Loved these parts....
Amazingly, stocks today move 20, 30
or even 80 points on no meaningful news or corporate developments. And this
morning Charles Schwab traded with $63 billion in market value, not only 70%
greater than Merrill Lynch but also surpassing General Motors. Schwab gained 61
points, or about 65%, in just eight trading sessions. E*Trade rose 83 points,
doubling in prices, and Ameritrade gained 126 points, or 200% in the same eight
sessions. NetBank surged almost 140 points in three sessions, or about 150%.
And looking at the market as a whole, prices have just marched higher with the
Dow gaining 700 points in less than three weeks with nothing in the way of
fundamental developments to explain such a huge move. As has been the case
all year, strong market gains fly in the face of fundamentals as interest rates
have surprised on the upside and earnings prospects only continue to
deteriorate.
For months now, Wall Street derivative shops
have been peddling products that provide the owner leveraged long exposure to
the Internet sector. And as the writers of these options, Wall Street derivative
trading desks must dynamically hedge their exposure to these instruments. This
hedging activity can be very destabilizing as it leads, particularly during turbulent
markets, to self-reinforcing buying when prices start to rise. As certainly has
been the case of late, the writers of call options on Internet stocks have been
forced to buy the underlying stocks, at any price, in a frantic effort to hedge
exposure. And this frenetic derivative related buying only exacerbates the huge
losses being suffered by those short these stocks. This has led to the current
truly historic market fiasco. One thing is for sure, the forced panic buying by
derivative players and those short these stocks is done with no regard to the
underlying business fundamentals of the actual companies. The lack of underlying
fundamentals will come back to haunt these stocks come the collapse.
For months now, Wall Street derivative shops
have been peddling products that provide the owner leveraged long exposure to
the Internet sector. And as the writers of these options, Wall Street derivative
trading desks must dynamically hedge their exposure to these instruments. This
hedging activity can be very destabilizing as it leads, particularly during turbulent
markets, to self-reinforcing buying when prices start to rise. As certainly has
been the case of late, the writers of call options on Internet stocks have been
forced to buy the underlying stocks, at any price, in a frantic effort to hedge
exposure. And this frenetic derivative related buying only exacerbates the huge
losses being suffered by those short these stocks. This has led to the current
truly historic market fiasco. One thing is for sure, the forced panic buying by
derivative players and those short these stocks is done with no regard to the
underlying business fundamentals of the actual companies. The lack of underlying
fundamentals will come back to haunt these stocks come the collapse. |
