Sorry guys I didn't continue immediately after the 1st episode as I got much more important news(Repo rate cut and PM's Speech) than this. So here we go...
The Crash of 1987
When: October 19, 1987
Where: USA
Effect: 508.32 points, 22.6%, or $500 billion lost in one day, the largest one-day percentage drop in history. By the end of October, stock markets in Hong Kong had fallen 45.8%, Australia 41.8%, Spain 31%, the United Kingdom 26.4%, the United States 22.68%, and Canada 22.5%. New Zealand's market was hit especially hard, falling about 60% from its 1987 peak, and taking several years to recover.
Main reasons for the crash are…
1. DERIVATIVE SECURITIES
Initial blame for the 1987 crash centered on the interplay between stock markets and index options and futures markets. The Brady Commission concluded that the failure of stock markets and derivatives markets to operate in sync was the major factor behind the crash.
2. COMPUTER TRADING
Many analysts blame the use of computer trading by large institutional investing companies. Computers were programmed to automatically order large stock trades when certain market trends prevailed.
3. ILLIQUIDITY
During the Crash, trading mechanisms in financial markets were not able to deal with such a large flow of sell orders. Many common stocks in the New York Stock Exchange were not traded until late in the morning of October 19 because the specialists could not find enough buyers to purchase the amount of stocks that sellers wanted to get rid of at certain prices.
4. U.S. TRADE AND BUDGET DEFICITS
Another important trigger in the market crash was the announcement of a large U.S. trade deficit on October 14, which led Treasury Secretary James Baker to suggest the need for a fall in the dollar on foreign exchange markets. Fears of a lower dollar led foreigners to pull out of dollar-denominated assets, causing a sharp rise in interest rates.
5. INVESTING IN BONDS AS AN ATTRACTIVE ALTERNATIVE
Long-term bond yields that had started 1987 at 7.6% climbed to approximately 10% [the summer before the crash]. This offered a lucrative alternative to stocks for investors looking for yield.
6. OVERVALUATION
Many analysts agree that stock prices were overvalued in September, 1987. Price/Earning ratio and Price/Dividend ratios were too high [Historically, the P/E ratio is about 15 to 1; in October 1987 the P/E for the S&P 500 had raised to about 20 to 1].
The Asian Crisis
When: 1989 - 2003
Where: Southeast Asia but primarily Japan
Effect: Percentage Lost From Peak to Bottom: 63.5% as of 2003
The Japanese economy gained extreme strength after its long recovery from the war and the atomic bombs. Japan became unstoppable economic force by coupling with the other emerging Southeast Asian economies.
Between 1955 and 1990, land prices in Japan appreciated by 70 times and stocks increased 100 times over. Trading became the national sport, and the Japanese jumped into the market with more blind confidence than that of the Americans of the 1920s. During the eighties, large Tokyo firms were worth more individually than all their American counterparts combined, and Japanese golf courses were worth more than the value of all the stocks on the Australian exchange.
An inverted growth cycle perpetuated itself when landowning firms started using the book value of their land to buy stocks that they in turn used to finance the purchase of American assets. Like the prosperity of the Roman Empire, the prosperity of Japan proved to be its undoing as corruption began to spread throughout the political and business realms.
The government sought to excise the tumor and put a halt to the inflammatory growth of stocks and real estate by raising interest rates. Regrettably, this didn't have the slow soothing effect on the market that the government hoped. Instead, it plunged the Nikkei index down more than 30000 points.
East Asian Currency Crisis
When: 1997
Where: East Asian Countries like Thailand, Malaysia, Singapore and Philippines
In addition to above mentioned Japanese crisis, East Asian Currency started in that period only. And in September I have posted about this. For your reference I will provide the gist of that posting here.
The crisis first came out into the open in Thailand where doubts about sustainability of the exchange rate peg (to a basket dominated by the US dollar) prompted a run on the currency in mid-May 1997. There were significant spillover effects on other countries in the region, notably Indonesia, Malaysia, and the Philippines. The Thai baht and the Philippine peso came under renewed pressure in late June 1997 and early July 1997, leading authorities to abandon their respective pegs in early July. The baht had lost around 16 percent against the US dollar in a single day on July 2, 1997. This unleashed a flurry of speculative activity in other ASEAN currencies.
