are wrong. In this case, the best evaluator of a business’s value, the very owner/manager, made a poor investment decision and bought their own business at peak pricing.