Felix Salmon

The markets are falling, not panicking

By Felix Salmon
August 18, 2011

Allan Sloan says that today is “scarier than 2008-09″ — and looking at the markets, he doesn’t seem far off. Yes, stocks are still much higher than they were at the height of the crisis, but relative to earnings the improvement isn’t all that impressive. Meanwhile the 10-year Treasury hit a new all-time low yield of 1.97% today, inflation figures notwithstanding, and gold too is hitting new highs above $1,825 per ounce.

To be honest, though, I’m not seeing fear or panic right here. For one thing, we’re in the middle of August — the time of year when traders and institutional investors go on vacation, volumes tend to dry up, and market moves can get magnified for no good reason. Today stocks fell as much as 5% and the VIX broke above 40 — moves which are indeed reminiscent of what was happening in those panicked days of 2008-9. But having experienced those days and come out the other side, I feel that the investing public as a whole has been toughened up a bit, inured to volatility in a way they weren’t back then. Plus, of course, they’re much richer, on a mark-to-market basis, than they were when the S&P 500 was below 700.

What I’m not seeing here is deep-seated existential fear — the idea that certain companies might well wind up seeing their stocks go all the way to zero, and then defaulting on their debts. During the crisis, we had the worst possible flavor of that fear — that it was banks which were insolvent. Now, by contrast, bank stocks are low, but the famous TED spread, for instance — one of the best indicators of the degree of faith that financial institutions have in each other — is still less than 30 basis points. It spiked to more than 400bp at the height of the crisis.

If we were genuinely in a period of panic and turmoil, we wouldn’t see multi-billion-dollar deals being done for companies like Morotola and Autonomy; we certainly wouldn’t be seeing extreme equity capital markets deals being mooted like the idea that Manchester United might list its shares on the Singapore stock exchange. The markets are clearly finding it difficult, this August, to determine what the right and proper price is for various financial assets. But that’s not panic. In fact, it might just be a perfectly rational response to an increasingly uncertain world.

7 comments so far | RSS Comments RSS

I happen to think that this is a repeat of 2008. If you look broadly at the DJI from a 5-year graph, it’s quite clear that the market has been in retreat for some time now. By zooming out that far, you can see how those 400+ pt upward swings were fairly insignificant to the broader trend pointing down. But that’s just my opinion.

Posted by GRRR | Report as abusive

Of course GRRR, no need for analysis when you have charts.

Posted by Jboy609 | Report as abusive

The two takeovers you mention are desperation takeovers. Google is worried about its Android phone OS being litgated out of existence, and Motorola has lots of patents. Even so, $700,000 per patent is a big price unless you want to attempt an Apple ecosystem copycat set up.

With Autonomy, HP are also making a desperation play: PC sales are plummeting and there is talk of HP hiving off its computer making arm, their new Tablet isn’t contributing to earnings as they hoped it would being discounted by $100 just weeks after launch, and cashflow is presumably suffering – hence the need to bring in a cashflow producer such as Autonomy.

There is also talk of ARM being in play, with Intel as the main predator, but this too can be seen as a desperation move. ARM are eroding large parts of Intels potential markets, even Microsoft are now producing an OS for an ARM chip and Apple’s own mobile chips are based on ARM designs.

For too long analysts have relied on ‘predicted’ P/E ratios and overvalued stocks accordingly, especially in the Tech area. Maybe this correction is going to see a return to checking the real reported values, not those based on yet to be confirmed guesswork.

When I was a teenager many moons ago a P/E ratio over 10 was seen to be ‘adventurous’ but for some time now they have been described as bargains. Are we just being hit over the wallet with reality? Are we being led by a few inexperienced young traders who are manufacturing their own fear through their actions? Or is there a darker sub-plot to all this set up to disguise the reserve currency issues the US is having right now?

Posted by FifthDecade | Report as abusive

“Now, by contrast, bank stocks are low, but the famous TED spread, for instance — one of the best indicators of the degree of faith that financial institutions have in each other — is still less than 30 basis points. It spiked to more than 400bp at the height of the crisis.”

Perhaps banks are bypassing each other and conducting emergency borrowing directly from the central banks….making such measures less meaningful.

Posted by PeterMarlow | Report as abusive

Have you considered adding a space for questions, in lieu of a contact form? Just a thought. (Correct me if wrong, but registration info is private, right?)

This is slightly off-topic; apologies to anyone beyond its intended audience. It is about trying to find rational responses to an increasingly uncivilized world.

In 2008, media companies laid off decent people. So it’s sad to find certain outfits, including newspapers, continuing to pay others who break the rules. A few of them seem to be afflicted with serious moral/chemical disorders — say, some mix of bipolar, narcissistic and sociopathic conditions.

Apparently, these individuals have nothing better to do than gossip, hunt strangers around the Internet, and concoct half-baked contortions about posts which do not have the first f…ing thing to do with them.

I chose this moniker with under 3 three minutes’ reflection. It’s from a book I read half a decade ago, and had not opened in at least a year. For me, the book’s emotional center rested on several themes: a grieving process; resolving weirdness/uncertainty; lawbreaking; lawbreakers suffering consequences, injury and blood loss; and people who pretend to be better at what they do than they are.

I’d like to include the part about an industry in a “winnowing process” — and how you know the dregs by how low they’re willing to sink. But I didn’t remember those or any other precise words, except that duck in the face line, until I dug it out to re-read last night.

I did not choose it because my name is Cayce. In fact, I chose it for the opposite reason. For once, I wanted to comment without having to worry about how some d-mn fool would react to it.

Again, apologies to anyone else who read that.

Posted by caycep | Report as abusive


I find your approach concerning ratios like “P/E” quite interesting. First off, i wouldnt know why they wouldnt be true today, too.

Secondly, as an Investor from Germany (who invests almost exclusively in German stocks) I found P/E ratios below 10 even before this recent crash quite often. In my amateur opinion many of the stocks that are crashing now were not overvalued (by a conservative, value investing point of view)

So, that’s why I think that this isnt permanent (getting back to oldschool valuations if you will) but rather a highly emotion – driven market, which almost completly ignores the teachings of Dodd/ Graham and the like.

For me, this is buying time.

Greetings from Germany,


Posted by Neroll | Report as abusive

I think the current behavior of the market is reflection of people’s attitudes vis-a-vis the economic and political outlook more than anything else.

The economy is stuck in neutral, the employment picture is bleak, and the political system is dysfunctional. Is it any suprise that people are starting to wonder where the increased corporate profits which would support a market upturn are going to come from?

Let’s not forget that until the recent correction, the market had more than doubled from it’s March 2009 lows without a single pullback of at least 10% along the way. It’s not like you needed to be a genius to see that the market was due for a correction sometime soon.

Posted by mfw13 | Report as abusive

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