October 13, 2008

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.