‘Automatic’ Crash Was Predicted!

Money News ^ | 5-7-10 | Christopher Ruddy

[STARWISE]

The largest one-day stock market fall in all of U.S. history took place Thursday, but it did not come as a surprise to readers of Financial Intelligence Report (FIR).

FIR has been warning for months that an “automatic” correction was in the works due to two factors:

1) the high number of stop orders placed on auto-trade with brokers and

2) the automatic expiration of the Bush tax cuts at the end of this year.

Back in October 2009, our monthly advisory — published by Newsmax — warned that many investors were nervous about their equity investments and had been placing automatic stop orders on their holdings.

My analysis for Financial Intelligence Report that month was headlined: "An 'Automatic' Stock Market Crash in the Cards?"

We shared with our readers information we had learned from one of the top private banks in the country. In past years, we were told, investors generally did not place such standing orders, believing as they did in the great American bull market.

But such optimism ended with the market crash of 2008 and 2009.

Wary investors have slowly been coming back into equities, but ever so carefully — and many times with those conservative stops in place to lock in their gains “just in case.”

On Thursday, when the stock market began to tumble and fell more than 200 points, stops obviously began to kick in. Selling pressure became enormous.

Media reports now say an “error” worsened the problem, with a trader accidentally placing a broad-market sell order in the billions instead of millions.

So far, the exchanges say no evidence of this has been found.

This further pressed the market down and even more stop orders kicked in.

But the shaky nature of the overall stock market is not caused by stops. They are just one problem the market faces.

The bigger problems are the state of the economy and President Barack Obama’s policies.

Once again, the press is blaming the stock market tumble on Greece and avoiding the “O” word.

How do they know Greece caused the tumble?

They don’t. I think the economy here in the United States and Obama’s policies are having a far greater effect on investors.

At Financial Intelligence Report, we have been warning of a major market correction all this year. We predicted that, one day, investors would wake up and realize that the Bush tax cuts are expiring en masse at the end of this year.

This means that without lifting a finger Obama will get a massive, almost across-the-board tax increase.

Those in the highest brackets — people who Obama sees as “rich” and who I see as critical for economic recovery — will see an automatic tax increase of about 10 percent.

It has been a long-held view that the stock market is a leading indicator of the economy by about six months.

In just over a half of a year, then, we foresee that the consumer economy will take a huge hit as the cash flow of high-income producers diminishes.

As the Bush income tax cuts expire, so do dividend and capital-gains cuts. Many investors will also realize it’s better to sell this year and pay less tax — another factor that will put downward pressure on the markets.

Obama thinks he will take from the rich to give to the poor by letting tax cuts expire, but he will most hurt the poor.

What Obama forgets is that those who make high incomes are not necessarily rich, at least as far as their balance sheets go.

Warren Buffett takes a very small income but is very rich, the richest man in America. Interestingly, his income will be little affected by the end of the Bush tax breaks.

I suggest the president and others read Dr. Thomas Stanley’s new book, “Stop Acting Rich.”

As Stanley explains, those who have high incomes, such as doctors and lawyers, are typically not wealthy.

Instead, he finds, they are hyper-consumers. They like to spend what they earn. Cars, watches, travel, restaurants, fashionable clothes, boats, you name it.

There is no question that such spenders drive the whole U.S. economy. Think of the thousands of workers who find employment due to such hyper-spending.

Financial Intelligence Report has warned that if the Bush tax cuts expire, it will reduce cash available to such spenders, who will further tighten spending.

Investors should begin tightening their seat belt as we careen toward a double-dip recession.

[STARWISE]

Oil Falls, Caps Biggest Weekly Drop Since 2008 on Debt Crisis

Crude oil tumbled, capping its biggest weekly decline in 16 months, on concern Europe’s debt crisis will slow the global economic recovery.

Futures dropped to the lowest level in 12 weeks as equities fell amid speculation Greece’s financial distress will spread to other countries. German Chancellor Angela Merkel said euro-area countries must speed up efforts to tighten financial regulation and pursue budget consolidation.

“The continued problems over in Europe seem to be infecting the rest of the world,” said Sean Brodrick, a natural resource analyst with Weiss Research in Jupiter, Florida. “If this thing continues it could really hurt the chances of a global recovery.”

*snip*

Moody’s Investors Service yesterday placed Portugal on review for a possible downgrade.

If commodities and equities “struggle to move higher in the wake of this positive report, the specter of bearish forces for growth may be larger than participants are currently pricing in and could push commodity and equity markets lower,” said Jason Schenker, president of Prestige Economics LLC, an Austin, Texas-based energy consultant, in a report today.

[bgill]

We predicted that, one day, investors would wake up and realize that the Bush tax cuts are expiring en masse at the end of this year. This means that without lifting a finger Obama will get a massive, almost across-the-board tax increase.

Amazing how everything falls into his lap.

[La Enchiladita]

Thanks, Starwise. It was sickening to see the avalanche of lies on Thursday about the crash. “Someone pushed the wrong button.” Who is buying that and how dumb are we supposed to be?

[386wt]

Do stop orders really work? I thought that a stop order could be "zoomed" through. And before it is executed the stock could drop far below the order.

Then it is executed anyway at a much lower threshold.

Is this true? (question for anyone).

[gaijin]

If my understanding of what you've told me is correct, it would appear that the oh-so-FAT FINGERS have gone and created......A CRISIS.

Do I read that correctly, sir?

[yoe]

(Banks: Losses From Computer Intrusions Up in 2007)

(Chronology of Data Breaches)

(...from condos that were involved in a mortgage fraud...FBI)

(SACHS REPEAT)

Too many 'drains' to read - Obama hasn't a clue.....

[gaijin]

The question of energy self-sufficiency made him vulnerable., BUT THEN the biggest oil spill IN HISTORY happened.

