Sorry about our slow start on the day. We've been busy this morning trying to gather up information about the who's and why's of this morning's equity crash. And, of course, trying to score twos for a pal of ours who recently got out of the hospital and has been having a rough time at work. The Dow went down 240 points after the open. That is to say, it has more or less shot down Bernanke's helicopter.

And, actually, that understates the breadth of the decline. On the New York Stock Exchange, less than four hundred stocks are up today. Decliners out-number gainers by 6:1.

There are various theories about today's plunge, almost all of them involving Citigroup in one way or another. Some say that Citigroup's Super SIV is not attracting investors, and that the entities failure could re-ignite the worst fears of a credit-market meltdown. But far more popular is the word from a CIBC analyst who says that Citi might have to cut its dividend and stop making acquisitions.

But when we call the so-called "experts" they keep asking us what we're hearing? "You got all those guys reading DealBreaker. What do you know?" one guy asked.

Fair enough. What are you hearing? Leave your ideas about today's stock market movements in comments below.

On Friday Oct 16, 1987, the Dow dropped -4.6 pct.

Market plunge is "going to hurt."

'Consequences' Ahead for the City [New York Sun]

According to the homeless guy asking for change outside our building Brandweek, every time Vanity Fair ad pages hit a record high, the stock market crashes. They’ve come to this conclusion based on a “highly scientific study by Short Takes” (and a bucket of crystal meth).

VF's March 2007 Hollywood edition ("Our Biggest Issue Ever!") clocked in at 500 pages. During the week of Feb 26, 2007, the Dow Jones Industrial Average collapsed, from 12,647 to 12,114. (Remember that the magazine hits the streets the month before its pub date). VF's previous largest issue was its April 2001 Hollywood edition, with 430 pages. In the week of March 19, 2001, the Dow tanked from 9,820 to 9,504. (By September it was at 8,235). Another example? The largest VF prior to 2001 was the September 2000 edition, at 396 pages. Lo and behold, in the week of Oct. 16, 2000, the Dow plummeted from 10,801 to 10,279. Now you know when to sell.

The Dead Horse statisticians have also determined a correlation coefficient of 1 between Graydon Carter’s girth and McDonald’s stock.

Vanity Fair Ad Pages Predict Stock Slumps [BrandWeek via Gawker]

James Surowiecki is the guy the New Yorkerpays to explain the economy and the stock market to its readers. This week he explains why the sell-off two weeks ago was not the crash of 1929, which is presumably within living memory for most New Yorker subscribers.

Some of Tuesday’s drama, then, was the result of a mild bout of investor hysteria. But it’s likely that much of it had more sensible underpinnings. While the past few years have been exceptionally good for American companies, with interest rates and labor costs low, and profits at historic highs, a host of potentially huge risks continue to loom, including the threat of terrorism, America’s huge current-account deficit, and the possibility of a slowdown provoked by the end of the housing boom. If investors collectively decided that there was a slightly greater chance of even one of these risks becoming reality, that could have provoked the market decline we saw on Tuesday.

It may seem unlikely that a small change in investor expectations could lead to such a big sell-off. But stock-market investors are trying to predict how much money companies are going to make over the next fifteen or twenty years. Over a period that long, relatively small changes in the present can have huge effects. A ten-billion-dollar company that grows at ten per cent a year for twenty years, for instance, will be, at the end of that period, twenty billion dollars bigger than if it had grown at eight per cent a year. So while big market swings in reaction to poor earnings news or bad economic data often seem exaggerated, evidence suggests that they often turn out to be justified.

At the end of the article James comes perilously close to engaging in the dreaded "healthy sell-off" cliché but manages to avoid it. A couple of good articles like this and we may actually start stealing our neighbors copy on a regular basis again.

