How the longest bull run in history ended in pandemic
panic
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[March 14, 2020] By
Tom Westbrook and Scott Murdoch
SINGAPORE/HONG KONG (Reuters) - As a
collapse in the oil price unleashed chaos in financial markets, Madrid
money manager Diego Parrilla phoned a colleague who agreed: they had
better head to work early in the morning.
By daybreak in Europe, the price of crude oil had fallen by a third. The
shock had turned worry about the coronavirus to full-blown panic, wiped
trillions of dollars from Asian stocks and sent futures for European and
U.S. markets plunging.
"We assessed the book," said Parrilla, 46, who runs a 300 million euro
($332 million) fund that is long gold and bonds and uses options to bet
on just about everything but dollars and volatility falling.
"We were in a good position," he said. "We decided which parts of the
portfolio we would take profits on first."
So began what became the worst week on Wall Street since 2008, which has
left Parrilla one of the few winners in the shakeout that ended the
longest bull run in U.S. history. His Quadriga Igneo fund is up 30% for
the year to date.
The wipeout has also exposed the complacency of investors as markets
marched toward record peaks in February, and the inadequacy of their
protection as traditional risk correlations broke down in the rout.
And for others it holds both clues as to what happens next and great
promise.
"It's these times that great fortunes are built, not bull markets," said
James Rosenberg, private client advisor at brokerage and wealth manager
Baillieu Holst in Sydney.
"But you have to buy the right companies, you have to have an appetite
for some pain and misery and you have to be patient."
OIL SHOCK
The twist that sent markets already stressed by the global coronavirus
outbreak into a tailspin was a plunge in the already weak oil price that
followed Saudi Arabia's move to launch a price war with Russia last
weekend.
The 30% drop had oil-linked currencies cratering – the rouble <RUB=>
fell 9% - and the stock prices of household-name oil majors from Shell <RDSa.AS>
to ExxonMobil <XOM.N> were down by double digits.
By day's end, the bonds of heavily indebted energy firms were trading
many times beneath their face value, and fears of a credit crunch were
growing.
It was at this point that Parrilla, who had argued for years that
equities were overvalued and that the cost of betting against them in
the options market was good value, was laying fresh bets.
"We came in on Monday, and we see things are happening. And from a
disciplined point of view, we were actually putting more trades, on
things that were lagging, such as the VIX," he said, referring to the
Chicago Board Options Exchange's Volatility Index.
Talk on trading floors and at funds from Sydney to Singapore, Hong Kong,
London and New York, was of crisis.
"When these big things happen, then you have no floor," said Sean
Taylor, chief investment officer for Asia-Pacific at German asset
management firm DWS. "You can't really work out the fundamentals, it's
not priced in," he said.
Taylor spent the evening on a phone hook-up with other regional chiefs
to discuss the oil move, followed by another meeting the next evening to
go over global economic forecasts.
"When it happens, you can't do much about it," said Taylor, whose
experience in the Mexican, Russian and Asian financial crises in the
1990s and the global financial crisis in 2008, taught him hard lessons
about liquidity and helped him prepare.
"People laugh at the old-fashioned techniques of the older guys, but
when it happens we come out slightly better, because you're not caught
with midcaps and liquidity. It's liquidity that really gets you in these
markets," he said.
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A man wears a protective mask as he walks on Wall Street during the
coronavirus outbreak in New York City, New York, U.S., March 13,
2020. REUTERS/Lucas Jackson
WRONG-WAY WEDNESDAY
Which is more or less what played out through the rest of the week, after what
proved to be a dead-cat bounce on Tuesday.
U.S. President Donald Trump's announcement on Wednesday of surprise restrictions
on travel from 26 European nations, his failure to mention medical measures that
would be taken to combat coronavirus and disappointment over the European
Central Bank's decision not to cut interest rates didn't just put stock indexes
into freefall.
Rather than fleeing into safe havens, investors sold them to cover other losses.
Bond yields, which had dived only days earlier, rose. At the same time
volatility in the currency market shot higher with the squeeze in liquidity.
"The amounts are smaller, but the spreads are much wider because liquidity is
starting to disappear from the system," said Stuart Oakley, Nomura's global head
of flow FX in Singapore.
"The markets have become so disorderly the correlations between assets and
currencies have completely broken down. We're in an entirely different world.
It's unnerving bigtime, because it tells you people are being forced to unwind
positions."
BLACK THURSDAY
By Thursday it had become a mad scramble for dollars and nothing else, with the
Dow Jones Industrial Average <.DJI> suffering its worst day since 1987. After a
big rebound on Friday, the index was down 10.4% for the week while the S&P 500
index <.SPX> had shed 8.9%.
When Australian fund manager Geoff Wilson woke at 2 a.m., as is his custom, the
tone of voice alone on CNBC was enough to know the crash he had begun to prepare
for was on.
"This has happened so quickly," said Wilson, whose firm Wilson Asset Management
runs roughly A$3 billion ($1.84 billion) and has more than doubled its cash
exposure over the past three weeks.
"To me this is a combination of '87 and the global financial crisis," he said,
having spent the week between work and home revisiting every investment thesis
to weed out weak stocks.
"We'd bought them because when interest rates are low and the economy's going
reasonably well, then debt wasn't a major concern ... now that's out the door."
By the end of the week Europe's benchmark STOXX 600 index <.STOXX> had fallen
18%. Australia's ASX 200 index <.AXJO> was down 11% and the S&P 500 was headed
for its worst week since 2008.
Like Parrilla in Madrid, who has another leg of bets on a further downturn in
China, Wilson expects things to get worse before they get better.
Others, though, are finding some of the discounts irresistible.
Scott Flanders, former chief executive officer of Playboy Enterprises and the
head of online insurance marketplace eHealth, called his brokers in New York at
breakfast time in Palo Alto, California, on Monday.
"I'm putting money to work right now," he said.
"I bought 5,000 shares in JPMorgan, I bought Bank of America and Citigroup.
They're getting hit hard ... but they're so much better capitalized than they
were during the '08 crisis."
(Reporting by Tom Westbrook; Editing by Paul Simao)
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