Rumor Panic Has Returned To The Markets
Courtesy of John Carney at Clusterstock
That was breath taking.
It looks like the pure fear that gripped the markets about an hour ago and dropped the Dow by 2% is subsiding. Stocks are still lower but the nosedive has subsided.
The fact that drop came so suddenly and on the back of good economic news was a striking demonstration of just how fragile the stock market is right now. It has been quite a long time since we saw the market respond that powerfully to vague rumors.
Lots of people aren’t even sure what the rumor was. Someone might default. CNBC reported that traders were talking about a "bank default."
But we have bank failures every week. Why was this one sending traders to place sell orders? Well, some were saying that "a west coast bank" was in trouble. On the message boards, which are often populated by day trading trolls hoping to move markets, there was talk that it was Wells Fargo. Commenters on blogs pointed the finger at Citigroup.
Still others said it was a European bank on the verge of failure. One trader told us that this was a misinterpretation. It was, he said, Europeans who were whispering about a US failure. Specifically, the default on a Cerberus fund. That particular version of today’s scare story got so much traction, Cerberus was actually forced to issue a formal denial.
Regardless of the substance or accuracy of the rumor, the takeaway here is that we’re once again back to rumors trumping news to move markets. The fear trade is back on.
Previously today:
Cerberus: Stop Whispering About Us Defaulting, Dammit!
Courtesy of John Carney at Clusterstock
It looks like the rumor that killed the rally today was that some Cerberus funds were on the verge of default.
And now Cerberus Capital Management LP has been forced to formally comment on the rumor. Most companies loathe commenting on rumors. Hedge funds all the more so.
The rumor was apparently gaining traction among traders in London and Frankfurt this morning.
"There is absolutely no truth to the speculation," said Tim Price, a Cerberus managing director and spokesman for the firm, told Reuters.
Losses on private equity investments in Chrysler and GMAC seem to have prompted investors pull a reported $4.77 billion from two Cerberus hedge funds. That amounts to 19 percent of Cerberus’ total $24.3 billion in assets.
See Also: What Year Is This?