Tuesday, March 10, 2009

Measure of Wealth

“Never use money to measure wealth.”

Print Ritter as portrayed by Robert Duvall
Broken Trail, Released 2006

Investors today might find some consolation of the words of wisdom spoken by Robert Duvall’s cowboy hero in the television movie Broken Trail. Yes, there are other valuables is life, such as good health and the companionship of friends. Unfortunately, that kind of wealth will not pay the rent or put food on the table.

Last week investors had to weather yet another dreadful week in the stock market that left indices at newer, even more alarming lows. Now we are working on setting records against the early 1990s. Personally, I prefer to limit my “retro” adventures to bellbottom pants and platform shoes.

One little glimmer of sunshine in trading last week can be seen in a chart of the CBOE Volatility Index. Yes the index has clicked up since the beginning of the year from approximately 40 at the end of December to 49.33 at the close of trading last week. Yet this is still well shy of the 80.86 mark set in late November 2008.

The Dow Jones Industrials lost 15.8% of the index value in the two months beginning October 1, 2008 to November 30, 2008. This was the period when the VIX spiked to percentages in the 70s and low 80’s. By comparison the first two months of 2009 were considerably more destructive in terms of the value lost. From the first of the year to last Friday (65 days compared to the 61 day period in October and November 2008) the Dow lost 24.5% of its value but the VIX has remained in the band between 40 and 57.

The decrease in volatility might suggest that the equity market is becoming somewhat more orderly even if there remains considerable re-pricing still to take place.

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