Monday, September 29, 2008

Wow, What a Day!

I am more concerned about the return OF my money than the return ON my money.

--Mark Twain

The markets were clearly in trouble early this morning as bank failures in Europe were signaling that bailout or no bailout, the global economic backdrop is deteriorating.

However, the one thing Wall Street hates more than yacht docking fees at the World Financial Center, is uncertainty. Despite the global upheaval in markets this morning (Asia and Europe were down 1-3%) most traders were confident that the bailout deal had been finalized and that the vote was merely a formality. I've been of the opinion that this bailout would have provided some cover for the system, but it would likely cost more than expected, be a behemoth to manage and was based on a series of overly optimistic assumptions.

I think the leaders of both parties underestimated the role that the upcoming elections would play in determining the voting on the bill. So there is plenty of blame to share for today's sell-off.

However, I think today's sell-off, while attention grabbing, may not have been tied entirely to the bailout bill failure. I think this article from Sunday foreshadowed much of Monday's market action.

"No one expects a wholesale flight from hedge funds. But even a modest outflow could reverberate through the financial markets. To pay back investors, some funds may be forced to dump investments at a time when the markets are already shaky.

The big worry is that a spate of hurried sales could unleash a vicious circle within the hedge fund industry, with the sales leading to more losses, and those losses leading to more withdrawals, and so on. A big test will come on Tuesday, when many funds are scheduled to accept withdrawal requests for the end of the year."

I think that the violent declines in hedge fund favorites like Google (down $40), Apple (down $22), Baidu (down $27), First Solar (down $28) and SunPower (down $10) indicate that a number of low-end hedge funds are bracing for a wave of redemptions in the very near future. These stocks are completely unrelated to the credit markets but they were sold consistently throughout the day.

Finally, for all of the gloom and doom in the media today there is a fairly consistent indicator of a near-term bottom in stocks. Without getting too technical there is a volatility Index (called the VIX) which has spiked into the 40's on a couple of occasions - 2002/2003 pre-Iraq war and 1998 during the Asian meltdown. We crossed above 45 today. Many, many professional investors follow the VIX as an indicator of fear by the small investor and use it as a contrarian signal that a bottom may be coming. With a ton of data coming out this week, it will be hard for the markets to find a bottom based on fundamentals, but if the charts tell big buyers to buy expect to hear more about the VIX.

Cheers!

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