The Dow closed down 348 points, which is the first time a down 348 point close would be considered good news.  The Dow’s plunge by almost 1,000 points was truly frightening.  The low was 9,872.  The trigger was the global credit market when spreads blew out and prices plunged as the euro tumbled on the debt crisis.  In this leveraged world, this means funds and investors have to sell anything liquid to meet margin calls.  That seems to have been the trigger that forced some of the selling. 

But that alone shouldn’t have caused the rapid plunge.  I’ve written from time to time how those high-frequency and/or black cloud massive computer driven trading programs seemed to be in control of the markets.  It’s clear that something went terribly wrong today.  There are rumors that some system errors occurred, but it could also be that those computer driven programs just got out of control.  The NYSE said they do not see evidence of errors.  Even if there was an error, this will damage any investor’s confidence in the market.  How could the exchanges and SEC allow any entity or group to function in such a manner that could trigger some a calamitous move?  This has been allowed, if not encouraged, to go on too long.  We’ll be hearing much more about this in the days ahead. One thing you might consider is this.  Last March, when the Dow roared back from a 700 point plunge, that was the bottom of the decline and signalled the rally was in play.  You could draw that comparison to today's rebound, except for one thing.  Last March the Dow came back from 6,500, not 10,000.  The market is not cheap. 

Tomorrow was supposed to be about Nonfarm Payrolls, but clearly that number is virtually irrelevant.  We’ll have to see what other markets do tonight and how Europe opens in the morning.  Perhaps with the bounce back here today, conditions will calm.  But don’t forget that the trigger was the credit market and those spreads did not rebound like stocks did. 

The 2-year closed at .77%, the 5-year 2.15%, and the 10-year gained 1&3/8ths to yield 3.38%.  The 30-year bond held on to a gain in excess of three points to yield 4.20%.  If conditions do calm overnight, you should see some heavy selling of treasuries tomorrow.  This is going to be a tense night for Wall Street traders.    

When I got back in the office Wednesday, I lamented that I had missed all of the excitement.  Guess they saved some fun for me.      

Update 12:20 p.m.:

I've been in the investment business a very long time, and I have to admit that was one of the scariest hours ever.  In the space of a very few minutes, the Dow plunged from about -250 to -994 points.  The Dow plunged below 10,000 to 9,872.  Clearly there was panic and forced liquidation, likely triggered by losses surging in lesser credit worthy bonds.  I think you can also blame some of those computer programs which had been on the buy side all year. 

Once the panic subsided, the Dow bounced back to down -350 and is now down 400 points.  Let's hope there isn't another round of panic coming.

The 2-year is .75%, the 5-year 2.12%, and the 10-year is now higher by 1&3/8ths points to yield 3.38%.  The 30-year bond is higher by a huge 3&30/32s to yield 4.17%.

Update 11:50 a.m.:

Scary.. in just a few minutes the Dow plunged to -990! The bounce back has started but the Dow is still down 650. 

Update 11:45 a.m.:

We're seeing some panic selling hit Wall Street.  The Dow is now down 572 points!  No kidding. 

Update 11:15 a.m.:

The euro stopped wiggling (see below) and headed straight down.  The euro is down to 1.264 vs. the dollar.  Greek bond prices are crashing, and all forms of debt are seeing spreads widen as fears of contagion are being realized.  The Dow is currently down 250 points.

The treasury bond market is on fire.  The 2-year is .80%, the 5-year 2.18%, and the 10-year is higher by a full point to yield 3.43%.  The 30-year bond is up almost two full points. 

Update 10:00 a.m.:

The past two hours have seen some significant volatility in stocks but the range has remained in the minus column.  The Dow has flopped around between -120 and -40 as traders are reacting to every wiggle in the euro.  The euro is currenlty wiggling higher to 1.273, and the Dow has pared the loss back to -74. 

Bond dealers have seen more of those reluctant bond fund managers throw in the towel and buy.  The 2-year is .83%, the 5-year 2.23%, and the 10-year is higher by 18/32s to yield 3.48%.  The 30-year bond has surged higher by 1&1/4 points to yield 4.31%.

