May 6, 2010

(video h/t Oliver Willis)

Jim Cramer can hardly contain himself as the market falls nearly 1000 points in the span of a few minutes, and uses Procter & Gamble as an exemplar of how investors can turn a downturn to their advantage.

If ever there was a video that highlights the deficiencies in our 24/7 all-speculation-all-the-time cable punditry corps, this is it. As it turns out, the market drop was hastened, magnified and traders brought to their knees over this:

The selling was exacerbated by a huge drop in Dow component Procter & Gamble (PG, Fortune 500). There may have been technical glitches which caused it to plunge 37% in minutes. P&G's slump was responsible for 172 points of the 992.60 the Dow initially lost.

I have some real problems with this so-called glitch. Let's start with Jim Cramer using it as an object lesson for what to do with a steep market drop. If there was really a "glitch", it would have triggered sharp program trades and hedge fund transactions. Aren't we all glad we're taking Investments 101 this year so we know what those terms mean? As Cramer points out in the video, the price drop makes P&G a "completely different stock" with a completely different set of decision points around buying it.

Now add that reality to programmed trades. Those are trades set up far in advance by investors, executed by computers, and usually in large quantities. It turns into a cascade: The price triggers a programmed trade, which triggers a hedge fund trader's response, which triggers panic on the floor of the Dow, which triggers Cramer sitting at his desk speculating about how to profit from others' ruin.

There are some very real reasons for volatility in the market. A weak Euro, Greece's shaky economy, tightening credit in other European countries and the UK Elections have everyone on edge in a global market setting.

Still, a pricing "error" should not cause a 1000 point plunge in market indices in such a short period of time. I can't help thinking there are speculators out there who made a great deal of money on this.

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