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Market volatility is stabilising after last week's high, hedge funds limit losses

Tuesday, August 16, 2011

Quincy Krosby
Opalesque Industry Update - Volatility has been high this year, and especially last week – thanks partly to panic following Standard & Poor’s downgrade of the U.S.’s credit rating and concerns about European economies. But stocks are starting to stabilise again.

VIX’ value went from almost 16 on July 1st to 48 on August 8th. It was at nearly 32 yesterday (August 15th). Comparatively, it went up to 80 in October 2008, and 41 in May 2010 – the two recent highest levels. VIX is the ticker symbol for the Chicago Board Options Exchange Market Volatility Index, a popular measure of the implied volatility of S&P 500 index options.

Meanwhile, the S&P500 index went from 1,340 on July 1st (having been at above 1,256 throughout 2011 up to then) to 1,120 on August 10th. It stood at 1,204 yesterday (August 15th); a spate of mergers and acquisitions helped build a rally of more than 2%, said NYTimes.com.

“For now it is clear that in essence there is a relief in the market,” said Quincy Krosby, a market strategist for Prudential Financial. “You can feel it.”

Pricing swings last week resulted in a 13.6% loss for the Dow Jones Global Index month-to-date (through August 10th) and -12% YTD. The S&P500 was down 13% MTD and almost 10% YTD then. However, hedge funds were able to preserve capital, relatively, as the Dow Jones Credit Suisse Core Hedge Fund Index went down 3.7% MTD over the same time period, bringing the YTD figure to -4.54% .

However last week was not so good for mutual funds as investors pulled more money out of them than they did in the aftermath of the 2008 collapse of Lehman Brothers, reported CNBC.

Fear Factor
Jan Poser, Banque Sarasin’s chief economist told Swiss daily Le Temps that volatility went so high partly because investors’ models, which pick up on market movements, reacted to last week’s swings and sold off. Those investors include hedge funds, which could have accentuated volatility although not by much as they don’t have that much weight on market moves, he noted.

Credit Suisse’s chief economist Martin Neff told Le Temps that fear, panic and greed made for an “explosive cocktail,” and that would explain last week’s volatility. He also said a big part came from non-professional investors. He expects lower volatility levels in the coming weeks.

“As we are no clairvoyants, we have low visibility as to when the current equity market volatility will abate, but we observe that Fed Chairman Bernanke’s comments on further financial heroine (low interest rates) helped to ease tensions somehow. Our take is that current turmoil is driven by a difficulty to quantify the “fear factor” expressed in the VIX rather than real Armageddon on the ground,” commented Markus Bachmann, CIO of the Craton Capital Funds, a specialist resource fund manager.

More volatility, more downturn expected
For his part, Frederic Neumann, co-head of Asian economic research at HSBC Holdings Plc in Hong Kong, told Bloomberg: “we have to get used to that volatility, it’s something we’ll see for years to come. We will not see a return to the stable markets that we had before the financial crisis.” That is due to investors cutting their exposure more and economic growth that is much more volatile as it is lower, especially in the West.

And Harry Dent, economist and author of a new book called “The Great Crash Ahead” (Simon & Schuster, Sept 2011), has apparently been warning that sometime next year we will see a major economic downturn that could last seven years and eventually see the Dow Jones Industrial Average fall as to as low as 6,000, or even 3,500. Dent, who went 70% cash last Monday before the market fall-off, says that we are in the midst of a false bottom, and the markets should see one more upturn – an opportunity for those still in equities – to get out before the peak sometime between October and January. He bases his forecasts on demographics: the huge population of Baby Boomers who boosted the economy is retiring and spending far less and saving. Their children, Generation X (who are in the age bracket for biggest spending), is only half the size of the Baby Boomer population, and can’t possibly help the economy grow. Moreover, Generation Y, their children and Baby Boomer’s grandchildren – a much larger population – won’t begin reaching their biggest spending years for another seven years.
B. Gravrand

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