When will the market turn around?

February 20, 2009 2:27:16 PM PST
The country has a new stimulus package, and President Obama is working on a rescue plan for struggling homeowners and automakers. So, why the jitters still on Wall Street, and when will the market turn around?Americans are all looking for an easy answer and looking for an end to the declines on Wall Street. It seems even the discussion of some solutions creates volatility.

Traders reacted Friday as the federal government considered ways to stabilize the economy. Orders came through the Chicago Board Options Exchange as investors tried to hedge investments.

"We are seeing some extremely depressed levels in the broad markets. What that means for option is, in general, when there is a lot of uncertainty, people tend to come to places like the CBO for protection from long-term exposure," said Group One's Ben Londergen.

In 2008, the CBOE traded a record 1 billion contracts. Options trading is heavy so far this year, especially in the volatility index, known as the VIX , which is a measure of the volatility of stock prices.

Today's volatility of the market comes as discussion about nationalizing banks spreads. Although it is essentially denied by the White House, it on adds to the uncertainty.

"There is an extremely high level of uncertainty in the markets and no one is sure what is going to happen," said Londergen.

"The two things I know the stock market doesn't like: one is uncertainty, and two is forecasting lower earnings. And we certainly have both of those," said George Kaufman, a professor of finance and banking for the Loyola University's School of Business Administration.

Federal efforts to stabilize the economy haven't worked yet. Projects with the stimulus package to create jobs to build and repair our roads and schools have not started. Nationally, unemployment rose to 7.6 percent in January 2009.

Kaufman said he expected stability would return when the banking system regains value and confidence.

"The economy is not going to operate until the banking system is back working. If we err on the side of subsidizing the stockholders too much, I think that's a price we should pay. I know we're angry at top management, but it doesn't make much sense to cut off your nose to spite your face," he said.

Kaufman says he understands Americans are frustrated with some bank executives' lavish lifestyles and banking practices. But, he says, without a stable banking system, it will be difficult to move out of the recession.

He says he expects Washington to reveal more about a plan to bail out the banks next week.