Reasonable Panic [New Yorker]

Earlier this morning, we discussed the failure of dissertations on the yen-carry trade, namely the one in yesterday’s Journal, in that they failed to get Carney some ladies. Who knew that financial ennui wouldn’t turn people on? Apparently, not us. We remained upset about this for the remainder of the morning when, suddenly, like an Ass-Bestowing Fairy Godmother, The Street’s Daniel Harrison came along to save the day, with the most titillating yen carry trade article to date (though one might remember that in the land of the blind, the one-eyed man is king). He writes:

"The main problem in China is that their economy is overheating and posing serious concern to the authorities," says a research note issued by J.M. Finn in London. "Speculation is rife, bank lending often irresponsible and it is estimated that 90,000 stock dealing accounts are opened daily. These are not everyday Western economic conditions. In addition, China is facing a colossal level of fixed-asset investment, nearly 50% of GDP in 2006."

You can practically taste the STDs that resulted from the irresponsible decision to forgo prophylactics, can you not?

(Also: great headline, you old scallywag)

Probing the Carry Trade [thestreet.com]

We get it—you’re sick of hearing about last week’s drop in the Dow. Whether this is actual independent thinking or the result of the threatening emails you’ve received from John Thain’s jabronis, we’re not sure, but we respect your right to ask us to, as one email put it, “cool it with the Dow crap.” Anywho, we decided we didn’t have anything wrong with your request, in the biblical sense, and are going to try our hardest to keep the next few days strictly about, we don’t know, the Cavemen stuff. But first, one last bit of info, RE: Zee Glitch. According to a friend of DB, “RG Niederhoffer's, Victor Niederhoffer's risk averse younger brother, Negative Correlation Fund was up 8% on Tuesday's plunge.” Don’t pretend like you didn’t just spring a homo-erectus.

Dealbreaker coverage of the Market Plunge

One of the most disappointing things about the reaction to last Tuesday's market action has been the failure of a good nickname for the day to develop. Glitch Tuesday? Plunge Tuesday? Thain's Bane?

We're frankly at a loss. Which is why we're turning to Time magazine's Person of the Year to ask for nomination. That's right. We are asking You. So, in the comment section below, please leave your nomination for what we should call last Tuesday. Or send us an email to dealbreaker@tips.com. If it catches on you might earn yourself a place in the history books. Or at least a place nearby history books from which you can shout that you invented the widely adopted term.

Financial journalists are scrambling to report on the big winners and losers among the hedge funds from last week's market turmoil. So far there has been lots of speculation and rumor but very little in the way of confirmed news about specific hedge funds.

Lots of money was lost by hedge funds last Tuesday. According to the hedge fund insider newsletter FinAlternatives last Tuesday was the "Worst Day Ever" for hedge funds.

According to Hedge Fund Research, Feb. 27 was the worst day it had ever recorded for hedge funds in the four-year life of its indices.

Macro funds suffered the worst drop, losing 3% to just about wipe out year-to-date gains. Market-directional funds, emerging markets and computer-driven managed futures funds were also hurting. Citigroup, in a note Thursday, wrote that the declines, “in conjunction with the long positions still shown by our credit survey… make us concerned about further de-risking ahead.”

Arki Busson of the $10 billion fund of hedge funds EIM told the Financial Times that hedge funds had lost about two-thirds of their gains for February, but, “The good news is there were no disasters.”

The category of likely losers on Plunge Tuesday includes funds that were shorting market volatility, a strategy which has been successful in recent years and has no doubt attracted fund managers in search of gains. Others have avoided the strategy as being historically too risky, emphasizing that its recent success is anomalous.

"Shorting volatility is like picking up nickels dimes in front of a steam roller," one hedge fund insider told DealBreaker. "You can make some money. But the moment you trip up, you're in a lot of trouble.

Word has it the the Wall Street Journal will report on hedge fund winners and losers in tomorrow's edition. But tomorrow is so far away.

What have you heard? Send your insights to tips@dealbreaker.com.

Worst Day Ever: Hedge Funds Hurting From Tuesday’s Tumble [FinAlternatives]

Gary Weiss has some good tips for coping with any market blues you might have regarding that thing that happened last week, including but not limited to eating chocolate and shooting heroin. Mostly good advice except for the fact that we're pretty sure freebasing is more the route you want to take in this situation, especially if you're a NovaStar shareholder.

