Daily Investment Interpretations

January 12, 2010

2010-1-12:  The indices all declined today. The NASDAQ Composite sank 30.1 points, (-1.3%) to close at 2,282.31, the Dow lost 36.73 points (-0.34%) to close at 10,627.26 and the S&P 500 subsided 10.76 points (`0.17%) to 1,146.98. Oil dropped to $80.06 a barrel. Gold plummeted $1,129. The VIX rose 0.7 to 18.25.
    I mentioned yesterday that the VIX ran mostly below its present level of about 18  (see the last chart below) for 3½ years from the beginning of 2004 through the middle of 2007, so the fact that it's presently around 18 isn't necessarily cause for alarm. But what's distinctive about the present situation is the steep downward slope of the VIX since it peaked at 96 in October, 2008. It's also interesting to look at how rapidly the VIX shot up in 2008. On August 29th, it closed at 19.43. By the end of September, it had climbed to 47. Then it topped out three weeks later, on October 23rd, at the aforementioned 96 ( not quite eight weeks after August 29th), though it closed that day, thanks to federal reassurances, at about 67. Two days later, it closed at 80, with its highest close, at 80.86, coming on November 20th. What's significant about this is how fast it happened, and how fast it could happen again in 2010 or 2011.
    As of tonight, the S&P 500 is up about 70% from last year's low, while my portfolio is only up 40%. Disappointing as this is, it's important to realize that last year's debacle was categorically different from anything that has occurred since the Great Depression. This is the first time in 80 years that recessions haven't been under the control of the Federal Reserve. Only heroic and desperate measures by the Federal Reserve and the Treasury Department saved this country from the Great Depression 2.0. and it's my notion that there were no a priori assurances that what they did would work. The last two years have seen what I hope will have been a once-in-a-lifetime financial meltdown. Unusual cautionary measures were in order.
    The question now is what to do about recovering from this. The S&P 500 is still about 35% below its 2007 high. In the meantime, global trade is just beginning to pick up. China is starting to export again. (With respect to China, it's worth noting that the China index FXI has topped and is rolling over... see below China has just begun raising interest rates to cool the Chinese economy in order to head off inflation and/or a real estate bubble.) However, it may still make sense to invest in calls on the international ETF EEM. The risk here is that dwindling liquidity will hit emerging markets once interest rates start to rise. And interest rates are going to rise unless the world's economies collapse again. Still, international funds are still, like the U. S., down about 30% from their highs.
    There are other investment areas such as alternative energy that may well match or exceed the broad domestic and international marketplaces over the coming year or so.
    One problem is that there will probably be one or two 10%-or-greater corrections this year. This can only happen if a majority of investing professionals can be persuaded that the recovery is stalling out, and that we're heading for a waterfall. That means that the news will be very scary, and that it will probably become advisable to sell, and even to short the market during the year.

(To be continued)