Global Market Comments for October 8, 2008

1) The global interest rate cuts brought the world's stock markets exactly one hour of respite. The Dow rallied 1,000 points, then sold off 900. From top to bottom, the Dow has dropped 1,800 points since passage of the bail out bill on Friday. The Fed is running out of bullets. People are now talking about Armageddon scenarios which see negative GDP of -5% in 2009, unemployment at 10%, and the Dow down to 7,000. You always hear this kind of talk when you are close to market bottoms. It says a lot that the only positive Dow stock year to date is Walmart (WMT).

2) The UK partially nationalized the banking system, taking up to $87 billion in preferred stock in private banks. The European financial system was grinding to a halt. Stores in Germany were refusing to take credit cards from UK banks.

3) On a positive note, pending home sales for September came in at a blistering +8.8% and +18% in the West. Over half of all sales are from foreclosures. Buyers are clearly responding to lower prices, those who can get financing, that is. Over 16% of US homes now have negative equity, with the greatest concentration of negative equity in California and Florida.

4) Another market bottoming indicator: when the number of stocks hitting new 52 week lows exceeds 50% markets usually turn. Yesterday the figure was 60%. The average bear market decline is 35%, and so far the S&P 500 has plunged 40% from 1,590 to 960 in just a year. It has dropped an amazing 26% in just the last 13 trading days. On the other hand, we are only 250 days into this bear market. The average postwar bear market has lasted 400 days. But these days everything moves with warp speed. The stock market has now fully discounted a recession. The question remains, will it go on to discount a Depression. We are probably days away from a tradable bottom.

5) Russia used its oil wealth to bail out Iceland with a $5 billion loan, which couldn't get help from the US or Europe. What a strange world it has become! The Russian stock market has collapsed 65% to 900 in just two months. The leases for Russian submarine bases in Iceland won?t be far behind.

6) The Chicago Mercantile Exchange increased margin requirements for all products as their risk models blow out to historic highs. This will force day traders to pare back their books, if they haven?t already.

7) Crude inventories soared by 8 million barrels as global demand destruction kicks in. Prices collapsed like a wet taco, down to $86. Unfortunately, prices have fallen so far that it will prolong America's dependence on foreign oil. Yesterday I filled up at $3.49/gallon.

Global Market Comments for October 7, 2008

1) There was a pretty dramatic improvement in credit spreads today after the Fed announced its entry into the commercial paper market. We saw it in LIBOR, TED spreads, and a stronger euro. One month Treasury yields rocketed up to 0.35%. The Fed is now massively flooding every credit market of any description. While I believe this will solve our problems short term, over the long term they are laying the foundation for the next crisis. That will be an explosion in inflation in a couple of years.

2) Despite all of the Fed efforts, the stock market still sold off 500 on a run on Morgan Stanley stock, which fell $10 to $14 on a rumor that the bail out financing from Mitsubishi Bank had fallen through. Also, the ban on short selling comes off tomorrow night.

3) $260 billion in cash is sitting on the sidelines waiting to buy distressed mortgage assets from banks once a price is set by the government. $129 billion is from hedge funds, $63 billion from private equity, and $50 billion from a Goldman Sachs fund.

4) Credit comes from the Latin word 'creer' which means 'to believe'. The fundamental problem with the credit system is that no one believes in the creditworthiness of any counterparty, except the US government.

QUOTE OF THE DAY

'The word 'politic' comes from the Greek 'poly', which means 'many', and the word 'tics', which means 'many blood sucking insects'. Former labor secretary Robert Reich.

Global Market Comments for October 6, 2008

1) Treasury Secretary Hank Paulson stood on the roof of the House and screamed fire!, frightening 58 congressmen into changing their votes to pass the bail out bill. Unfortunately, the rest of the country heard him along with Bush, who warned Americans several times last week that we are on the verge of an economic collapse. This, more than anything else, will cause companies and individuals to pull back on any spending plans, guaranteeing that this recession will be longer and deeper than otherwise. This is what the 1,600 point drop in the Dow since the house passed the bill on Friday is telling you. It was a day of truly extreme moves on every front: Dow down 900 at one point, dollar/euro at $1.34, natural gas at $6.90, crude at $87, 30 year bond yields under 4%. An economic recovery is increasingly looking like a 2010 event. Make your plans accordingly. Obama is going to be left with a bankrupt, empty shell of a country to govern.

2) There is no doubt that panic redemptions of hedge funds are driving this sell off. The fifty stocks most owned by hedge funds fell 19% in September, more than double the rate of decline for the broader market. I always wanted to run a hedge fund that only bought the positions of other hedge funds blowing up, and this is the best time ever to do that. Chesapeake Energy (CHK), the largest provider of natural gas, is down from $75 to $25 in two months?