My Sure-Fire Cures For the Market Blues [gary-weiss.com]

As previously noted, John Thain would like the “I–told-you-so” traders who he fired to “quit [their] bitching” and “wipe the smirks of [their] faces” in regard to the events of Tuesday night. Now he also has—we can only assume, as we sometimes do—some unsavory thoughts for those "nabbering-nosey-nancy-boys" fueling rumors he’s looking into early retirement. Though the appointment of Duncan Niederauer to president and co-chair has sent the smell of fish wafting through the NYSE Group, the Thain-meister categorically denied that he will be leaving the company, during a conference call yesterday. He also stuck to his earlier story that the SEC is not investigating The Great Glitch of ’07, his exact response to the question "What's the SEC going to do?" being "Nothing," which scores points for pith but maybe not for accuracy, a pill (or crock of s***) that Charlie Gasparino, during a spot on CNBC yesterday, seemed to find difficult to swallow, as he’d been told otherwise by sources close to the matter. Perhaps Thain is simply embracing the platitude of his favorite TV character and moral compass in all things work-related, G. Constanza, who once wisely noted, “It’s not a lie if you believe it.” Can't argue with that.

NYSE in the Hot Seat [thestreet.com]
CNBC's Gasparino: SEC Looks at NYSE's Handling of Trading [CNBC]
As Rumors Fly, NYSE Chief Seeks to Reassure [DealBook]

**jfcarney(1:57:24 PM): also, did you make those Thain quotes up? If so you should at least put in a footnote explaining that we made that up because Thain isn't funny enough to say stuff like that. And also, have you issued a fatwa on your Return button?

ohbabyitssbess (1:57:53 PM): yes, yes and S a D.

Last night we had a good conversation with one of our favorite wise men of the markets. He mentioned that a couple of percentage points drop in the market is not exactly a historically unprecedented or terrifying event. It definitely shocked people who haven't seen this kind of volatility in a while but grown-ups should know better, he said.

So if all that talk of absolute numbers confuses people, maybe we should talk in terms of percentages instead. But that probably won't help the public understanding much because people aren't too good about thinking in percentage points. It's too much like math, and no one likes math. Actually, most people don't even dislike math. They just don't have much of a relationship with math at all. It's like that kind of obnoxious cousin you haven't seen since you were a kid. He kind of slips your mind. Yeah, that's math.

So we were glad when a reader send this chart this morning. It helps put Tuesday's "market plunge" into a little bit of perspective. And surely people can think in terms of pictures, right?

We've been gagging to use the word "testicularity" ever since we heard Mark Haines invent it on CNBC back in January. Finally, this week's market plunge gives us an excuse.

You see, our reporting on the reaction of a trader stunned by Tuesday's market plunge has attracted a lot of attention. Not the least from people who weren't trading equities on Tuesday who have a lot of conviction that people who were trading equity are, basically, spineless wimps. Well, they didn't quite say "spineless." It was another piece of anatomy that they alleged the equity traders were missing.

One correspondents—who we swear is not former Amaranth energy trader Brian Hunter—writes:

Stock traders are such pussies. Market dropped 4%? Natural gas traders work in a market that drops 20% in a day and rebounds likewise. They must be manly men, even the girls. None of them are, however, older than 32. There's got to be a reason for that. Sum: Equity trader - limpwrist. Energy trader: Volatility He-Man (or Her-Man).

One would suppose- erroneously, it would now seem- that those on The Street were made of sterner stuff than this. The testicles on the famous bull are, after all, made of bronze last I checked- no? Perhaps, oh, anonymous aspirant to big swinging schmuck status, you better run out and get some duct-tape and plastic sheets for the imminent biological attack, too. I am certain, however, that once you recover from the shock, say, Friday afternoon or, perhaps, Monday morning, it might be a good time to go long on Anthrax remedies and buy those ethanol stocks "on the dip," right?

Drama Queens to the Floor, Please [Going Private]

Apparently no one at the SEC tipped off John Thain that they are looking into the alleged problems with the hybrid trading system.

