That's how the financial world is looking to increasing numbers of the public and their political representatives, bemused by the frenetic agitation of a market gone cold turkey. As I predicted here (see Bear blog below) the market had reached an extreme of fear and loathing on many measures that meant a snap-back rally was a good bet and probably has legs, especially as CDS indices such as iTraxx are actually rallying for the second day running. The smell of burning flesh from frazzled short positions in the financials was palpable yesterday after a failed attempt to sink Lehmans, and it is becoming increasingly clear that Bear Stearns (with $17bn of cash and short-term securities) was brought down by a concerted campaign to undermine it by short-sellers who were in many cases also its fleeing prime brokerage clients. SEC investigations in NY will be followed by FSA investigation in London as this morning banks such as HBOS slumped almost 20% in minutes because of lurid insolvency rumours. Certain hedge funds and bank prop trading desks are acting with wanton irresponsibility in feeding a febrile atmosphere. The failure of a big Wall Street institution often signals a market bottom as yesterdays stunning move may well prove in hindsight. That was broadly true of Continental Illinois in 1984, Drexel Burnham Lambert in 1990, Kidder Peabody in 1994 and Long-Term Capital Management in 1998. According to JPMorgan (who else?), the S&P was up an average of 17 per cent in the 12 months after these events. The Fed and SEC must act in concert to rein in the destabilising excesses of funds, both in driving an inflationary spike in commodities and slamming equities with aggressive and self-serving rumour mongering, or else this latest (and final?) rate cut will be only a short term palliative as with its predecessors. However, the extreme bearishness as represented below augurs well for a sustainable bear rally over the next few weeks; this divergence in opinion has always marked major market bottoms in the past, notably 2003 and along with extreme risk aversion manifested in short bonds and corporate credit spreads means the balance of risks for US equities is now significantly positive.
Posts
