Making Sense of New Market Lows

So, here we are at new market lows. Who couldn't predict that would happen, given the troubles of banks, the economy and government intervention. Past is often prologue with markets as we see the same results over again. Without some growth in the economy markets are limp. We also know that markets are forward-looking, and they must be telling us the future is somewhat cloudy. The government is throwing everything but the kitchen sink at the problem but it may not be enough (or just the wrong stuff).

Financials Are Insolvent... Period

I don't have to look at the books to figure this out. There really is no way out for the banks - they've mostly crossed to the other side as the cost of doing business is just enormous. The toxic assets and other bad mortgages on the balance sheet must be vaporized and replaced by capital, if that indeed is possible, or the banks will suffer the consequences. Friday's 'fear' was about nationalization, specifically C and BAC. But why do these two stocks strike fear? They are already 'dead men walking', right? At under $5 a share institutions won't touch 'em.

Every week there seems to be a bank nationalization, too. There have been 14 of them already this year (generally on Fridays the FDIC takes a bank over but it flies under the radar). The stress test idea Secretary Geithner introduced is likely to show most banks won't pass, and may therefore not be entitled to more federal help.

How Do You Spell Relief? QGRI

QGRI...you may not know what this means. It stands for Nasdaq Government Relief Index, created by Nasdaq in January 2009 to track the companies that took financial help from the gov't, either TARP money or bailout money. All the ones you've heard about, from GM to GE, BAC to GS - all the names that took money are in this index. They started it with a price of 1,000 on the index. It never traded over that price, and closed this past Friday at 486... a stunning 53% drop for these stocks in under two months! This is how we are supposed to measure the performance of taxpayer money to the credit crisis.

A Word on Future Volatility

The VIX hit a recent high of 52 on Feb 20, the highest level in about a month. Fear is still out there, but strikingly that fear dampens when you look out into the future. VIX futures actually look for LESS impact from volatility as you go out on time horizon. What does this tell us? Basically the market is trying to find some sort of range again and the mood is likely to be accepting of it over time. Oh sure, 50's are a relatively high level of VIX but it's not spikey yet. The recent sentiment otherwise has been bearish and miserable, which may be signs of a brief, short-lived rally.

Comments

[User 367725:]

If one is a critical reader, it is hard to give much credibility to an article that begins with a sweeping statement such as "the financials are insolvent...period" that doesn't back up said statement with one iota of evidence. This is propaganda. How about if you tell us how many banks per year failed during the S&L crisis, and use that data point to add relevance to your statement that 14 banks have been shut down by the FDIC this year. You might be surprised by the statistics if you only were responsible to take the time to investigate and provide context.

Mar 02 09:09 AM

[jasonjim:]

It is so easy to diss the financials when they are down and struggling, instead of trying to do something to help your country by finding something positive to say about the situation. This article is unsupported negative propaganda and unworthy of being published.

Mar 02 09:43 AM

[cash:]

Help your country, Jason? You can do so by organizing lynch mobs around Wall Steet. Strike some real fear into whoever wants to work on wall street, for the benefit of future generations.

Mar 02 10:28 AM

[ebschor:]

C and BAC will be touched by institutions since they are still components of major indexes.

Mar 02 11:23 AM

[Mad Hedge F...:]

This has been coming for a long time. Bank of America’s (BAC) Ken Lewis says that he won’t resign until he pays back the $45 billion in TARP money he owes the government. So paying $50 billion for something that is really worth a negative $170 billion is a bad career move? That’s a revelation! I can see that secrecy is a concept that is forever banished from the investment community. CEO’s won’t be able to make an acquisition, nor fund managers raise a single nickel from here on, without a complete undressing, and a full proctologic exam!

Mar 02 02:04 PM

[Bruce Pile:]

The market has announced it's major direction from the limbo it's been in by breaking the broad index Russell and S&P support levels and moving the VIX out of its quiet consolidation to the upside. Knowing this market, however, this is probably some carefully crafted disinformation.

If you look at the VIX over the '00-'03 period, you see that a low was not put in until the VIX made a new high. This would suggest that we have to see our VIX travel all the way back up to about 80 from our present 50 while a large move down proceeds.

The quieting VIX and other indicators was presenting a viable threat of a sharp bear rally, but that looks less likely now.

You could be 30% in cash, 25% or more in short or double short positions, only around 10% or less in long positions, and have the rest in gold positions, and still not be bearish enough. This market seems bent on punishing prudence. That saying "Bulls make money, bears make money, pigs get slaughtered" is foreign to this market. The new rule is to be 100% double short, set it and forget it, and go fishin'.

Mar 02 06:54 PM