08 May 2010

What Thursday Means

It is now Saturday morning, following Golden Gate Thursday, and none of the Usual Suspects in the Pundit Gang have (that I've read or heard, at least) taken up the issue of what The Plunge means going forward. Lots of words regarding forensics and post mortems, and the like, but nothing dealing with the change in structure of stocks.

Herewith my modest attempt.

First, Blankfein and his Merry Band of Visigoths were reacting to the Day of the Long Knives on Wednesday, when Democratic leadership let it be known that they were serious. This was the Merry Band's object lesson: we can destroy the economy in minutes, and we will if you don't leave us alone. Remember the Prime Directive of Social Darwinism: never attribute to stupidity that which can be motivated by malice; malice wins every time.

Second, what happened to all that stock that changed hands? Where did it come from and where did it go? According to the Usual Suspects (depending on which you read), some 40 to 60 percent of trading of NYSE stocks actually occurs on outside electronic exchanges. From reading message boards of stocks I follow, many retail investors were stripped by stop losses during the plunge. It is legend that hedgies and the like don't use stop losses, given that they have these wonderful computer robots to do real time trade analysis. Other reports out of Swan Dive Thursday say that, yes, hedgies were victims of stop loss when the S&P crossed one of its moving average points. Hoisted on their own pitards, that.

But such movement doesn't change, in the aggregate, the distribution of stock ownership: hedgies traded back and forth, so what? On the other hand, many (most, perhaps?) retail investors use stop losses, since really it's their own money at risk. All of that Mom and Pop stock went into hedgies at really cheap prices. NASDAQ has said it would cancel trades that were below a 60% line (Reuters: Nasdaq Operations said it will cancel all trades executed between 2:40 p.m. to 3 p.m. showing a rise or fall of more than 60 percent from the last trade in that security at 2:40 p.m or immediately prior). As far as I find in the news today, NYSE's electronic exchange did the same, but NYSE proper did not. But this still leaves a tsunami of really cheap stock now in the hands of hedgies. The retail investor using his/her web browser connection was locked out most of the afternoon as all this went on. Schwab couldn't even display positions for most of that time, let alone execute orders. Retail could have picked up some nice bargains; 59% is a very nice discounted price.

Once the Dow hit minus 1,000 (actually, 998.50), those same computers kicked in to buy up the stocks. Again, only 60 percenters will be undone. The loss for the day was about 350.

What is different come Monday morning? Mostly, retail investor will be much poorer and holding an even smaller proportion of stocks. Hedgies will have made billions, on paper (unrealized capital gains). The question is: what will they do with this fortune? Will they trade up the market to increase the gains, greedy bastards that they are? Or will they flip the shares, thus causing a cascade of mini-plunges? Friday's loss is instructive. There was no bad news, and what news there was, was good. But another loss on the day.

So, I'd expect a damped oscillation of losing days for a week or so. Blankfein and his Merry Band will drive home the point.

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