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Capitulation?

October 22nd, 2008 · No Comments

Earlier today we argued that we think we are close to a bottom (nasty surprises excluded). The arguments are rather simple.

  1. We think that the interventions to stabilize the financial sector are working. There are many signs of that, inter-bank rates have come back a lot, injecting liquidity, capital, and guaranteeing inter-bank credit together was the right approach. It’s going to take a while still to get back to anything approaching normality (that is, for banks to start lending again), but the worst has been averted.
  2. We’re not going to get a 1930s type depression, the policy reaction (after significant dithering), has just been a couple of orders of magnitude better than in the 1930s.
  3. That leaves a recession, probably of 1980-1 type magnitude, perhaps a bit worse. But we also have to recognize that stock prices have given up quite a bit already. The Dow is down from 14,000 to 8,000s range. It could go down another 10% or so, but except the recession turns out to be a lot worse than that of 1980-1, we wouldn’t think any lower would be necessary.
  4. That means that most is already priced in
  5. And we still have a couple of interest rate cuts (especially in Europe) to go, another stimulus package, the decline in prices from a rising dollar and steeply falling commodity prices, so we’re not too worried at these levels.

Now, having said this, are trading patterns confirming this, that is, is there anything like the proverbial capitulation? Well..

A Bit of Capitulation: Money Fleeing the Market at Rate Typical of Bottoms
Posted Oct 22, 2008 12:47pm EDT by Aaron Task in Investing, Recession

  • As the market struggles to find its footing, debate is raging over whether the kind of panic typically associated with market bottoms has occurred in recent weeks.
  • It’s too soon to judge whether a sustainable bottom has occurred, “but there is a bit of capitulation going on,” says Liz Ann Sonders, chief investment strategist at Charles Schwab & Co.
  • According to Sonders, outflows from mutual funds in the first two weeks of October exceeded the record $75 billion of redemptions set for the entire month of September.
  • Breaking things down further, the most dramatic outflows have come from assets tied to commodities like oil and gold, as well as emerging markets, which have suffered even more dramatic declines than the Dow and S&P.
  • That level of “I give up, get me out”-type activity — which is also evident in massive redemptions from hedge funds – is typically associated with market bottoms. Conversely, mutual fund investors were most bullish at the market’s peak in early 2000.
  • To be clear, Sonders isn’t a market timer or declaring the bottom has been established. Her message remains unchanged: have a plan, stick to it, stay diversified and periodically rebalance. But when panic – or even just fear — is in the air, it’s probably too late to go to cash, which may feel “safe” but typically proves to be a long-term loser after adjusting for inflation, she notes.

We especially agree with the last part.

Tags: The Markets