Making Sense of New Market Lows

Includes: BAC, C, DIA, IVV, QQQ, SPY, XLF
by: Bob Lang

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 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.