From the February 01, 2011 issue of Futures Magazine • Subscribe!

2010 tops & bottoms

YEAR IN REVIEW

BOTTOMS

Disaster in the Gulf. Again!

Still reeling from hurricane Katrina, Gulf Coast residents experienced another disaster — this one man-made — as the explosion at the BP Deepwater Horizon offshore drilling unit killed 11 workers and poured billions of gallons (4.9 million barrels) of crude into the Gulf of Mexico, harming wildlife, devastating commercial fisherman and local economies and causing the Feds to put a moratorium on deep-sea drilling.

The reaction to the disaster included fits and starts of numerous attempts to cap the well along with the typical finger-pointing. The leak was officially capped in mid-July, meaning the gusher of oil was spewing mostly uninterrupted into the Gulf for three months. BP agreed to a $20 billion spill response fund, which does not cap its liabilities. Despite this, oil prices were mostly unaffected, although BP stock fell more than 50%

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Flash crash

In the midst of a significant down day on May 6, the sell-off went viral. Equity indexes dropped approximately 5% in less than 15 minutes and numerous individual equities traded at "irrational prices" of a penny or $100,000. Some exchanges broke trades and other didn’t, but only trades that were 60% away from a pre-crash reference price were broken. Early rumors suggested a fat-fingered error in Proctor and Gamble was the cause, but that proved not to be the case. High-frequency traders also were blamed, but if they had a role it was in suspending their models once trading got weird.

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Cause

A joint CFTC/SEC report on the flash crash said a lone 75,000-lot sell order was the catalyst for the crash, but many industry vets challenged those conclusions. While the report cited two liquidity crises, one in the E-mini S&Ps (ES) and the other in individual equities, volume figures in the ES did not indicate a liquidity crisis. The report cited drying up of liquidity in individual equities and the practice of stub quoting (bidding a penny or offering at 100K) by market makers for the irrational prices.

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TAX compromise

We try not to be too partisan here, but both sides of the political aisle claim to be concerned over deficits. They struck a compromise in December, though, that extended top-end tax cuts and jobless benefits, both policies that add to the deficit. If they truly were concerned, they would have ended high-end tax cuts and not have extended jobless benefits or paid for them with budget cuts.

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PIIGS

The year began with talk of a Greek bailout, how it would be structured and coining the phrase, PIIGS (Portugal, Italy, Ireland, Greece and Spain), as there was a domino effect of European nations in fiscal peril. The question became "who was next?" and the answer was Ireland. Though political correctness has replaced the term PIIGS with peripheral European economies, the dangers and large debt remain.

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