Friday, 24 October 2008

Are You Exhausted Yet?

As I sit down to type this on Friday night, the German and French stockmarket's are down more than -8%, the UK is down more than -7%, S&P500 futures are down -6.5% which is limit down. Limit down is the circuit breaker that prevents further selling until the market has had time to cool off.

The speed at which events are unfolding is mindnumbing. There are so many things to write about but it is just impossible to include them all. Things like the Baltic dry index, down more than 90%, the UK economy has just contracted -0.5% in 3Q08. The unintended consequences of backing Australian bank depostis leading to a halt on redemptions by the likes of Perpetual, AXA and Babcock & Brown. OPEC cutting 1.5 million barrels of production. Falls in International air passenger traffic not seen since the SARS scare of 2003. and on it goes.

It's against this backdrop that panic is starting to take hold. Just 2 weeks ago stockmarkets experienced their worst week since the great depression. However the panic seems more extreme at this moment, I heard on bloomberg tonight one trader say "God help us!" That is the kind of talk I've been wating to hear. The capitulation low that everyone has talked about might be here.

That said, I wouldn't be surprised to see the market finish up in the US today, although it looks highly unlikely at the current time, that's the kind of volatility we are dealing with. The VIX has exceeded all previous records - which leads to another point worth noting.

We keep hearing comparisons to previous times, the bear market of 1974, the recession of the early 1980's, the depression of the 1930's. However, this market continues to defy all expectations. We are in unchartered territory and all the old metrics can't be relied upon.

We have unprecedented leverage in the form of hedge funds and exotic financial instruments such as credit default swaps. Sure there have been times of excessive leverage in the past but nothing even comparable to the present day.

All that said, if you are a long term investor that tries to purchase shares in good businesses at fair prices then there is reason to be optimistic. The current prices of many businesses have not seen such attractive levels for a couple of decades. It takes of bit of courage to wade into the markets with such uncertainty, but if you can stick to a disciplined approach you will be well rewarded in a few years time.


Deano said...

Hectic indeed, read an interesting article in the UK tele about the situation Europe is now in, worth a read

The Fundamental Analyst said...

Thanks for that, it was interesting, the epicentre of this crisis seems to be shifting to Europe and other emerging market economies. But then what? What are the nunforseen and unintended consequences of all this government intervention? Events are unfolding so rapidly it's difficult to keep up and for most the prudent thing to do is look on from the sidelines.