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.

Global Market Comments for October 1, 2008

1) The democrats are going to get the bail out bill through by turning it into a Christmas tree with presents for all of the wavering members. So far on the list: subsidies for mental health, alternative energy, makers of US based wooden arrows, and a tax cut for small businesses for Republicans. Poulson's original three page bill is now up to 400 pages. Rumors of a proposed ???300 billion bail out of European banks by the ECB was later denied by France, who else?

2) Since 1990, October has been the top performing month of the year for the Dow, followed by November and December. Since 1950, five out of nine bear markets ended in October. The 1929 and 1987 stock market crashes also happened in October.

3) Emerging markets account for just 11% of the world's stock market capitalization, but will deliver 70% of global growth over the next two decades, according to the Capital Group. The iShares MSCI Emerging Markets Index Fund (EEM) is a strong buy here, which has fallen from 45% from $55 to $30 over the past year. Look for an easy double over the next two years and a tenfold return over ten years.

4) The high school drop out rate in California is 25%, ranking it 43^rd in the nation. In the Los Angeles School District, the state?s largest, the rate is 50%. Appalling. And you wonder why things are going to hell in a hand basket here. Ebay's Meg Whitman says finding qualified staff is now the biggest impediment to doing business in California.

5) The average compensation of a Goldman Sachs employee last year was $600,000, and that includes the janitors and the secretaries. CEO Lloyd Blankfein earned $70 million, making him the eighth high paid executive in the US. This year it will be less.

6) We are about to see huge buying of JP Morgan (JPM) and Citibank (C) by index funds. With the disappearance of so many of banks, JPM and C now account for a much larger percentage of the banking industry, and index funds must buy their shares to maintain market weightings. The concentration of the banking system is accelerating at an amazing rate. These two banks alone now account for one third of all US bank deposits.

8) Investors withdrew $74.5 billion from equity mutual funds in September, an all time record. As a result the S&P 500 Index had its worst month in history. This is historically a great buy signal.

Global Market Comments for September 30, 2008

1) The Bail Out Bill II will be voted on Thursday. That took the Dow up 485.

2) Three month LIBOR hit 7% overnight, a 500 bp premium to Fed funds. During the 1987 stock market crash the premium only got up to 200 bp. Mortgage backed securities are now trading at levels implying a 55% default rate. During the great depression the default rate peaked at 12%. Things are way out of whack.

3) A number of indicators are pointing to a major long term bottom in the stock market soon. The S&P 500 volatility index hit an all time high of 48% on Monday. Every time the VIX traded at this level the market was up 7%-15% within a month. The market PE multiple is down to 13. The Index is now 30% off its year ago high. The hedge funds told us yesterday that big cap tech will lead the next bull market with their massive selling of the sector yesterday. This is where they had their big long positions. The BRIC countries are also very attractive here.

4) Wachovia Bank went under because of its 2006 acquisition of Golden West Financial for $24 billion. The company was the inventor of option arms, and had a portfolio almost entirely made of these high risk loans, 60% of which were made in Florida and California. Citibank immediately wrote off $42 billion of Wachovia's loans. This has to go down as one of the worst takeovers in history, which vaporized the buyer within two years. Talk about 'caveat emptor' with a turbocharger. Unfortunately, along with the WAMU deal, this means that the greatest destruction of loan capacity is going on in California. JP Morgan was the largest bank in the US for a whole weekend until Citibank passed it with this deal on Monday, taking its deposits up to $1.3 trillion.

7) The really important move yesterday was not in the stock market but in the Baltic Dry Shipping Index ($BDI), which has melted 70% from 1,200 to 3,746 since May. The index measures the average cost of chartering carriers of iron ore, coal, wheat, and other bulk commodities, and is a very accurate, but volatile measure of marginal global economic activity. Especially affected is the Brazil-China route. An entire fleet of ships is sitting idle off the Brazilian coast hoping for charters at any price.

QUOTE OF THE DAY

'To say derivative accounting in America is a sewer is an insult to sewage': Berkshire Hathaway's Charlie Munger.