There's nothing logical, sensible or even historically defensible about the volatility in the stock market. Companies are selling at ridiculous discounts right now. It's like a time machine, as if you could rewind the bull market, buy stocks, and then ride them back up again.
Why? Recession, sure, but big investors priced that in a month ago or earlier. It will last until mid-2009, most analysts say, which means now is the time to buy.
So why no huge upside rally? Too many shorts? Waiting for Obama? Nope.
Simply put, hedge funds and college endowments are messing around. This from The Wall Street Journal:
"This has been the toughest year on record for hedge funds. Several factors suggest it could get even worse.
In recent weeks, many hedge funds have been stockpiling cash in the hopes of stanching losses and having the wherewithal to satisfy investor redemptions.
Some hedge-fund managers had hoped investors might reverse their withdrawal requests if the market improved. But amid the past week's rout (even with Friday's gain), and a steady redemptions drumbeat from pension funds, endowments and others, there is a sense that more hedge funds will have to close."
If it were just retail investors, this bear market would have keeled over already. Problem is, there are still about 10,000 -- yes, I said 10,000 -- hedge funds still in operation. George Soros figures two-thirds will close down.
As their investors realize the bloom is off the rose, and that these Ivy kids with the right family connections and slick networking skills are not masters of the universe, that they do not have any special tricks for investing and winning in up or down markets, the funds' shareholders will press for their money back, which forces the funds to sell into a bear market to raise cash.
Short sellers know this and keep taking positions on vulnerable companies (hello Citigroup!) on the presumption that hedge funds have to keep selling, no matter what. And, for now, the shorts are right about that.
Which, naturally, creates volatility. No one knows how long it takes to liquidate 7,000 hedge funds, but individually they can't have that much under cover, so it's just a matter of pushing the lemmings off the cliff and moving on.
Believe him or not, Barton Biggs has a pretty good explanation of it.
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