Another Bad Week For The Stock Market

The Dow lost more than 5 percent, the Nasdaq was down nearly 10 percent. So far in 2008, the Standard and Poor's 500 index is down 40 percent and poised for its worst year since 1931. One analyst has called it a bear market on steroids. And some analysts saying it's the result of hedge funds running for the exits.

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This is Weekend Edition from NPR News. I'm Scott Simon. Another difficult week for the world stock markets. The Dow lost more than five percent, the NASDAQ was down nearly 10 percent, and the S&P 500 Index is poised for its worst year since 1931. One analyst has called it a bear market on steroids. Some say it's the result of hedge funds running for the exits. NPR's John Ydstie reports.

JOHN YDSTIE: One of those pointing the finger at hedge funds is David Kotok, chairman of Cumberland Advisors, a money management firm based in New Jersey. He says hedge funds have gotten into trouble because they borrowed heavily to take positions primarily in stock markets.

Mr. DAVID KOTOK (Chairman, Cumberland Advisors): They either bought stocks, an index, or a country index, and they also bought the credit default swap attached to it as a hedge.

YDSTIE: The credit default swap was insurance to protect the hedge fund if stock markets sold off, which they've done in spates. But for many hedge funds, that insurance evaporated when Lehman Brothers collapsed, because it was a counterparty to the swaps. That meant as the markets declined sharply, hedge funds had to sell stocks to pay off their loans and to pay off investors pulling out of the funds.

Mr. KOTOK: We saw 43 billion withdrawn from hedge funds in the month of September. That represents 43 billion of cash that exits. The leverage on that 43 billion might have been 10 or 20 times.

YDSTIE: And that means that to cover the redemptions and pay off the loans, hedge funds had to sell 10 to 20 times 43 billion dollars in stocks, or half a trillion to a trillion dollars worth. Simon Johnson, a former chief economist at the IMF, now a professor at MIT, says certainly hedge fund liquidations have been a part of the downward pressure on markets, but he thinks there's a more fundamental force.

Professor SIMON JOHNSON (Entrepreneurship, Sloan School of Management, MIT): The most of it is people realizing that global growth is going to be slower, companies are going to make less money. And of course that comes through directly into stock prices. So, you know, it's painful. It's sort of unavoidable given what's happening in the global economy. And as long as it doesn't get out of control, as long as you don't get into, sort of, a panic situation or self-fulfilling downward spirals, we'll be OK.

YDSTIE: Johnson says he thinks to turn things around, governments need to put together a huge fiscal stimulus to try to jumpstart the world economy. He says a good time to unveil that would be at the November 15 meeting of the top 20 world economies in Washington. Johnson also believes that before then, probably as early as next week, the G7 countries need to intervene in the currency markets to stem the quick rise of the dollar against most of the world's currencies. He says if the dollar continues to strengthen rapidly, it could be very damaging to emerging market nations. Many firms in those countries have borrowed in dollars but must pay off the loans with devalued local currencies. John Ydstie, NPR News, Washington.

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