Global Market Comments for October 14, 2008

1) There is no doubt now that we hit the bottom in the stock market on Friday at 7,700. The question now is how long we will bounce along the bottom between 8,000 and 10,000 while the air bubble works its way through the economy. Many smaller banks are still going under despite government aid because they are beyond redemption. A lot of bodies are going to float to the surface after this one. The data releases, like non farm payroll and jobless claims, are for the next few months going to be nothing less than horrific, and could give us our double bottom in the stock market. Unemployment will jump from 6.1% now to at least 8% next year.

2) The Treasury is forcing 25 key banks, including GS, MS, C, JPM, BAC and WFC, to sell to the government preferred equity stakes yielding a 5% dividend for three years. The CEO's are now subject to compensation caps. Global leverage peaked at 30:1 18 months ago and is 15:1 now. Asset sales will continue until it is 10:1, the normal leverage of a conservatively run bank. The banking business is now a low risk, low return public utility.

3) The latest poll of the Electoral College shows Obama winning 264 to 163. Checkmate. He is even ahead in Virginia where democrats have not won in 40 years. Jefferson Davis must be rolling over in his grave. We have our Depression now. The big question is, can Obama become a Franklin Delano Roosevelt? Will Depression II give us the New Deal II?

4) A friend bought gas over the weekend in Michigan at $2.59/gallon! She was so thrilled she took a picture of the sign. Some oil insiders are now predicting a drop in crude to $50. OPEC is now talking about production cutbacks to maintain prices. Oh well, I can't qualify for the loan for that Prius anyway.

5) Mitsubishi Motors brought out its all electric 'i Miev' car in Japan for $55,000. The lithium-ion battery hatchback, similar in its technology to Silicon Valley?s Tesla, can drive 100 mph for 100 miles and then recharge in minutes with a quick charge device. The gasoline powered version of the car costs only $13,000. Being green is expensive. If history is any guide GM won't bring out its competitor for two more years, and it will cost more, be slower with a shorter range, and will start to fall apart after the first 10,000 miles. That?s if they don?t go bust first.

QUOTE OF THE DAY

'We have had a dark chapter in American history. I will never be forgiven for being right too early. '?'?.I'm a pussycat in real life. But give me 800 words and I start slashing:' Nobel economics prize winner Paul Krugman.

Global Market Comments for October 13, 2008
Special Post Apocalypse Issue

1) I spent my weekend convincing people that we are not entering a thirties style Depression and not to sell their stocks. We are entering a recession that will be longer and deeper than previously forecast. The net decline in GDP has probably jumped from 1% to 5%, and the duration has extended from 18 to 24 months, finishing by early 2010. After that, we are facing several years of sub par growth with a real estate albatross hanging around our necks. But we will not see 12 years of soup lines that will only end with a World War (although we may have some investors jump out of windows). Things happen at warp speed in the internet driven world, and that counts for slowdowns as well as recovery. We also have the experiences of the Great Depression and the Japanese 'lost decade' to draw on.

2) The PE multiple for the stock market is now under 10 X, and the dividend yield at 3.8% is higher than the ten year bond yield. The last time stocks were this cheap was after the first oil shock in the late seventies, when short interest rates were at 12%, or during the mid thirties. This may be the only opportunity to buy stocks at Depression level valuations this century. Many technical indicators hit once in a century marks on Friday. The S&P hit 35% below its 200 day moving average, and over 60% of stocks hit new 52 week lows. Last week investors redeemed a staggering $47 billion of equity mutual funds.

3) Chesapeake Energy (CHK) CEO Aubrey McClendon disclosed on Friday that he?? sold virtually all of his 33.5 million shares in his company, making the $12 spike bottom in the stock, down from $75. He had built up a position on margin, which at the peak was worth $2.5 billion, and the 80% drop in only three months triggered a monster margin call that flushed him out at the bottom with a total loss. This is what happens when you drink your own Kool Aid. Looks like the Swift Boat Veterans for Truth is going to have to look elsewhere for funding. The Right Wing Conspiracy sheds a tear. The stock is an extremely strong buy here. It's a way to buy gas for $2/btu when the market price is $6.70.

