It appears we’re finally getting some panic in the markets. Treasury bills at one point today were yielding just a few basis points because the demand for safety was so great that the yield was irrelevant. When T Bill yields are competing with the mattress, people are panicking. Gold had its biggest up day ever today. You don’t have to worry about getting your money back when you’re buying, well, money.
We also saw Goldman Sachs and Morgan Stanley get creamed today. At one point GS was down over 25% and MS was down over 40% at the low. Their bonds also got crushed. I guess the thinking is that earnings and assets don’t matter; if Lehman can fail, well so can these guys. Frankly, I’m not buying it. Goldman is not Lehman. I was a buyer of GS today as well as a financial ETF. I may be wrong, but if you aren’t willing to be a buyer when people are losing their collective minds then you shouldn’t be in this profession. I’m not trying to be a hero but when the market puts good merchandise on sale, you have to be a buyer.
As for the market as a whole, I think we are approaching a bottom of some kind. I’ve been waiting all year for a capitulation and I think we’ve finally gotten it this week. The VIX spiked over 36 today and while that isn’t the highest I’ve ever seen (it hit 100 in the crash of ’87), it is within a range of values that has proven to be a buying point in the past. Spikes above 36 are relatively rare having happened less than 10 times since 1990. Every spike was followed by a significant rally, the worst of which was from last August when by October the market climbed 15% from its low. All the other times a rally of at least 20% followed.
Of course those numbers are measured from the lows of that month and we may not have plumbed those depths yet. That’s why you need to scale into a market like this, buying some and then if it goes lower, buying some more. Hopefully, you don’t run out of cash before the bottom.
This is not, to quote REM, the end of the world as we know it. This is a financial event and is not yet an economic event. There are plenty of healthy banks around willing to lend to worthy customers. Sub prime need not apply, but that is as it should be.
A few years from now, someone will be on the cover of Forbes or Fortune because of the money they made out of this mess. Those who had the courage to buy real estate and junk bonds during the S&L crisis, when 1500 banks went under, were amply rewarded. If you can’t bring yourself to be a buyer today, you don’t understand investing. After all it is about buying low and selling high. This is the buy low part.
They say opportunity doesn’t knock twice. I would add that when it does knock the view out the peephole might be plenty scary.