Uncertainty and Fear Grip the Markets

There is apparently more to fear in today's markets than there is to be excited about:

• The CBOE Volatility Index (VIX) has shot up in recent weeks and is approaching 30, putting it near where it lived from 1999-2003 during the bursting of the tech bubble.
• Subprime contagion has spread to Alt-A and A paper as measured by the ABX indices. It seems investors are fearing the worst for just about every mortgage backed loan. The ABX HE BBB Index, which tracks subprime paper, has fallen 60% since February. Meanwhile the ABX HE AAA is off almost 8% after flirting with 10% earlier in the year. This is a large drop for AAA rated debt.
• Our inverted yield curve whip-sawed over the past two weeks as investors snapped up short term treasury bills. The 3 month treasury bill is now trading at levels not seen since the beginning of 2006.
• Quantitative Hedge Funds have taken it on the chin in August. Goldman's Global Equity Opportunities fund lost $1 billion, over a third of its value in the first week of August. Goldman injected $2 billion of its own money into the fund to reduce its leverage but CFO David Viniar refused to call that move a "rescue." He insisted Goldman was being opportunistic. AQR Capital Management reported "shockingly bad" losses in its quantitative strategy, which lost 20% of its value in the first week of August. AQR, like Goldman, was able to raise an additional $1 billion even after the fall. The king of the hedge fund world, Jim Simons (pictured to the right), sent a letter to his clients announcing that RIEF was off 8.7% in August alone, after a bad July. So much for absolute returns.
  
• LBOs seems to be a thing of the past. I still remember the heady days back in Q1 when you couldn't go 24 hours without a few billion dollar deals. Instead we are seeing the LBO premium unwinding and the S&P now down for the year. The end of cheap money may well spell the end of the bull market, which at least in its final stages was fed primarily by cheap financing for LBO's and stock buybacks.
  
• Mortgage Lenders and REITs have gotten absolutely crushed. Countrywide is off 41% this month. Thornburg Mortgage is down 60%. NovaStar is off 76%. ECC Capital is off 66%. New Century is finally throwing in the towel and is down 65% this month.
• The Fed isn't budging on rates. While it will inject liquidity, it is serious about inflation. Just this evening Fed governor William Poole had this to say: ``I don't see any impact as yet on the real economy or on the inflation rate,'' he said in an interview in the bank's boardroom. ``Obviously, there could be an impact, but we have to rely on some real evidence.'' Poole says he will be watching monthly jobs, retail sales and industrial production data to determine his stance at the next Fed meeting in September.

Given all the headlines above, are you optimistic about strong stock returns?