November 21, 2008

Global Market Comments for November 21, 2008
Featured trades: (GS), (GOOG)

1) The Cassandras had a field day yesterday after the decisive break of the 2002 low in the Dow at 7,700, hitting the lowest level since 1997. It seems they were competing with each other to see how dire their downside targets could get. 7,000, 6,000, 4,000, 2000? The market seems to be discounting a permanent cut in the US long term growth rate to an anemic, Euro style 2%/year, down from the torrid, artificial, debt fueled 5% rate seen earlier this decade. I think the final bottom may be dictated not by levels, but by time. The candidates? End 2008, when hedge fund and mutual fund redemptions finish. Tax loss selling to beat Obama guaranteed capital gains tax increases will also be done. After that, the next window will be the Obama inauguration on January 20, when the US officially no longer becomes leaderless, and the new president shows his true hand with new policies. A major tradable rally will almost certainly spring off of these two dates. A Fed interest rate cut of 50 basis points at its December meeting is now a sure thing.

2) At 3.7%, the S&P 500 dividend yield now tops the 30 year Treasury bond yield for the first time in 50 years. Stocks are back to 1950s valuation parameters, when the Great Crash was still a recent memory, and equities were considered too risky for most investors. The melt up in the Treasury futures bond markets were truly of Biblical proportions. The long bond ($USB) gapped up eight points in two hours to 130, the sharpest move in the 30 year history of the contract. The Merrill Lynch US High Yield Index surpassed 21%, the highest in history, and a move right off the top of the charts.

3) Pit bull Henry Waxman overthrew Michigan's legendary John Dingel to become chairman of the House Energy and Commerce Committee in a palace coup. This is big, and shows you that these are not your father's democrats. If there was one person who helped Detroit shirk from producing safe, well made, fuel efficient, clean burning affordable cars, it was John Dingle. The air cover he provided virtually assured that the US auto industry would eventually disappear up its own exhaust pipe. Shifting control of this key committee, from the main car producing state, to the largest car consuming state, hints at the new priorities of a harsher, more realistic Democratic Party. Kiss the Big Three goodbye.

4) According to MDA Dataquick, the October San Francisco Bay Area median home sales price was $375,000, down 45% YOY, and lowest since 2001. Foreclosures account for 45% of sales. The highest price fall was in Contra Costa County, down 49%, while the lowest was in Marin, down 13%. The greatest foreclosure rate was 68% in Solano County, and the lowest was in San Francisco at 10.6%. More losses are to come.

5) One of the lead stocks in this leg of the downturn has been Goldman Sachs (GS), whose shares have dropped 64% from $140 to $50 in the past month. The investment bank is staying mum, but the stock is acting like something ugly is going on behind the curtains. When Hank Paulson became Treasury secretary, his stock in GS, worth $900 million, was put in a blind trust where he couldn't touch it. It is now worth only $180 million. If GS doesn't reverse its slide soon, the Treasury secretary may be looking for a bail out for himself.


I have to tell you that in all honesty, I don't think I could have come through this dreadful week without losing money. It wasn't that one thing blew up, it's that everything blew up. I went into the week with a recommendation for just one small, limited risk bet that the S&P 500 would not drop more than 10% by Friday. I was short the November 780 puts which expired today. It just made it there. Having shorted the puts at $10 I would have stopped out at $20. But I almost certainly would have taken a hit on a short position in 30 year Treasury bonds as it powered its way up through my cost at 124, though a stop out at 125 for a loss of a point, and eventually to an unbelievable high of 130. All in just an hour! And how much would I have nibbled on my favorite stocks on the way down this week, like Goldman Sachs, as it went from $63 to $49, and Google (GOOG) on the way from $325 to $260? I have always worked with risking controlling hedges and tight stop losses, which always cost me a lot of money in bull markets, but left me still standing after bear markets. Trading the Japanese stock market from ¥3,000 to ¥39,000, and then back down to ¥7,000, and the yen from ¥360 to ¥79, and then back to ¥160, no other philosophy could evolve over a 35 year career. It's all about risk control, something the major investment banks apparently forgot to do, and was one of the reasons I left Morgan Stanley 19 years ago.