4) Just for the record books, the VIX volatility index hit 76.9% on Friday afternoon, almost double the previous record of 48%. Today it closed at 54%. At the market bottom on Friday, Morgan Stanley (MS) at $6.78/share had a market cap of only $7 billion. Amazing. It closed today at a $20 billion capitalization.

5) I wondered where Hank P5ulson got his $700 billion figure from. Turns out that it is enough to buy 49% of the entire US banking system and still have plenty of money left over. This may have been his plan all along.

Global Market Comments for October 10, 2008

1) The mother of all margin calls hit the market this morning, opening the Dow down 700 at 7,800, just 100 points above the 2002 low. I went to the next room to refill my coffee and when I came back the market had rallied 800 points, pushing the VIX up to another record high over 70%. Then Bush spoke to the nation, and his characteristic platitudes drove the market down 500. The PE multiple for the market is now under 10, back to levels not seen since the seventies. The stock market has lost $6 trillion in value in a week, the same amount of money the US housing market has lost in three years. The cavalry has been dispatched, but the good guys may get wiped out by the Indians before they arrive.

2) The meltdown in Iceland is nothing less than amazing. The banks have all been nationalized. The stock and currency markets are closed. Somehow a country with a population smaller than Toledo, Ohio (300,000) ran up $150 billion in debts, or $500,000 per person. The locals were oblivious to it all, but when I was there a few years ago everyone was driving big, flashy new SUV's. The country became a super leveraged hedge fund and is now bust.

3) Copper has had a huge route, like everything else, falling from $4.08 to $2.25. Keep a laser like focus on the red metal, because when it turns everything else will follow. It is the only commodity that has a PhD in economics, and is especially sensitive to the China trade.

4) In 1979 the average Fortune 500 CEO made 30 times what the average worker earned. Now it is 250 times. I think it is going down from here. The amount of money a billionaire earns has remained remarkably constant over the last century. Today $1 billion roughly equals the earnings of 20,000 workers, who today take home $45,000/year.

5) The Lehman hearings in congress gave us a preview of next year, especially with a democratic election win. 2009 will be the year of the perp walk. Today $400 billion of Lehman's credit default swaps settled at auction at 90 cents on the dollar, requiring 358 companies that wrote this insurance to pay out $360 billion to the swap owners. Some hedge funds that bought this stuff made a killing.

Global Market Comments for October 9, 2008

1) It?s looking like the Treasury will partially nationalize the US banking system, taking equity stakes in hundreds of firms in preferred stock form. This is why secretary Hank Paulson was so mum on the details of his program. Socialization of the American financial system would not have garnered a single republican vote in the house. It is ironic that the chief legacy of the free market Bush administration will be the government takeover of a large part of the nation's businesses. Milton Friedman must be rolling over in his grave, and probably Karl Marx too.

2) The Dow and the S&P 500 indexes are now down seven days in a row for the first time since 1987. Right now the well diversified portfolio has half of your money buried in the back yard and the rest in the mattress. Technicians now see solid support for the Dow at 8,000, close to the 2002 low. Futures were trading 200 points lower after the close, and if we open very low tomorrow, like down 500, that might be the end of the selling.

3) GM fell 31% today to $4.50 on bankruptcy rumors. The company's market capitalization is now below $3 billion, less than where it was in 1929. Investors are betting that the company does not have enough cash to make it through the year and can't borrow any more. If General Electric (GE) and Goldman Sachs (GS) have to pay 10% for their capital, how much will GM have to pay? Are there interest rates at infinity?

4) The short selling ban expired last night, and was not renewed because it was generally perceived to be a disaster. Hedge funds wouldn't cover shorts because they couldn't initiate new ones. Long side investors wouldn't buy stocks they couldn't hedge. A whole host of strategies like convertible arbitrage were put out of business. The great majority of short sales are market neutral, involving buying one security and going short against it. What naked shorting there was came mostly from banks shorting each other to hedge their own business. The SEC was so out of touch with the market they didn't know this, but were forced by politicians to do something.

5) The 'Escape from Berkeley' race starts tomorrow where participants attempt to drive 600 miles to Las Vegas on one gallon of gas. One participant plans to fuel his vehicle only from trash picked up along the freeway. First prize is $5,000.

6) Weekly jobless claims dropped 20,000 to 478,000. No one cares. Nobody has looked at economic data for about a month now because it doesn't matter.

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.