11 DAYS LATER

The global market events of the last eleven days remind me of the plot of the movie 28 Days Later. Only, in this case, the virus is a global solvency crisis and the zombies are bankers who are vomiting blood on us all as they fiend for additional capital.

Since the Dow Jones US Financial Index rallied 24% from the low on 10/10 to the close on 10/13, the index has given back all that gain and then some. And, the VIX index, which had posted record highs near 70 previously, is now well into uncharted territory, opening near 90 this morning before retreating.

In previous posts, I had pointed partial blame for the increase in volatility to the SEC short-sale ban that expired on October 8th. However, that was two weeks ago--- how could the volatility persist? One explanation could be that the short-sale ban had no impact on volatility and that the VIX (which measures fear, basically) is rallying because people are frantic and uncertain. However, I still believe that the SEC market manipulation that correlated to unusual options activity and a spike in the VIX is still contributing to the volatility and the fear in the market. I believe that the market came unhinged during the period of the short-sale ban, by which I mean that the normal corrective mechanisms of the markets were not behaving as expected, and those mechanisms have yet to return to normal function. This, in turn, is spooking investors who are already on edge thanks to the exceptionally poor performance in the financial sector, which is now spreading to the larger economy. They buy the dips and get bitten, looking for a snap-back rally that never materializes.

The markets, to a large extent, are disconnected from reality, unless we believe the 28 Days Later thesis that England is going to be reduced to a military compound of 10,000 inhabitants within 28 months. So, while I liked the movie a lot more than I enjoy watching the markets shred 401(k) accounts, I tend to think that what we are seeing is an opportunity in global equities the likes of which we haven't seen since the 1930's.

For example, shares of numerous companies in the water transportation sector (examples include OCNF, PRGN, ESEA, EGLE, SBLK) are trading well below book value and paying huge dividends with high profit margins. This can only be explained by the 28 Days Later thesis in which global trade shuts down and everybody heads for the basement.

So, while taking a bite at this market likely means getting bitten, sometimes the best opportunities to invest come when the zombies are roaming the streets and everyone is running in panic.