Between end June 1997 and end March 1998, depreciation of these currencies vis-à-vis US dollar ranged between 11% and 74%: Indonesian Rupiah (74%), Thailand baht (37%), Malaysian ringgit (31%), Philippine peso (33%), South Korean won (36%), and Singapore dollar (11%).
Investor confidence declined leading to sharp declines in equity prices in the stock markets of these countries. Compared with June 1997, the stock prices in January 1998 had declined in the range of 32 per cent (in Thailand) to 53 per cent (in Malaysia).
Causes are:
1. The prolonged maintenance of pegged exchange rates, in some cases at unsustainable levels, which complicated the response of monetary policies to overheating pressures and which came to be seen as implicit guarantees of exchange value, encouraging external borrowing and leading to excessive exposure to foreign exchange risk in both the financial and corporate sectors.
2. Debt overhangs. In Malaysia, loans are 140 percent of annual economic output -- the highest in Asia. Many loans are for real estate speculation or consumption; only 16 percent are for manufacturing. Thailand needs to shut, merge or fix 58 troubled financial institutions.
3. Inflated values. Japan's economy has been in recession since real estate and stocks collapsed in 1990. The Nikkei has never risen above 58 percent of its 1989 high.
4. Loose financial practices. In South Korea, foreign currency reserves have been pledged to guarantee foreign loans to corporate borrowers that push exports. In Thailand, Malaysia and Indonesia, off-the-book government guarantees cause bank loans to flow toward favored companies that create jobs and drive exports.
5. Imprudent lending by international lenders.
6. High and unsustainable level of current account deficit.
For further information you can check my September’s posts…
The Dotcom Crash
When: March 11, 2000 to October 9, 2002.
Where: Silicon Valley (for the most part)
Effect: NASDAQ Composite lost 78% of its value as it fell from 5046.86 to 1114.11.
The "dot-com bubble" was a speculative bubble during which stock markets in Western nations saw their value increase rapidly from growth in the new Internet sector and related fields. The period was marked by the founding of a group of new Internet-based companies commonly referred to as dot-coms. A combination of rapidly increasing stock prices, individual speculation in stocks, and widely available venture capital created an exuberant environment in which many of these businesses dismissed standard business models, focusing on increasing market share at the expense of the bottom line.
The dot-com model was inherently flawed: a vast number of companies all had the same business plan of monopolizing their respective sectors through network effects, and it was clear that even if the plan was sound, there could only be at most one network-effects winner in each sector, and therefore that most companies with this business plan would fail. In fact, many sectors could not support even one company powered entirely by network effects.
In spite of this, however, a few company founders made vast fortunes when their companies were bought out at an early stage in the dot-com stock market bubble. These early successes made the bubble even more buoyant. An unprecedented amount of personal investing occurred during the boom.
One possible cause for the collapse of the NASDAQ (and all dotcoms) were massive, multi-billion dollar sell orders for major bellwether high tech stocks that happened by chance to be processed simultaneously on the Monday morning following the March 10 weekend. This selling resulted in the NASDAQ opening roughly four percentage points lower on Monday March 13 from 5,038 to 4,879—the greatest percentage 'pre-market' sell off for the entire year.
Another reason may have been accelerated business spending in preparation for the Y2K switchover. Once New Year had passed without incident, businesses found themselves with all the equipment they needed for some time, and business spending quickly declined.
The first shots through this bubble came from the companies themselves: many reported huge losses and some folded outright within months of their offering. Siliconaires were moving out of $4 million estates and back to the room above their parents' garage. In the year 1999, there were 457 IPOs, most of which were internet and technology related. Of those 457 IPOs, 117 doubled in price on the first day of trading. In 2001 the number of IPOs dwindled to 76, and none of them doubled on the first day of trading.
Subprime+ Credit Crunch
When: We are going through that now.
Where: Base is in US and spreading to everywhere.
Effect: Yet to find out as still there is long way to go.
Guys you all know that what Subprime crisis is, where it is started and how it is affecting everybody. So I will directly mention the some of the causes for that briefly as I need to close this topic as this is becoming very lengthy to read. So here are the causes:
1. Boom and bust in the housing market
2. Speculation
3. High-risk mortgage loans and lending practices
4. Securitization practices
5. Inaccurate credit ratings
6. Government policies
7. Financial institution debt levels or leverage
Sources...
Investopedia
Wikipedia &
Google(last resort)...
