On the right we see a pallet of 100 dollar bills, and a man – let’s call him Timothy. This stack of cash is worth 100 million dollar. You’ll need a lot of pallets to stock one trillion dollar. See here to get a grasp how many pallets you need for a trillion dollar. Notice that our down-to-earth friend Timothy is still standing there on the left side, and the pallets are double stacked.
Dozens of psychologists, economists and behaviourists have studied the cause of several stock market panics. They are still graduating on the 1987’s crash and panic selling. Time for a change.
The current devastating crash is one of history’s worst. However, the most interesting phenomenon is the complete absence of panic. Sure, investors may have trouble getting enough sleep and the crash will ruin some marriages – but the panic in the option markets remains absent.
When markets crash, the option prices rally as the price to be paid for insurance is exploding. With the indices closing at multi-year lows, the price of calls and puts rises only gradually. The implied volatility as measured by the VIX or one of its countless sisters (VDAX, VAEX,..) is way below November 2008 levels.
Scores of weblogs are addressing the issue of the low volatilities. The Daily Options report, Vix and More, and Stock Geometry to name just a few. A possible explanations has been the orderly sell-off, also coined the “slow motion capitulation”. Investors may also just turn to outright short selling instead of buying put options. A little unlikely, but possible.
From my professional perspective, I can confirm I’m not in panic either. It has been nearly half a year since Lehman’s collapse. During this time I had enough time to cover my job-risking short positions. Now we keep on falling as a rock, I don’t have to reach out for that red panic button. Apparently, I’m not the only calm witness of the meltdown.
Back in 1995 my club AFC Ajax was the reigning champion of the Europe – of the world, to be more specific. The old stadium was still in use and the new one had yet to be build. In England the Blackburn Rovers won the title and over here FC Volendam (!) played and lost the cupfinal to Feyenoord after the winning goal from good old Mike Obiku. Our Patrick Kluivert was the rising star. Sorry for this football intermezzo, yesterday’s victory over Fiorentina is still on my mind.
On the other side of the ocean the Twin Towers were still standing there. Bill Clinton was serving his first term and nobody knew miss Lewinsky. In 1995 I never heard of e-mail, and didn’t own a cellular phone. Actually, I hadn’t seen any mobile phone in real life. In the world of derivatives the physical trading pit was the place to be. Today, February 27th, the national AEX index dropped below the 2003 lows into levels last seen in 1995.Hard to believe the world has changed, but the index is back at the same old levels.
Editors in the financial press need a lot of imagination to describe the distressed world around us. Cutting jobs, slashing dividends and reducing estimates are the most common lines on the front page and hardly leave any room for poetic creativity. Enter the zombie banks. The term financial “Zombies” has been coined by economist Edward Kane to describe the problems of Japan’s lost decade. Zombies have been Big in Japan for two decades now.
According to Douglas Diamond and Raghuram Rajan of the University of Chicago the Curse of the Zombie Banks Haunts Fed was published this week.In short, the weak banks can’t sell their assets at current market prices as it would put them out of business. These zombie banks can only survive by soaking money from the government. The money flowing into the crappy bank doesn’t find its way back to the society in the form of profitable loans, it just disappears in the ever-growing black hole. The zombies won’t add any value to the economy and block the way to revitalizing the financial system. A natural solution would be the zombies banks to fail, selling their toxic assets in a fire sale into stronger hands.
As happens with most of our problems, closing your eyes won’t make zombies disappear. The best advice for Obama and his economic team is get out their shotguns and aim for the head. It’s not painless, as the zombies will remind you of former respected friends – just keep in mind they are already dead. Apart from the final scene in Shawn of the Dead, no zombie will ever make it back to a useful life. And the toxic debts aren’t a comedy.
The zombie metaphor sounds too good to be true, and it is. In reality the zombie banks are hard to kill without massive collateral damage, where George A. Romero’s undeads can be gunned down with a single shot between the eyes. His zombie’s are scary because of they are with many, financial undead’s aren’t that numerous. They are just… massive.
Avoiding mistakes is a rewarding trait for traders. Pressing the wrong buttons or trading with the wrong variables will invariably cost you dearly. A true source for self-hatred too.
The same logic doesn’t count for the stock exchange themselves. Running an exchange shouldn’t be regarded as rocket science. Open your trading pit or computer system for trading and sell the price information to subscribers. Make money on both sides.
Messing up is rather common for the employees of NYSE Euronext. Introducing the wrong new option series or blocking trading altogether by imposing the wrong price limits happens almost on a daily basis. An alcohol raid in the Euronext premises may reveal surprising results.
Yesterday NYSE Euronext messed up the price feed. All stocks in the Amsterdam midcap index traded in negative territory. Heavy weight Draka even dropped as low as 9%. With 25 stocks in the red zone, the market average of the index was a plus of 2% according to Euronext. It doesn’t take a mathematician to note the error.
Turned out Euronext used the wrong closing prices of the previous day. According to Euronext’s spokesman they are still investigating the matter, and the unreliable information hasn’t led to the wrong trades. Investigating is fine, but wouldn’t put my money on the other part of the statement..
(Photo by Aviva – the Canadian girl that is, not the British company)