John Thain, head of the New York Stock Exchange, told CNBC's Bob Pisani that there is no investigation by the Securities and Exchange Commission of trading problems at the the Big Board during Tuesday's market selloff.

The comment, which Pisani mentioned on air, appeared to contradict a Wall Street Journal report earlier Thursday that the SEC is looking into whether the NYSE's shift toward electronic trading affected its ability to handle a surge in trading volume.

Citing a person familiar with the matter, the paper said the regulators are concerned that capacity issues may have exacerbated the Big Board's woes this week.

We assume that what Thain means is that the SEC has not launched a formal "enforcement action" against the NYSE. But it stretches credibility to say that the SEC is not at least looking into the alleged problems with the hybrid system, especially since those problems have received so much media attention in the last couple of days.

And that should just about conclude our "All Thain, All The Time" coverage. No one should really have to read that much about John Thain this early in the day.

CNBC's Pisani: Thain Says No SEC Probe of NYSE Trading [CNBC.com]

Any of the unlucky traders who didn’t get a second to give John Thain the finger as they were shown the door during the NYSE’s killing spree over the last few months—either because they were being shoved out of it too quickly or because it was too cold and they were wearing mittens, in which case we’d suggest simply raising one’s hand and saying “Guess which figure I’m holding up?”—got a second chance late Tuesday night. The Post reports that the some of the victims of The Carnage of JT® think a “certain ‘I-told-you-so’ posture is warranted.”

"Someone pushed the sell button and guess what? There was no human there to stem the slide," said Ron Perez, a laid off specialist.

The Post, however, apparently feeling no sympathy for those lost in the hybridization of the floor, chalked the whole thing up to a bout of “crummy luck” for Thain, whose tenure, it waxes poetically, has been three years of “uninterrupted success.”

Champions of the Thain’s program claim, predictably, that the 416 point drop had “nothing to do with execution by the big board” and that “The hybrid system worked the way it was supposed to because human beings were able to step in and stocks could be traded manually…The situation has been resolved."

Opponents of the system (who think Thain should at least offer to pay for the tab Carney and Co. racked up Tuesday night), were apparently sent a quick note in response to their complaints/inquiries into the situation late last evening from the man himself, brief but not unclear in its point: “Stop your bitching.”

THAIN BLAME GAME [NYP]

Reading the remarks of John Thain is the new Kremlinology.

As we noted in our earlier item, Thain defended the hybrid system yesterday. But one thing we didn't get around to noticing until we re-watched the interview this morning is that hain defended not just the electronic aspects of the hybrid system but the human components as well.

"If anything I think that yesterday proved that we still need people here. And that's really what hybrid is all about. And people were able to deal with, and really to overcome, the technical problems at the close yesterday," Thain told CNBC.

Thain's defense of the human element on the trading floor got our attention because it came on the heels of the announcement that Goldman managing partner Duncan Niederauer, who reportedly strongly favors moving to a fully electronic trading system, had been tapped to become a high-ranking executive at the exchange. There had been speculation that Niederauer's arrival at the NYSE might presage a move to eliminate the specialists.

The hybrid system has been controversial, especially among specialists who trade on the floor of the New York Stock Exchange. Hybrid combines human traders with electronic trading and it's introduction has led to a reduction in the number of traders on the floors of the exchange. Some specialists view the hybrid system as a sort of Trojan Horse for the eventual move to totally a automated, electronic system that would eliminate the specialists all together.

Some have pinned the blame for Tuesdays problems squarely on the electronic components of hybrid and the reduction of traders on the floor of the exchange. Traders we spoke to Tuesday evening pointed to this problem. And this opinion isn't just confined to specialists (who obviously have an interest in blaming the electronic systems they fear may make them redundant). CNBC star reporter Charlie Gasparino also argued that the hybrid system was compromised by an inadequate number of specialists.

"One of the reasons why we had problems yesterday is because there aren't enough specialists inside the hybrid working to make markets," Gasparino said last night on CNBC's "On The Money" program. "Ninety-percent of the time the electronic markets can work fine. You need specialists when you have these huge order imbalances."

