Wall Street's "Panic"

by John M. Curtis
(310) 204-8700

Copyright October 10, 2008
All Rights Reserved.                    

        Wall Street ended another disastrous week, dropping the Dow Jones Industrials 1,874 points or 18.2%, prompting President George W. Bush to beg investors to give his bailout plan time to work and, most of all, to not panic.  While the Dow finished the Oct. 10 session down only 128 points, it had been down over 700 points just three hours earlier.  Blue chip stocks had lost over 2,400 points in eight trading days, the worst drop in market history, including the dreaded 1929 crash.  At one point Friday, the Dow dipped 688 points to 7,882, a low not seen since the market bottomed in 2003, following two years of steady declines after Sept. 11.  Hours later the Dow jumped to 8,500, finally ending the whipsaw day at 8,451.  Contrary to Bush, the market was far from panicked, watching the nation’s biggest mutual and hedge funds methodically play the relentless ups-and-downs.

            Day-traders and hedge funds carefully calculate how to buy low and sell high, making profit on the spread between the two.  While it’s frequently camouflaged or glossed over, today’s market demonstrates beyond any doubt that the market is anything but panicked.  Despite the global equities’ sell-off, Wall Street was several moves ahead, driving share prices to bargain levels, then methodically swooping up the irresistible bargains.  “Nobody wants to miss the bottom,” said Anton Schultz, President of Mendon Capital Advisors in Rochester, N.Y.  “I view it as a victory that we only finished down 100,” affirming there was no real panic, only carefully planned and executed buying and selling.  At one point Friday, the market rocketed from a nearly 700 loss to a 250-point gain, a 950-point swing upward.  Bush talks about panic selling but doesn’t mention inexplicable buying.

            When the G-7 meets in Washington over the weekend to discuss a fix to the global credit and stock market meltdown, it’s going to show indomitable resolve to markets going forward.  Sooner-or-later, just like it did in part of the trading session Friday, major mutual and hedge funds will send buy signals, propelling the market to unprecedented gains.  If the market gyrated 950 points Oct. 10 in a whipsaw session, it could easily rocket up 2,000 points when fund managers decide it’s time to buy.  “Everyone is hoping for really good news that can invigorate some buying and break this credit freeze, but your guess is as good as mine as to whether that will happen.  I think people are desperate for action,” said Jon Biele, head of capital markets at Cowen & Co. in Manhattan.  Market experts know that the nation’s biggest funds will move to the upside when selling finally ends.

            If Bush were right, panic selling would have taken the market to new lows.  Instead, major funds look for buying opportunities when selling bottoms out.  Only insiders at major mutual and hedge funds know when the capitulation point has been reached, when sellers can no longer justify unloading stocks.  “Fear has been running rampant all over the Street.  Fear and greed, that’s what rules the Street. I think the carcass has bee stripped to the bone,” said Dave Henderson, a floor trader with Raven Securities, misleading that traders are driven by emotion.  Buying or selling involves methodical strategies, driving inflated share prices back to reality, then swooping up bargains, causing the market to go up.  Wild swings in the market don’t involve small investors telling stock brokers to bail out.  Gyrations stem from fund traders carefully deciding when it’s time to buy or sell.

            Wall Street’s dirty little secret involves how a carefully coordinated buy-and-sell program drives the market up-and-down.  Regardless of external events, Wall Street decides when the market is too inflated, requiring programmed selling to create more attractive share prices.  Market meltdowns always carry the excuse du jour, namely, today’s real estate bubble and credit crisis.  Past sell offs have involved oil shocks, terrorist attacks, Asian economic problems, natural disasters, inflation, interest rates or any other excuse used to justify sell-offs.  Bush chastises the market for panic selling when, in reality, programmed selling achieves the end of driving down share prices for the purpose of creating the next bull market.  While no one knows when the exact bottom will hit, Wall Street has been through many predictable cycles involving sell-offs and eventual buy-backs.

            When major mutual and hedge funds dump their holdings, they typically park liquid assets in safe short-term investments like money market funds.  Fund traders know they can’t make enough profits to keep the cash parked for too long.  When equities deflate in value to the point of captitulation, namely, when programmed selling stops, fund managers buy back positions driving the market upward.  Shortsighted investors don’t understand Wall Street’s standard-operating-procedure for making profits.  Small investors take a beating when they lose faith and bail out in down markets.  Smart investors who can afford a long-time horizon roll with Wall Street’s endless buying-and-selling roller coaster.  Wall Street’s latest downturn is no different than past:  Programmed trading will eventually stop selling, buy back positions and eventually drive markets upward.

  John M. Curtis writes politically neutral commentary analyxing spin in national and global news.  He's editor of OnlineColumnist.com and author of Dodging The Bullet and Operation Charisma.

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