Thursday, April 9, 2009

Fear subsides, prices rise (4)

This chart helps explain the degree to which fear and uncertainty is driving the market. Leading up to the first major low in equity prices on Nov. 21st, the market was strongly and negatively correlated to the implied volatility of equity options (i.e., the Vix index, which is a good proxy for the level of fear, uncertainty and doubt). Since then, fear and uncertainty have subsided, but prices have not rebounded on balance. The rally of the past month has been accompanied by a reduction in fear and uncertainty, but while the Vix has returned to levels not seen since last September, the equity market remains generally depressed. But it's not just fear and uncertainty, it's also the knowledge that there are serious obstacles to recovery today that the market could only vaguely imagine six months ago.

Progress is progress, though, and with the decline in the Vix we have also seen a general decline in swap and credit spreads, a rise in commodity prices, a rise in shipping rates, a relatively stable dollar, an increase in market liquidity, a significant increase in home sales, and a bounce in retail sales; all signs that the economic fundamentals have improved. Improving fundamentals and less uncertainty/more confidence are exactly what is needed for the economy to find a bottom and stage a recovery.


Cabodog said...


Not sure why, but the increased shipping rates you mention (I'm assuming Baltic Dry Index) have dropped by about 30% over the last few weeks.

Still higher than where they were after the October 08 collapse.

Nice to have you back; thanks for all the great posts from Argentina.

Donny Baseball said...

The conventional wisdom is that China went on a brief iron ore restocking binge early this year, but that they now have plenty and/or are trying to leverage negotiations with the iron ore suppliers. I'm not an expert but I follow that trade tangentially. Cheers.

Scott Grannis said...

I think what we are seeing is the sort of fluctuations that are quite normal in this series. The important thing is that rates are still well above their lows. Demand has come back from near-extinction.