Martial Law?

Last Thursday, Rep. Brad Sherman (D-CA) accused bailout proponents of using extreme fear appeals to sell the rescue package. This is from The Congressional Record October 2, 2008:

The only way they can pass this bill is by creating and by sustaining a panic atmosphere. That atmosphere is not justified. Many of us were told in private conversations, if we voted against this bill, that, on Monday, the sky would fall and that the market would drop 2,000 or 3,000 points the first day and another 2,000 the second day. A few Members were even told that there would be martial law in America if we voted ``no.'' That's what I call fear mongering--unjustified, proven wrong.

Hat tip: Kathy G, who has a video link.

On his website, Sherman adds this:

In order to pass the Bill, Wall Street declared that unless they received $700 billion in unmarked bills, the Dow would drop by 4,000 points and blood would flow in the streets.

Despite the fact that bill was passed and signed into law, the Dow dropped 3.8% today (360 points). At one point, it was down nearly 8%, so the final number indicates a late rally. Keep in mind that this was the first full day of US trading since the bailout passed.


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Doomsday scenarios: put off investing?

OK, I'm not much of an investor, but time is money and I know how to waste the former by following increasingly paranoid internet links. Who doesn't enjoy a good conspiracy theory?

First, the background. Somebody is betting big bucks that the European stock market is about to tank. This news is from Smart Money, August 16 and apparently references a financial news piece owned by Dow Jones:

An anonymous investor has placed a bet on an index of Europe's top 50 stocks falling by a third by the end of September, as world equity markets plunged for a third day and volatility hit a three-year high.

The mystery investor has bought put option contracts on the DJ Eurostoxx 50 index that will result in a profit if it plunges to 2,800 or below by the end of September. Based on the 2,800 strike price, the position covers a notional EUR6.9 billion, and potentially even more using a market price of about 4,100 when the trades were done on Tuesday and Wednesday.

That's 245,000 put options for those keeping score.

And EUR6.9 is currently worth about 9.4 billion U.S. dollars.

To me, that seems like quite a lot to risk on the idea that the market is going to collapse by one-third in September.

August 27, CNBC reported a similar phenomenon in the U.S, though the amounts at stake are much smaller -- and the expected collapse is not as great:

So far, over $500 million in so-called put options have been purchased betting that the benchmark Standard and Poor's 500 index will tumble anywhere from 5% to 11% in September. Some investors are even buying put options calling for 52% decline.

The story says that this volume is on the high side:

Of course, there are always investors betting on big declines -- they're called bears. What's unusual is the amount of money being put up on such a doomsday scenario.

"The activity in those puts has been a lot more aggressive then we have seen in the past," said Bill Lefkowitz, options strategist at brokerage firm Finance Investments.

I've seen speculation about the same sort of large put option trading in Japanese markets too, but have been unable to confirm them with a more credible source.

In any event, what is causing this kind of pessimistic U.S. and European market speculation? Well, it could simply be a large hedge fund (and some copycats) trying to protect profits against a huge market "correction." These could simply be savvy investors who think the market is highly overvalued.

Or, if you believe what you read on the internets, it could be a forecast of "another 9/11 within 4 weeks."


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