Late yesterday afternoon we reported on New York Stock Exchange chief executive John Thain's interview on CNBC explaining why traders had been told to keep their books open past 4 PM.

But there was more than just that to the Thain interview. The NYSE chief also came out swinging—or what passes for swinging for the mild-mannered executive—in defense of the exchange's hybrid trading system.

"There was no problem with hybrid at all," Thain said.

Thain pinned the blame on a system called Designated Order Turnaround, or Dot, an older system that predated the hybrid trading system. DOT electronically routes certain orders to the floor of exchange.

But not everyone was convinced by Thain's performance. Reuters quoted a Prudential analysts note as saying:

"Clearly there would appear to be implications for the hybrid system and questions of reliability," wrote Prudential Equity Group analyst Rob Rutschow in a note, adding that, although the exchange claimed hybrid was not the issue, "NYSE may suffer damage to its reputation."

CNBC reporter Charlie Gasparino described Thain's remarks as "a lot of spinning."

NYSE defends new system despite glitch

When it rains, it pours, as they say. Yesterday we treated you to a little update on everyone’s favorite Wall Street Warrior, Tim Sykes. Today, he was good enough to offer us some insight on The Dow, Punxsutawney Phil, and his friend/housekeeper’s feelings on the scrutiny the media’s placed him—the housekeeper—under, of late.

Let’s talk about yesterday. What are your thoughts?
Who cares! Its a small percentage move in the overall scheme of things and we've been long overdue for a correction. Hopefully this puts back some fear into the marketplace because everybody has gotten used to stocks moving gradually higher over the past few years.

The character Dow 道 (or Tao, depending on the Romanization scheme) means "path" or "way", but in Chinese religion and philosophy it has taken on more abstract meanings. Explain.
In Taoism, one cannot force their destiny, they must be receptive to the path laid before them. The Dow is the Tao of our country as we look to it as a guide to the overall health of our economy. While this is somewhat of a ridiculous notion since there is no way to tell exactly how long the Dow lags the economy or vice versa, it has become an overarching symbol rather than an exact indicator, much like the famous groundhog, Punxsutawney Phil.

Yesterday, everybody became very nervous very quickly because our economic groundhog saw a rather large shadow and scared everybody into believing that we are due for an economic winter. AKA recession. I believe it to be a little less than accurate than Mr. Phil.

How did the events of yesterday affect your live-in help?
My roommate is tired of getting shit on by the press that has inexplicably decided to focus on that part of my story probably because I have not done anything significant lately to warrant all this most recent round of attention. This should all change once the book that I am currently working on is published and blows the water out of people's perception about the hedge fund industry.

P.S. My roommate has no comment [of his own] regarding yesterday's market drop.

Do you think you've got what it takes to rally the Dow on pure Tim Sykes Juice (TM) alone?
No, all the juice and the Jews in the world are not enough to keep this super tanker from well, tanking. This will either be the beginning of a short drop, an extended drop, or some sideways action which would inevitably then lead to either a short drop, an extended drop, or a short pop or an extended drop. whether it is a short drop, an extended drop, or a short pop or an extended drop, that will surely lead to more sideways action before leading to either a short drop, an extended drop, or a short pop or an extended drop.

I hope you understand my sarcasm in that really anything can happen because it is overwhelmingly impossible to predict with any definitive accuracy if this is just a blip or a major change in direction for the nation's economic Punxsutawney Phil.

Wanda or Plum?
Crazy Eyes Killa.

Earlier: Tim Sykes Has The Gargantuan Cojones To Ask His Friends To Clean His Dirty Underwear (And That's Not Necessarily A Bad Thing)

You called today's market-action correctly in this morning's Reader Poll, reading the early signs of morning rise as an indicator that the Dow would close up for the day. It's up nearly sixty points as we post this item. Good work!

So now we'll turn to you to answer the only remaining pressing question of the day: what caused yesterday's downturn? If you want to do a little homework, feel free to peruse our Market Plunge archive. Or check out Abnormal Returns' post-plunge round-up.