3) I listened to the House Oversight Committee's Lehman hearing in its entirety. Dick Fuld feels 'horrible'. That's good enough isn't it? He admitted to taking $320 million in compensation since 2000. He owned 10 million shares of Lehman, which at the peak, was worth $800 million, but along with unexercised options, is now worth zero. He said that the failure was not his fault, but was caused by short sellers, rating agencies, and false rumors. What happened to Lehman could have happened to anyone. 30% of Lehman was employee owned. The Democratic members of the committee were clearly trying to pin him to a statement, times, and dates that would lead to a fraud indictment for him or Hank Paulson.

Global Market Comments for October 3, 2008

1) The September non farm payroll came in at 159,000, worse than even the most dire estimates, and the unemployment rate jumped to 6.1%. Q3 will now almost certainly come in with a negative GDP, the new jobs figure indicating a -0.5% rate, delivering a body blow to business confidence. So far 760,000 jobs have been lost in this recession, compared to 2-3 million for a normal recession. The low number of job losses this year are partly because so few people were hired in the last upturn, because so many jobs were shipped to China. The October payroll figures are expected to be worse as the credit crunch takes hold. Taking into account the diabolical YOY sales figures announced by the car makers earlier in the week (Nissan -40%!) it is clear that the US economy fell off a cliff in September. Put on your hard hat!

2) Borrowing at the Fed window this week shot up from $$360 billion to $520 billion, an unprecedented increase. With the commercial paper market closed the Fed is basically the only game in town. Globally, central banks are flooding the system with liquidity at a record rate. Expect the monetary aggregates to skyrocket over the next few months.

3) Some 4.2 billion square feet of office space in the San Francisco Bay area is occupied by financial companies that have gone bankrupt or been taken over, like AIG, WAMU, Merrill Lynch, Lehman, and Wachovia. That is almost the equivalent of one World Trade Center Tower. WAMU alone has 267,000 sq. ft. in Pleasanton.

4) Apple (AAPL) stock got crushed down to $94, down from $180 in eight weeks, on an earnings downgrade. Apparently the market for cell phones that freeze, drop calls, with chargers that blow up in your face, is not as big as they thought. Go short cults!

Global Market Comments for October 2, 2008

1) One month T-bills are at 0.50%. The credit markets are still locked. If the house bill fails, the Dow will drop another 1,000 very quickly. Even if the bill passes, traders are starting to realize that it may bail out the banks, but not the economy or the stock market. That is what took the market down 350 today. Commodity and transportation names like POT, CHK, CSK, MOS, MON, all hedge fund favorites, were sold off bigtime. Friday is going to be a hairy day because not only do we get the house vote, we also get the September non farm payroll, which could show job losses surging to 150,000. Today weekly jobless claims hit 497,000, a seven year high.

2) I spoke at length with Robert Reich last week. The recession that is unfolding has so many structural elements that a recovery will be won't begin until 2010, so look for a lot of pain and much lower house prices in 2009. The house will pass the bail out bill tomorrow because a dozen fence sitting congressmen were able to extort funding for favorite programs. Next year we will see a witch hunt and show trials of Wall Street leaders on par with the McCarthy hearings of the fifties. He was brilliant, funny, and insightful as always. It turns out he went to Yale with Hank Paulson and the Clintons.

3) The European Central Bank left interest rates unchanged, causing the dollar to hit a new high for the year at the $1.37 handle against the euro. With the US entering into recession, our chronic trade and current account deficit is about to shrink dramatically, while the surpluses of foreign export countries will drop big. This means there will be fewer sellers of dollars in the several hundred billion dollar range. This has been a major factor supporting the dollar. Investors would rather own a currency in trouble, than own a currency in trouble, but doesn't know it yet.

4) CNBC did an interesting series of interviews with the CEOs of companies in 20 different industries to see how the credit crunch is affecting them. It appears that the local effects of the credit crisis are being exaggerated by the administration and the press in order to get the bail out bill through. The net net is that prime and medium quality credits still have adequate liquidity, although interest rates and spreads may be higher, especially if rollovers are due. The real crunch seems to be happening to lesser credits and small businesses like those of fast food franchisees and highly leveraged SUV oriented car dealers (think GM). Surviving banks are clearly skimming off the best customers from failing banks and leaving the dross behind.

5) Another indicator that the global recession is accelerating is the Baltic Dry Index ($BDI), which has had a record fall of 75% from 12,000 to 3,000 since July. This is another index of international shipping rates, with China as the biggest factor.