October 10, 2008

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.