One of the things we avoid like the plague (and other clichés!) over here at DealBreaker headquarters is trying to explain the markets. Sure, we'll link to an entertaining or surprising analysis. Say, like this one on Gawker from banker-turned-novelist Dana Vachon. But we don't put much stock in the business of journalists explaining why the market did this or that on a particular day. Mostly because the explanations are so humiliating. It's always "profit taking" or "liquidity coming back into the markets" or some such nonsense. Whenever we read this stuff we wonder: Oh yeah? If you're so smart, why aren't you rich?

One former journalist described the problem like this: "The problem is that people are paid to write these kind of stories. It's their job at the paper. And they can't just write the Dow went up because the stock of Company A did this, the stock of Company B did that, the stock of Company C did this. They have to write a theme. Find a pattern. And because the theme is basically imaginary, it means they have to turn on their internal bullshit generators. And it's no surprise that a bullshit generator generates bullshit."

Gary Weiss picked up on a particularly unfortunate bit of market mind-reading from the Wall Street Journal yesterday:

The Wall Street Journal reported a few minutes ago as follows:

Stocks declined sharply Tuesday, with the Dow losing more than 200 points, as weakness in China sent markets around the world into the red, durable-goods data disappointed and uncertainty increased about Iran and Afghanistan.

Now, I'm not picking on the Journal, and I used to write stuff like this myself, but does anyone really know why the market is down just under 2% as of this moment? (Actually the S&P cracked 2% during the time I wrote this item.)

That's the fundamental problem with writing spot news about the markets. Nobody really knows why markets go up or down. It may actually be more accurate to report that the Dow lost more than 200 points because "traders watched other traders watching other traders watching other traders... sell."

Felix Salmon is even blunter in his post entitled " No one knows why the market fell, and it doesn't matter anyway":

Dan Gross gets it. Andrew Leonard gets it too. In fact, any halfways-decent financial journalist gets it, and, if honest, would simply write a story saying "the market went down and we don't know why". But instead we're inundated with "explanations", from an assassination attempt on Dick Cheney (Daily Intelligencer: "Are investors balking because Cheney was attacked? Or because he wasn't hurt?") to a drop in one of the most boring economic series in the US. (Go on – quick – tell me what a durable goods order even is.)

The Wall Street Journal's editorial page notes the dangers of market mind-reading but can't resist it anyway:

Any equity selloff as large as yesterday's will produce a multitude of explanations. Among other culprits, we heard about "overbought" Chinese stocks that were due for a correction, a weak durable goods report, the Kabul explosion aimed at Vice President Dick Cheney (see below), and former Federal Reserve Chairman Alan Greenspan for declaring Monday that a "recession" was possible later this year.

Our own "whodunit" contribution would point to the mortgage-related markets, which sold off nearly as much as stocks. This reflects the cracks appearing in the housing credit markets, especially in subprime loans but with some damage up the income chain as well. Along with emerging markets such as China, this is where the excesses have been most notable. And when Adam Smith does a house cleaning like yesterday's, he sweeps the dirtiest corners first.

Even bolder, David Lat at Abovethelaw thinks maybe he caused the market crash:

As you can see from our Programming Note, we stepped away from the computer at around 3 PM today.

Which is just about the time the Dow Jones decided to take a 200-point plunge. The Dow ended the day down 416.02 points, or 3.29 percent -- in terms of points, the worst day since the market reopened after 9/11. (The S&P 500 fell 3.47 percent, and the Nasdaq fell 3.86 percent.)

Coincidence? We think not. Apparently the stability of world financial markets requires us to keep ourselves planted in front of our computer all day.

So does Paul Kedrosky, and for the same reason:

Whoa, sorry about the market decline. If I had known that spending the day in meetings and on airplanes and generally incommunicado would make the markets tumble like this, I would have stayed on blog sentry and posted reassuring thoughts. Too late now, apparently.

But everyone knows it was really Matt Drudge who tanked the market.