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Stocks Bear Market- Light at the End of the Tunnel?

Stock-Markets / Stocks Bear Market Oct 28, 2008 - 12:54 PM GMT

By: Weekly_Wizards


Best Financial Markets Analysis ArticleQ&A with Jay Matulich, Septos Capital Management

A lot of people were expecting Monday to be a buying opportunity. What do you make of Monday's action?

Part of it is history -- the major bear markets in the past have ended on the last Monday in October. I think some traders were looking for that. They'd been looking for it on Friday and it didn't happen, though the market did make a comeback after opening down big. On Monday the market opened down somewhat and also made a big comeback, but then in typical secular bear market fashion, the markets sold off, especially the last 5-10 minutes of the session. People just have zero confidence.

Is a bottom near?

From a contrarian standpoint the market has come down a lot in September and October also, and you would think there'd be much more fear out there than there is. It seems like there are a lot of people out there looking to catch a bottom here. Prices have come down enough and they should be going back up, but I'm not so sure. I think yes we can get a rally, even a big rally, but is it one that is going to be investible for a long period of time? I just don't think so.


I just think there are too many crosscurrents right now in the US economy and in the global economy. It's clear that in this bear market everybody is coupled together, there's no decoupling, and now when somebody coughs over in a distant part in the world, it seems like everybody is going to get pneumonia instead of that only happening when just the US coughs. We're all at risk, and it all has to do with the easy money policies of the last 5 years, and the fact that there was clearly too much leverage in the system, as I've been talking about for the last 15 months. The unwinding is not pretty, and it's going to be continual and I still think that there's more unwinding to go.

This unwinding also becomes self-fulfilling. As asset values come down, that means the value of the collateral goes down, so that means the people who are leveraged with what they thought was good collateral -- which is now not very good collateral -- end up having to sell, and it hits investment banks, investment funds, and individual investors. It runs the whole gamut. You have banks, hedge funds, even some mutual funds that use VAR, and with the volatility we have they have to have strict adherence to the VAR rules for leverage purposes inside these firms -- so if it goes up too high they're de-leveraging. That's the problem there on the liquidity side of the markets. They're forced to sell.

And then we've got an economy that has been slowing. I said I thought we'd entered a recession early in the summer, and many people are thinking we may be coming out of it because the Fed's pumping so much money into the system. I don't know about that -- they've been sterilizing a lot of their liquidity that they've put in the market. I think there are so many crosscurrents that getting a market with any viable trend on the upside is going to be challenging.

How are you playing this market?

Mostly in cash. I do have an investment in the technology sector -- semiconductors, in particular, that look to be washed out. This area's acting a little bit better than the Nasdaq index. Although today was bothersome because it did sell off at the end of the session after acting well for most of the day. The stocks have been hit very hard over the last six months, and I think that they're getting down to a point where there is value there, it's just a question of how long do I have to wait to realize it

I do maintain some hedges with index shorts. I just don't think the environment out here is one where you can actually be exposed quite frankly on the long side and quite frankly on the short side, too, because anything can happen. That's the type of market we're in.

What do you think of gold?

Gold looks interesting, just from the standpoint of going into 2009. It looks like the Treasury is going to have to raise new cash, about $1 1/2 trillion worth, which is going to be a global phenomenon, and I believe that once the markets get wind of that, gold is interesting. I wouldn't be averse to picking away at it on some type of weakness, but nothing to where you'd be putting a huge position on. I'm just saying it's an interesting asset right now, but it's one where you build it up gradually over time.

How about convertibles, which a lot of people are talking about?

I don't want anything having to do with any type of debt outside of sovereign debt, and even sovereign debt these days is questionable unto itself, except if it's just U.S. Treasuries, because you've got Switzerland that has a potential problem with all the money they lend out to Eastern European countries. Its currency is running wild against those country currencies now. I just think it's too dicey not knowing what the value is of some of these credit instruments and quite frankly even preferred stock, especially financial-oriented preferred stock of banks and that type of thing. Yield on Bank of America (BAC) is north of 9% -- sounds great, but when it's all said and done do you really know what's there? Again you're better off safe than sorry -- I would just stick quite frankly the majority of my money in Treasuries, money market funds and maybe some munis.

How about oil?

Oil is part of the asset liquidation and if we're going into a meaningful global slowdown, oil is probably priced right at the moment. If it goes up it could be for a technical rally, but I don't know if you've got a sustained move in that area. Playing a rally? I guess it may make some sense perhaps next week.

You mean after the election?

Yes. If the market is going to make a tradable bottom, like I was saying about earlier, I think it comes early next week -- Tuesday, Wednesday -- and it could be one to participate in. But remember I just don't think it lasts all that long.

Any parting shots?

One of the things that concerns me about the general market and the economy is that the ABX Index look to have bottomed on July 18. That tracks the credit default swaps for all types of credit instruments, particularly in the mortgage area, and it looked like it bottomed with the rest of the financials relative to the market on July 18, and had been previously making higher lows. All of a sudden on Thursday and Friday it dropped right out of bed and to a new low, which really gives me concern because I think the market had been thinking that this mortgage issue may have been behind us. But now with this pricing coming it says it may not be, and then we've got other areas in the commercial paper market and corporate market which are just starting to widen, which could be problematic. That's one of the reasons why I am cautious on things, because I just don't think we've reached a point where you can say that there's some visibility ahead. I just don't see the light at the end of the tunnel right here.

Jay Matulich is principal of Los Angeles-based Septos Capital Management. To contact Jay with questions or comments, please email

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