Gyrations and Volatility in the Markets, October 20, 2008
The Chicago Board Options Exchange (CBOE) defines the Volatility Index (VIX) as a key measure of market expectations of near-term volatility conveyed by the S & P 500 stock index option price.
Since the VIX was introduced in 1993, it's been considered as a measure of investor sentiment and market volatility. This means that when the VIX index reaches over 50's in the past, the sentiment and volatility reverse itself. Please find below the 52 week trading range of the VIX index trading at all time high.
| 70.33 | |
| Trade Time: | Oct 17 |
| Change: | 2.72 (4.02%) |
| Prev Close: | 67.61 |
| Open: | 67.65 |
| Day's Range: | 59.82 - 74.48 |
| 52wk Range: | 15.82 - 81.17 |
In the past two weeks, we've seen such huge gyrations in both the Dow and the TSX that one wonders if the fundamentals for investing have been thrown out of the bath water!
There is a real credit crunch and liquidity crisis happening around the world. That is why we've seen a concerted effort from leaders around the world to inject liquidity to the markets. The Bank of Canada lowered overnight rate target by .05% to 2.5% percent on October 8, 2008. After the announcement, the five (5) Canadian banks reduced their prime rate by just .25%. Mr. Flaherty said then that he was "concerned" about the banks' decision, but not "surprised" given the availability of financing. The next day, Mr. Flaherty announced that Canada is buying 25 billion dollars in insured mortgage pools to help the banks. It was only then that Bank of Nova Scotia and TD Bank announced another .25% reduction in their prime rate.
Below some events for your information/reference:
Are we seeing credit lightening up with all the global monetary policy stimulus being initiated? It appears to be happening slowly. The key to watch here are the credit markets, the libor (London inter bank overnight rate) and the Ted spread (the difference between the rate for Treasury Bills and the rate for Eurodollar bills). The rate fell in London only last Friday, October 17, capping the first weekly decline since July, sliding 8 basis points to 4.42%. It declined 40 basis points this week. The overnight rate for dollars slid 27 basis points to 1.67 %, the lowest level since September, 2004.
With all these economic crisis happening around the world, why is the price of gold not going up? It hit $1,000 a few months ago and has since come down to $772.10. The GLD in New York tracts the price of gold valued at 10% of the spot gold price.
Below the information on the Gold price as traded in the NYSE exchange as of the close of Friday, October 17, 2008.
GLD quote (NYSE Exchange - quotes delayed 20 min)
Gold is historically a hedge against inflation. With crude oil falling from the highs of $150 to the $71.85 and major commodity prices coming down, the threat of inflationary pressures have gone down recently to dampen the price of gold. However, there appears to be a shortage for physical gold and gold coins recently in the world markets. I am not a "gold bug" but I believe that gold should be added to one's portfolio as insurance. Like insurance of any kind, one would not want the event to happen, but it is something that needs to be added on for protection and peace of mind. Should the US Federal Government decreases interest rates again on October 29 or earlier, then we should see the price of gold go up again. The US dollar has been going up lately against all other currencies specially the Euro not because the US economic fundamentals are improving but only because Europe appears to see its' economy starting to deteriorate. The strength in the US dollar should be temporary and once it starts to weaken again, the price of gold should continue to go up (remember gold is price in US dollar).
OPEC moved their emergency meeting from November to next Friday, October 24 to discuss the falling price of crude oil. Canadian oil stocks are undervalued right now if you compare it to their cash flow. With this in mind, big oil company like Exxon Mobile or countries like China or India might seriously look at the Canadian oil stocks to buy. Remember Warren Buffett and Bill Gates visited the oil sands just a few months ago. Though Mr. Buffett had said that he is not interested in the oil sands then, remember he IS a value investor and with the recent decrease in stock prices in Encana, Canadian Natural Resources, Suncor and Canadian Oil Sands, Mr. Buffett might change his mind.
There are a lot of undervalued stocks right now and now is the perfect time to upgrade your stock portfolios. Get rid of all your "dog" stocks and move up to large cap quality companies as these companies share prices have gone down with the rest of the markets. The beauty about the falling stock prices is the dividend is currently very attractive, between 4-10% depending on the stock. A simple rule that Warren Buffett dictates in buying stocks is: Be fearful when others are greedy and be greedy when others are fearful. Happy investing!!!
Mimi C. Tang, CFP CLU CHFC
Investment Advisor
Peak Securities Inc.
www.mimitang.ca
Please note: Ms. Mimi Tang, offers financial planning and insurance services as an independent representative, under Mimi Tang Wealth Management and Consulting LTD. and these services are offered independently of PEAK Securities.
PEAK Securities inc., an IDA registered, full service investment broker, limits its responsibility to investment products such as stocks, bonds, and mutual funds. PEAK Securities inc. is a member of the Canadian Investor Protection Fund.
Call Mimi Tang at (604) 926-8068 or email mtang@peakgroup.com
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