Thursdays “Fat Finger” Freefall

Market Buzz – Thursdays “Fat Finger” Freefall

We would be re-miss if we did not comment on Thursday’s trading action and its effects on the market’s mood going forward – even if the powers that be have yet to identify the root cause and we are left to speculate in this regard.

In case you missed it (and many did, as much of the incident was over in less than 30 minutes), this past Thursday, according to regulatory officials, “a huge, anomalous, unexplained surge in selling” happened at about 2:45 p.m. New York time, setting off trading based on computer algorithms, thus amplifying the fall.

The Dow ended Thursday’s session down 3.2 per cent at 10,520.32, after being down as much as 998.50 points earlier, the index’s biggest intraday drop on record.

Dow Jones Industrial Average

In one of the most dizzying half-hours in stock market history, the Dow plunged nearly 1,000 points before paring those losses—all apparently due to a trader error. According to multiple sources, a trader entered a “b” for billion instead of a “m” for million in a trade possibly involving Procter & Gamble, a component in the Dow. “Sources” say the erroneous trade may have been made at Citigroup.

Amid the sell-off, Procter & Gamble shares plummeted nearly 37 per cent to $39.37 at 2:47 p.m. By the end of the session however, P&G had recouped much of the losses and traded back to the $60.75 level.

The Procter & Gamble Company (PG:NYSE)

The New York Stock Exchange is investigating the cause of the possible erroneous trades.

But tech problems alone are not to blame for the whole of the collapse. As we suspected, the markets have been looking for an excuse to sell-off or take profits. Global equities have rallied 79.9 per cent in a scant 13 months through April, so it would be only natural to go through a correction of around 10 per cent or 20 per cent at some point, if not a sustained period of consolidation.

Amid the panic and confusion, there was good news from K-Bro Linen Income Fund (KBL.UN:TSX), long a favourite in our Canadian Small-Cap Universe. The company is the largest owner and operator of laundry and linen processing facilities in Canada with seven processing plants in six Canadian cities including Toronto, Edmonton, Calgary, Vancouver, Victoria, and Quebec City.

Revenue for the three months ended March 31, 2010, was $23.9 million, an increase of 11.3 per cent over the comparable 2009 period.

A full update and current rating in light of these results will be released to our clients and posted on www.keystocks.com this coming week.

Looniversity – Of Crashes and Bubbles

A bubble is an investing phenomenon that demonstrates the influence human emotion has on investing. A bubble begins when investors put so much demand on a stock that they drive the price beyond any accurate or rational reflection of its actual worth, which should be determined by the fundamental performance of the underlying company. Like the soap bubbles a child likes to blow, investing bubbles often appear as though they will rise forever, but since they are not formed from anything substantial, they eventually pop. When they do, the money that was invested into them dissipates into the wind.

A crash is a significant drop in the total value of a market, almost invariably attributable to the popping of a bubble, creating a situation where in the majority of investors are trying to flee the market at the same time and consequently incurring massive losses. Attempting to avoid more losses during a crash, investors resort to panic selling, hoping to unload their declining stocks onto other investors. This panic selling contributes to the declining market, which eventually crashes and affects everyone. Typically crashes in the stock market have been followed by a depression.

The relationship between bubbles and crashes is similar to the relationship between clouds and rain. You can have clouds without rain but you can’t have rain without clouds, bubbles are like clouds and market crashes are like rain.

Put it to Us?

Q. Why do companies choose to “go public” or list their shares on a stock exchange?

– Phillip Bennett; Red Deer, Alberta

A. Well, Phil, there are a number of reasons or motivations for a company to “go public,” but the primary one surrounds access to capital. Going public raises cash and usually a great deal of it. Being publicly traded also opens many financial doors:

Because of the increased scrutiny, public companies can usually get better rates when they issue debt.
As long as there is market demand, a public company can always issue more stock. Thus, growth through mergers and acquisitions is much easier to accomplish because stock can be issued as part of the deal.
Trading in open markets means liquidity (ease of buying and selling stock in this case). This makes it possible to implement things like employee stock ownership plans, which help to attract top talent.

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