So lucky..!

He called for financial reform, but his bill was stalled. Oh! BUT THEN the biggest one-day swing in the stock market happened...!

SO LUCKY...?

[Christian_Capitalist]

Do stop orders really work?

They "work" as intended. If there is a sufficient volume of buyers to provide "takers" for your stock at your chosen price, then your sale should be executed at the price you specify.

If there's not any buyers at that price, or not enough to fill your order (as previously-placed orders get filled first), then you may not get the price you wanted and may instead get filled at a lower price.

I thought that a stop order could be "zoomed" through. And before it is executed the stock could drop far below the order.

Much lower? Not as likely with very liquid stocks, but that is indeed possible. And much more likely if you're selling stock which only trades a few thousand shares a day, for example.

Then it is executed anyway at a much lower threshold.

That is indeed possible.

Is this true? (question for anyone).

Yes.

[GodBlessAmericaKD]

Its not that we are thought to be dumb (although they DO think we are all dumb), but this fits the narrative they are spinning to allow the federal government to transform into an all powerful national state. If we look at the stock market crash this week for what it was - a crazy part of the cycle caused by fundamental domestic and international economic concerns and technical factors related to the computerized trading world in which we live, coming together for a perfect storm of selling - then we don’t have a “teachable moment” that allows the government to extend its power.

However, if we have the entire global financial market being thrown into a tizzy because an idiot trader at a large bank (we are supposed to hate all bankers, I saw it on the news), then we have an enemy to peace and prosperity for those normal, working Americans among us. In fact, the normal, working Americans (many of whom aren’t really working right now, but are being supported by the benevolence and caring of our glorious leader) need somebody to protect them from this evil cabal of bankers who have fun toying with us by making typos on trading orders. The ONLY people who can save us all from ruin and chaos (according to this narrative) is a strong and powerful NATIONAL STATE! Yea fascism! Of course, a State friendly media is absolutely required to make sure the normal, working Americans among us (even those that aren’t working, but are living off the benevolence of the State) are really “informed” as to what is “really going on” - at least what the State wants them to know about what is going on.

We are living in historic times, scary times. Times when a small elite are finally trying to strip our Liberty away in the name of providing us security. As has happened so many times in the past, it is not security from a foreign enemy that they seek to provide, but economic security. Before we know it will have neither Liberty nor economic security. How sad.

[slowhandluke]

Much lower? Not as likely with very liquid stocks, but that is indeed possible.

That's a pretty timid answer, considering what happened to APPL. 268 to 199, back to 258. That's enough to trigger 20% stop points, much less a tight 10% stop. It zoomed down, folks were stopped out, and it zoomed back.

PG went to 0.01. How's that for zoom?

[SonOfDarkSkies]

This article pretty much nails it.

The idea of a fat finger is ridiculous but an avalanche of stop-orders would easily account for such a tumble.

Just a guess but I would think it was the institutional equities desks at large retail firms that first noticed that the sell orders driving the market down were "stop loss" orders and at some point those traders pounced when the market reached a bottom.

I can imagine the head institutional equities traders asking their retail system counterparts for an estimated date on which these stop loss orders started to be placed in large quantities (probably mid-February of this year--or last fall--as retail buyers returned to the market).

That would give them a rough idea of where the bottom was (around 10,000 for the DJIA).

[386wt]

Thanks. Your answer is clear (unlike my broker agreement).

[combat_boots]

Related story cross-linked to EU Times from JustPiper's RSS feed: http://justpiper.com/2010/05/obama-moves-against-us-federal-reserve-bank-calls-for-audit/

[STARWISE]

Fed trace flash crash to Chicago

http://www.freerepublic.com/focus/f-news/2509155/posts

[Christian_Capitalist]

That's a pretty timid answer, considering what happened to APPL. 268 to 199, back to 258. That's enough to trigger 20% stop points, much less a tight 10% stop. It zoomed down, folks were stopped out, and it zoomed back. PG went to 0.01. How's that for zoom?

It happens.

Wouldn't be surprised if there were some technical errors behind all of that, but it does happen.

Often? No. Sometimes? Yes.

[La Enchiladita]

Post #37 in the linked thread requires an answer.

[Mr. Jeeves]

Karl Denninger's explanation of what happened is much clearer than any others. Since it was a systemic "failure", no one is going to want to own up to it - especially since doing so would give away the game. Easier to make up ludicrous stories about a "fat finger".

[La Enchiladita]

Of course, a State friendly media is absolutely required to make sure the normal, working Americans among us (even those that aren’t working, but are living off the benevolence of the State) are really “informed” as to what is “really going on” - at least what the State wants them to know about what is going on.

I am at the point where Hal Lindsey makes more sense than anyone else on TV, and I think of myself as a reasonable woman. But this is not a reasonable world we live in. This administration has gotten us in worse shape faster than anything I have ever seen.

Speaking of which, what is happening with the Chris Dodd banking bill?

From what I can see, the Senate is taking a piece-meal approach to the legislation but what will be the overall effect? Will the proposed "Consumer Protection Bureau" actually be a government-run central bank that regulates all private banks?

[STARWISE]

I'll say ..

~~~~~~~~~

Post #37

To: Nachum Hello. One purpose of the "flash crash" was to take stops set by those trying to protect their investments. In reality, their stocks were stolen at a lower price due to the rapid market fall. Also, the drop was so precipitous the price paid for many of the securities would be below the stop price which can not be guaranteed depending upon the rate of all. Whoever had the power to do that is now filthy rich at everyone else's expense.

37 posted on Friday, May 07, 2010 10:48:10 PM by MeneMeneTekelUpharsin

Who are the crooks, liars and outright thieves ????

[Para-Ord.45]

bm