Update 8:15 a.m.:

The markets are getting a little nasty.  The Dow is now down 106 points as the euro is struggling to hold on to the 1.27 level.  I mentioned below what matters is what the bond markets do with Greece et al.  Despite the expected government approvals, the prices of Greek debt are tumbling again.  The Greek 10-year note is 11% and the Greek 2-year is over 15%.  It seems the wildfire is going to be tough to put out.

Bond prices have moved higher.  The 2-year is .82%, the 5-year 2.23%, and the 10-year is now higher by 15/32s to 3.49%.

Update 7:50 a.m.:

As mentioned below, the euro popped higher on short-covering and stocks moved into positive territory.  The euro then again sank below 1.27 briefly, and the Dow fell to -60.  Looks like we're in for a day of following the bouncing euro. 

Update 7:10 a.m.:

The Dow opened down 34 points as the euro sunk below 1.27 vs. the dollar.  The euro fell after the press conference by Trichet offered no hints of additonal relief efforts.  But, the euro quickly rebounded on short-covering by currency traders.  The euro has bounced back to 1.276.  This boosted the Dow back into just barely positive territory at +4 points.  When the dollar first started to rally and then broke the 1.40 euro level, I felt that the likely target would be 1.25.  The market got close enough to that level today.  Perhaps the euro can rally back for a few days from this level.  But it might be time to consider that the decline of the euro to 1.25 is just the first stage of the fall of the euro.  Start dusting off those passports. 

There is no longer any doubt that the German Parilament will approve the Greek bailout.  Word is that Merkel has garnered enough votes to get approval.  The Greek Parliament is also expected to approve the required austerity measures despite the public protests.  So what's next?  It seems like the EU and Greece will have completed all the necessary steps to douse the Greek crisis.  The problem is that the markets might have a different view.  The markets might have gone too far down the path of contagion.  This would mean that the market will still factor in a Greek default (which could still happen down the road should the pressure on the Greek government intensify) and also factor in growing crises in the other weak sisters of the European Union.  The next couple of weeks should be very interesting. 

Bond prices have reversed the early losses.  The 2-year is .86%, the 5-year 2.29%, and the 10-year is now higher by 1/32 to yield 3.54%.  Unlike yesterday, dealers say volume is light.

Morning Comment:

The European Central Bank announced no policy changes in the latest meeting.  There is some disappointment that the ECB did not announce any margin relief changes for distressed debt funding (Greek bonds), nor did they announce any outright purchases of bonds.  Later this morning the ECB President Trichet will hold a press conference, and there could be some verbal promises.  The announcement did cause some further weakness in the euro, but it appears this will not be a big factor today.  European stock indexes are trading close to unchanged levels

Weekly Jobless Claims fell very slightly to 444k.  Some economists thought claims might decline more, but that was not the case.  Looking ahead to Friday’s Nonfarm Payroll number, the official consensus is for a gain of 190k jobs.  But, we’re hearing “whisper numbers” as high as +300k.   Some employment service companies like Monster.Com have been reporting stronger demand. 

In early pre-opening trading, Dow futures are very close to unchanged.  Although the euro is weaker to start the day, any strength in the euro will likely provide a reason to trade stocks higher.  Market pundits on CNBC and the like are all still very much on the bullish side of the equation.  Deep down traders have to fear what is still to come down the road as the fallout from the European debt crisis has many more chapters to be written but, for the short term, traders remain unequivocally bullish.  That could be a warning sign in and of itself. 

After several very strong days, bond prices are falling back just a bit.  The 2-year is .87%, the 5-year 2.30%, and the 10-year is down 5/32s to yield 3.56%. Yesterday’s early huge rally was clearly based on some panic buying by under-invested bond fund managers.  The market overall for bonds though is still not at all bullish.  The consensus bearishness on bonds rivals the consensus bullishness for stocks.  Traders remain focused on the long-term outlook for higher yields, and money managers are playing for a rise in yields and only buying when necessary.  You might also consider this a warning sign.     

I’ll be back with updates.  I hope there are some.

Dwight Johnston