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Strange days

As we limp into the end of the toughest year I have ever seen to make money, it’s time to recap on what we lived through, what we have learnt and what can be expected next year. And while economically the first-half of 2009 will prove to be more harrowing than this year, the stock market is bound to be a much friendlier place to work in.

Jingle bells

Regular readers who also tune into my Money Makers program on Sky Business must have been flabbergasted at what happened this year. In late July one of this country’s foremost economists and one of the country’s most referred to stockbrokers were both blindsided and rang my bell signalling the end of the bear market.

Both will remain nameless because I don’t want to lower their boom. These were big calls and they were made with the best of intentions and with cutting edge knowledge of markets, but 2008 brought strange days indeed!

Meet VIX and TED

Let me describe two of the best indicators of the strangeness of this year. I recently got my research assistant to merge two charts together. One was the TED Spread and the other was the VIX.

Don’t worry about the acronyms. The TED tells you what the credit markets were like while the VIX measures the volatility — the ups and downs of the stock market each day.

Twin Peaks

And while one comes from the price of money markets and the other is known as the ‘fear index’ as it measures the jumpiness of share traders, when they were put together they looked like the same charts.

Before the credit crunch started, the TED was a small spread, say in the teens, and so was the VIX.

Then in August 2007 when the credit crunch started with a spike in interest rates on wholesale foreign money markets, they pushed up as a consequence of the collapse of the market in November, then rose again in January this year, followed by another spike when Bear Stearns had to be rescued in March.

This told the market that there was a real lot of ‘you know what’ going down on world stock markets and the US economy was deep in it!

The VIX and TED remained high and the latter went hand in hand with the often-heard comment that credit markets were frozen. That meant banks, businesses and even governments were finding it hard to get money and if they did, it was at horrendous prices.

Defend the banks

That’s why I even made excuses for banks when they said they had to raise interest rates by more than the Reserve Bank, and when they could not easily pass on all of the interest rate cuts initiated by the Big Bank. Strange days indeed!

Big surprise for 2008

But the big shock came in September and rolled into October and November. The starting point was the surprise failure of Lehman Brothers and even the surprising decision of US officials to allow it to happen.

Why they did let Lehman fail will be a debating point amongst economists and market ‘experts’ for the ages, but it certainly increased volatility and interest rates in credit markets and smashed share prices. The S&P 500 index, the broadest measure of the US stock market, lost 30% after September 15 and that cost a lot of people a hell of a lot of money!

Get serious

On the other hand, it forced the US Congress and their team of election-distracted politicians to concentrate on dealing with the credit crunch. It also forced the head-in-the-sand European politicians to get serious about their corporate mess and rapidly faltering economies.

Improved leadership

Since that time leadership from all governments and central banks has improved, though the Yanks spooked the markets with a change in plans over the use of their bank rescue money in November. That caused a spike in TED and VIX but things have improved since then with credit markets producing lower interest rates. The VIX remains high without being scarily high.

There is improvement in both measures, but not enough for me to ring the bell. There is a bottoming process going on and November 20 might prove to be the low in this bear market but my jury is still out on this subject.

The Fed’s decision to take the target rate of interest down to a 0-0.25% band was well received by the share market with a 4-5% rise in the respective market indexes. This will help the bottom-building process and keep adding to confidence.

Confidence building

I made the point a few months ago that there are effectively two towers of market critical news with the bad news towering over and dwarfing the good news. There is still a lot to go for the good to be greater than the bad, but it’s starting to make up the headway.

Worrying economic reports will still put a break on confidence, but I suspect that with Obama finally ensconced in the White House by late January armed with a big fiscal package, the bulls will begin to outnumber the bears.

When that happens and some better economic and corporate reports kick in, we then will be off to the races.
Have a great Christmas and look forward to a better New Year for stock market players.

Published on: Thursday, December 18, 2008

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