Wednesday, November 12, 2008

Revisiting October lows

The stock market is flirting with the lows it hit in October. I'm hopeful we don't see new lows, and I base that optimism on the following observations. Key measures of fear are all lower now than they were then: the Vix index is 65 now vs. 90; the TED spread is 197 vs 460; 2-year swap spreads are 102 vs. 155; 10-year swap spreads are 40 vs. 63; and junk bond yields are 20% vs. 22%. Other indicators are showing significant improvement in the economic fundamentals: the dollar is up 7%; bank reserves are up 66%; raw industrial commodity prices are down 12%; oil prices are down 25%; and real estate prices are lower and sales volume is up. In short, while the stock market is still plenty fearful, the inner workings of both the market and the economy show that stress and fear have subsided to an important degree.


Red River said...

Has the market priced in the cost of the policies from the 2009 Congress and the new President, yet?

Scott Grannis said...

Given the depths to which valuations have plunged, I have to believe that the market has priced in a virtual catastrophe scenario. One in which future policies are about as wrong-headed as you can imagine. The market is priced to a depression, and it would take an awful lot of bad policies to produce a depression.