Fasten Your Seat Belts, Investors

Volatility has returned to the stock market, with a vengeance. We take a look at the issues underlying the subprime mortgage crisis.

The Dow Jones industrial average on August 1 surged to a 150-point gain in the final minutes, dramatically reversing earlier losses. And that was the mirror image of the day before, when big early gains were wiped out late in the day, replaced by 146-point slide. Fasten your seat belts, everyone, because it appears you'll see lots of similar volatility in months to come. Explosions in the toxic subprime-mortgage market guarantee much more turbulence ahead.

Scarcely a day passes without word of another subprime mine blowing up. One day it's the collapse of a leveraged hedge fund stuffed with arcane mortgage-linked derivatives like collateralized debt obligations. The next day it's a mortgage lender vaporizing. Or a jump in subprime borrower defaults and home foreclosures. How long will this Chinese water torture continue? "Unfortunately, no one knows how subprime will play out," says Kevin Murphy, managing director of Putnam Investment Management.

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Contributing Writer, Kiplinger's Personal Finance