A "perfect storm"? How about 1,300 points down?

The market opened weak and was down 200-300 points. Tokyo was down over 900 in the morning and in the afternoon the Hang Seng Index followed Tokyo's lead and was down almost 1,300 points to under 20,000. It recovered with short covering and was down some 280 points at the close.

On Thursday, the trading pattern was very similar and there were rumours that futres brokers were receiving margin calls in mid trading as market volatility was outside expected norms, "a perfect storm". We saw many quant funds taking huge hits because the volatility was outside their parameters. When will we learn? This happened in 1997 with the Asian Financial crisis, the LTCM debacle, and the Russian meltdown. It's always the tail end of the bell curve that gets you.

Just as in the LTCM debacle, and the Russian meltdown fiasco (and in South America before that) we can expect the US Cavalry to ride to the recus. By that, I mean the US Federal Reserve. And right on cue, the Fed cuts the Fed Funds rate by 50 basis points. The "Greenspan put" is again in effect. There is really not much choice. Either you save US financial institutions from their own follies, or you watch the market implode from lack of liquidity and credit concerns. Unfortunately what happens on Wall Street will after Main Street. George Bush and the Republicans have enough to worry about in the Middle East. With an election year coming up, the last thing they need is is an economy that tanks.

So where does that leave us? Rumours have been flying around that Chinese money is poised to come in. The market got ahead of itself on the announcement of QDII and went straight up to almost 24,000. We are now back at the pre-QDII announcement levels at the beginning of the year. QDII applications are being approved. The current levels will let QDII money buy in a favourable levels now that hedge funds speculators have been shaken out.