The Crash of 1987
When: October 19, 1987
Where: USA
Effect: 508.32 points, 22.6%, or $500 billion lost in one day, the largest one-day percentage drop in history. By the end of October, stock markets in Hong Kong had fallen 45.8%, Australia 41.8%, Spain 31%, the United Kingdom 26.4%, the United States 22.68%, and Canada 22.5%. New Zealand's market was hit especially hard, falling about 60% from its 1987 peak, and taking several years to recover.
Main reasons for the crash are…
1. DERIVATIVE SECURITIES
Initial blame for the 1987 crash centered on the interplay between stock markets and index options and futures markets. The Brady Commission concluded that the failure of stock markets and derivatives markets to operate in sync was the major factor behind the crash.
2. COMPUTER TRADING
Many analysts blame the use of computer trading by large institutional investing companies. Computers were programmed to automatically order large stock trades when certain market trends prevailed.
3. ILLIQUIDITY
During the Crash, trading mechanisms in financial markets were not able to deal with such a large flow of sell orders. Many common stocks in the New York Stock Exchange were not traded until late in the morning of October 19 because the specialists could not find enough buyers to purchase the amount of stocks that sellers wanted to get rid of at certain prices.
4. U.S. TRADE AND BUDGET DEFICITS
Another important trigger in the market crash was the announcement of a large U.S. trade deficit on October 14, which led Treasury Secretary James Baker to suggest the need for a fall in the dollar on foreign exchange markets. Fears of a lower dollar led foreigners to pull out of dollar-denominated assets, causing a sharp rise in interest rates.
5. INVESTING IN BONDS AS AN ATTRACTIVE ALTERNATIVE
Long-term bond yields that had started 1987 at 7.6% climbed to approximately 10% [the summer before the crash]. This offered a lucrative alternative to stocks for investors looking for yield.
6. OVERVALUATION
Many analysts agree that stock prices were overvalued in September, 1987. Price/Earning ratio and Price/Dividend ratios were too high [Historically, the P/E ratio is about 15 to 1; in October 1987 the P/E for the S&P 500 had raised to about 20 to 1].
The Asian Crisis
When: 1989 - 2003
Where: Southeast Asia but primarily Japan
Effect: Percentage Lost From Peak to Bottom: 63.5% as of 2003
The Japanese economy gained extreme strength after its long recovery from the war and the atomic bombs. Japan became unstoppable economic force by coupling with the other emerging Southeast Asian economies.
Between 1955 and 1990, land prices in Japan appreciated by 70 times and stocks increased 100 times over. Trading became the national sport, and the Japanese jumped into the market with more blind confidence than that of the Americans of the 1920s. During the eighties, large Tokyo firms were worth more individually than all their American counterparts combined, and Japanese golf courses were worth more than the value of all the stocks on the Australian exchange.
An inverted growth cycle perpetuated itself when landowning firms started using the book value of their land to buy stocks that they in turn used to finance the purchase of American assets. Like the prosperity of the Roman Empire, the prosperity of Japan proved to be its undoing as corruption began to spread throughout the political and business realms.
The government sought to excise the tumor and put a halt to the inflammatory growth of stocks and real estate by raising interest rates. Regrettably, this didn't have the slow soothing effect on the market that the government hoped. Instead, it plunged the Nikkei index down more than 30000 points.
East Asian Currency Crisis
When: 1997
Where: East Asian Countries like Thailand, Malaysia, Singapore and Philippines
In addition to above mentioned Japanese crisis, East Asian Currency started in that period only. And in September I have posted about this. For your reference I will provide the gist of that posting here.
The crisis first came out into the open in Thailand where doubts about sustainability of the exchange rate peg (to a basket dominated by the US dollar) prompted a run on the currency in mid-May 1997. There were significant spillover effects on other countries in the region, notably Indonesia, Malaysia, and the Philippines. The Thai baht and the Philippine peso came under renewed pressure in late June 1997 and early July 1997, leading authorities to abandon their respective pegs in early July. The baht had lost around 16 percent against the US dollar in a single day on July 2, 1997. This unleashed a flurry of speculative activity in other ASEAN currencies.
Between end June 1997 and end March 1998, depreciation of these currencies vis-à-vis US dollar ranged between 11% and 74%: Indonesian Rupiah (74%), Thailand baht (37%), Malaysian ringgit (31%), Philippine peso (33%), South Korean won (36%), and Singapore dollar (11%).
