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Just as the markets seemed to be settling back into comfortably complacent mode, Friday afternoon saw share prices take another hammering.
The Dow Jones dived by almost 300 points as one of investment bank Bear Stearns' two presidents, Warren Spector, left the ailing group.
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It was the demise of two Bear Stearns hedge funds, which were invested in subprime mortgage debt, that kicked off the current bout of volatility in the first place.
So just how much worse can it all get?
Warren Spector, head of stock and bond trading at Bear Stearns, resigned on Friday. It was Spector who oversaw the two hedge funds (High-Grade Structured Credit Strategies Fund and its more leveraged sister fund) which went into meltdown over the subprime collapse just a month or so ago.
Credit agency Standard & Poor's put the company's debt on a negative watch on Friday - in other words, it's warning that it could be downgraded. The company tried to reassure the markets.
"I've been involved in the securities industry for more than four decades," said chief executive James Cayne, "and have seen a broad spectrum of dislocations. This is not the first time and will not be the last time that Wall Street and the financial community will work through difficult conditions."
Samuel Molarino, the chief financial officer, said the company is "in a mode where the appropriate path is to preserve our capital and try to weather the storm our goal has been to preserve liquidity." According to Marketwatch.com, he also said that "current conditions in fixed-income markets are the worst he has seen in his 22 years in the business." That's in a career that has seen the 1987 stock market plunge, and the collapse of Long-Term Capital Management in 1998, as well as the dot-com bust, of course.
As you might have guessed from the several hundred point fall in the Dow Jones Industrial Average, it wasn't exactly the reassurance that Wall Street was hoping for.
What the crew at Bear Stearns may not have fully appreciated is that while they were talking of stormy weather and "preserving liquidity", everyone else was still hoping that this was a brief squall. There are plenty of people in the markets who are still trying to pretend that those pitch-dark clouds and that big water spiral on the horizon are just going to go away.
Bear Stearns' talk of "weathering storms" isn't what they want to hear. They're not in any fit condition to be weathering storms. Part of the problem is that "difficult conditions" were meant to be a thing of the past. Cayne and Molarino might have been around long enough to have seen hard times, but lots of the younger generation of managers currently playing with money on Wall Street don't know what a real recession is. They can hardly believe a time existed when making money was difficult, and outperformance meant losing less than all the other managers.
Besides, the credit derivatives industry was supposed to have abolished risk - not sewn the seeds for the next major disaster. Everyone laughed at Warren Buffett when he warned - many moons ago - that derivatives were weapons of financial mass destruction. What did that old guy know?
Yet it seems the world's most successful investor was onto something. And now, as Mike Vogelzang of money management group Boston Advisors tells The Telegraph this morning, "Everybody's waiting for the second, third and twentieth shoe to drop."
Our cover story of last week talked about the reasons for the credit crunch, and how to shelter your portfolio from the fall-out. If you missed it, you can read it online here: Is the tidal wave of cheap money about to break?
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Turning to the wider markets
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London shares ended Friday lower as weak US jobs data renewed investor concerns. The blue-chip FTSE 100 closed down 76 points, at 6,224, and the broader indices were also lower. Insurers Standard Life and Old Mutual were among the day's biggest fallers ahead of updates due this week. For a full market report, see: London market close.
Elsewhere in Europe, the Paris CAC-40 was 84 points lower, at 5,597 and the Frankfurt DAX-30 was 98 points lower, at 7,435.
Across the Atlantic, the Dow Jones was down 281 points to end Friday at 13,181 with all of its components in negative territory. The tech-heavy Nasdaq was 64 points lower, at 2,511. And the S&P 500 was down 39 points at 1,432.
In Asia, the Japanese Nikkei 225 was down 65 points to close at 16,914 today.
Crude oil was nearly 1% lower, at $74.76, this morning, whilst Brent spot had fallen to $74.84.
Spot gold had fallen to $673.10 and silver had slipped to $13.09.
Turning to the foreign exchange markets, the pound had risen to 2.0432 against the dollar and was at 1.4783 against the euro. And the dollar was at 0.7233 against the euro and 117.64 against the Japanese yen.
And in London this morning, Barclays formally launched its 65bn euro bid for Dutch bank ABN Amro following a bidding war with rival Royal Bank of Scotland. Barclay's is offering 2.13 shares plus 13.15 euros for every ordinary share in ABN Amro. The offer's acceptance period will run until 4 October.
And our two recommended articles for today...
Is the market ready for a real correction?
- The coming months could see a 10% correction in the market - or fresh all-time highs. And there's one magic number that holds the secret to its direction. For the Smart Profit Report's take on current market conditions, see: Is the market ready for a real correction?
Will the yen benefit from the global credit crunch?
- Recent political upheaval in Japan - namely the weakening of Shinzo Abe's administration and resignation of anti-rate hike Hidenao Nakagawa - has set the stage for more rate rises. That, along with a dollar sell-off, could see the yen go from strength to strength. For more on what the current political and economic situation, at home and abroad, means for the Japanese currency, click here: Will the yen benefit from the global credit crunch?
John is the executive editor of MoneyWeek and writes our daily investment email, Money Morning. John graduated from Strathclyde University with a degree in psychology in 1996 and has always been fascinated by the gap between the way the market works in theory and the way it works in practice, and by how our deep-rooted instincts work against our best interests as investors.
He started out in journalism by writing articles about the specific business challenges facing family firms. In 2003, he took a job on the finance desk of Teletext, where he spent two years covering the markets and breaking financial news. John joined MoneyWeek in 2005.
His work has been published in Families in Business, Shares magazine, Spear's Magazine, The Sunday Times, and The Spectator among others. He has also appeared as an expert commentator on BBC Radio 4's Today programme, BBC Radio Scotland, Newsnight, Daily Politics and Bloomberg. His first book, on contrarian investing, The Sceptical Investor, was released in March 2019. You can follow John on Twitter at @john_stepek.
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