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August 10 Markets' Freefall More Eurocentric Than American
Watching the market give up its hard earned gains from Tuesday was certainly painful, and most likely due to events in Europe, not the United States
Watching the market give up its hard earned gains from Tuesday was certainly painful, and most likely due to events in Europe, not the United States.
The ECB’s purchase of Italian and Spanish bonds to stem uncertainty and add liquidity had a number of unintended consequence. For starters, the cost to insure German bonds from default actually increased yesterday, surpassing the cost of similar protection for the British Gilt. Apparently investors have such a dim view of that paper that it has thrown the credit quality of the strongest economy in Europe in doubt.
All the attention on Spanish and Italian debt ended up pressuring the second largest owner of these bonds – large banks. Bank of America (BAC) continued to bleed, as did every other money center bank and most brokerages. Most French banks got hammered, especially Societe Generale, which lost 15% on the day, as fears of credit rating drop in that country are taking hold.
On a positive note, since the U.S. downgrade Treasuries have rallied, and this week’s auctions went off without a hitch. We are far better off today than we were in 2008. There is far more liquidity in the system than three years ago. I know this is scant comfort, but I feel confident that we will NOT see a repeat of the credit crisis.
About the Author
Ben Warwick, Quantitative Equity Strategies
Veteran investment strategist Ben Warwick brings 20 years of investment management expertise to AdvisorOne.com in his blog, Searching for Alpha. His market and economic insights provide readers with an insider’s view on generating alpha through asset allocation, the use of strategic portfolio “tilts” and alternative investments.
Ben Warwick founded Quantitative Equity Strategies (QES) in 2002 as a platform for implementing his quantitative investment strategies. The firm manages assets with traditional long-only equity and fixed income, private equity, managed futures and alternative investment mandates. QES has developed an industry leading expertise in building investment programs that can replicate alternative returns, while offering daily liquidity and transparency. These products include the HFRq, a hedge fund replication strategy developed in concert with Hedge Fund Research in Chicago; the Managed Futures Beta Index, with Aspen Partners; and the Nomura QES Modeled Private Equity Returns Index (PERI), which was developed with Nomura Bank and Preqin, the leading source of information in the private equity industry.
He is the author of several books, including "Searching for Alpha: The Quest for Exceptional Investment Performance," (Wiley, 2000) and "The Handbook of Managed Futures," with Carl Peters, (McGraw-Hill, 1996). He can be reached at ben@qesinvest.com.
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