Investor confidence declined leading to sharp declines in equity prices in the stock markets of these countries. Compared with June 1997, the stock prices in January 1998 had declined in the range of 32 per cent (in Thailand) to 53 per cent (in Malaysia).
Causes are:
1. The prolonged maintenance of pegged exchange rates, in some cases at unsustainable levels, which complicated the response of monetary policies to overheating pressures and which came to be seen as implicit guarantees of exchange value, encouraging external borrowing and leading to excessive exposure to foreign exchange risk in both the financial and corporate sectors.
2. Debt overhangs. In Malaysia, loans are 140 percent of annual economic output -- the highest in Asia. Many loans are for real estate speculation or consumption; only 16 percent are for manufacturing. Thailand needs to shut, merge or fix 58 troubled financial institutions.
3. Inflated values. Japan's economy has been in recession since real estate and stocks collapsed in 1990. The Nikkei has never risen above 58 percent of its 1989 high.
4. Loose financial practices. In South Korea, foreign currency reserves have been pledged to guarantee foreign loans to corporate borrowers that push exports. In Thailand, Malaysia and Indonesia, off-the-book government guarantees cause bank loans to flow toward favored companies that create jobs and drive exports.
5. Imprudent lending by international lenders.
6. High and unsustainable level of current account deficit.
For further information you can check my September’s posts…
The Dotcom Crash
When: March 11, 2000 to October 9, 2002.
Where: Silicon Valley (for the most part)
Effect: NASDAQ Composite lost 78% of its value as it fell from 5046.86 to 1114.11.
The "dot-com bubble" was a speculative bubble during which stock markets in Western nations saw their value increase rapidly from growth in the new Internet sector and related fields. The period was marked by the founding of a group of new Internet-based companies commonly referred to as dot-coms. A combination of rapidly increasing stock prices, individual speculation in stocks, and widely available venture capital created an exuberant environment in which many of these businesses dismissed standard business models, focusing on increasing market share at the expense of the bottom line.
The dot-com model was inherently flawed: a vast number of companies all had the same business plan of monopolizing their respective sectors through network effects, and it was clear that even if the plan was sound, there could only be at most one network-effects winner in each sector, and therefore that most companies with this business plan would fail. In fact, many sectors could not support even one company powered entirely by network effects.
In spite of this, however, a few company founders made vast fortunes when their companies were bought out at an early stage in the dot-com stock market bubble. These early successes made the bubble even more buoyant. An unprecedented amount of personal investing occurred during the boom.
One possible cause for the collapse of the NASDAQ (and all dotcoms) were massive, multi-billion dollar sell orders for major bellwether high tech stocks that happened by chance to be processed simultaneously on the Monday morning following the March 10 weekend. This selling resulted in the NASDAQ opening roughly four percentage points lower on Monday March 13 from 5,038 to 4,879—the greatest percentage 'pre-market' sell off for the entire year.
Another reason may have been accelerated business spending in preparation for the Y2K switchover. Once New Year had passed without incident, businesses found themselves with all the equipment they needed for some time, and business spending quickly declined.
The first shots through this bubble came from the companies themselves: many reported huge losses and some folded outright within months of their offering. Siliconaires were moving out of $4 million estates and back to the room above their parents' garage. In the year 1999, there were 457 IPOs, most of which were internet and technology related. Of those 457 IPOs, 117 doubled in price on the first day of trading. In 2001 the number of IPOs dwindled to 76, and none of them doubled on the first day of trading.
Subprime+ Credit Crunch
When: We are going through that now.
Where: Base is in US and spreading to everywhere.
Effect: Yet to find out as still there is long way to go.
Guys you all know that what Subprime crisis is, where it is started and how it is affecting everybody. So I will directly mention the some of the causes for that briefly as I need to close this topic as this is becoming very lengthy to read. So here are the causes:
1. Boom and bust in the housing market
2. Speculation
3. High-risk mortgage loans and lending practices
4. Securitization practices
5. Inaccurate credit ratings
6. Government policies
7. Financial institution debt levels or leverage
Sources...
Investopedia
Wikipedia &
Google(last resort)...
1 comment:
hi neveen..
sorry wont be able to comment on the post..... but though i have read it... well got to understnad my condition......
anyway like i said i wil give you the link to my blog.... it is
tibet10z@blogspot.com
hi hope you get some info. though not about finance and the market. but some G.K... atleast about tibet.....
take care man.......
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