October 15, 2008

Global Market Comments for October 15, 2008

1) The Dow cratered 7.9% today, the greatest one day loss since 1987. Sell programs from distressed hedge funds hammered the market right into the close. LIBOR is coming down, but not fast enough. The Treasury/Eurodollar interest rate spread (TED) is now 300 basis points, compared to 75 basis points before the Lehman bankruptcy and 10 basis points 18 months ago. With crude down to $74, oil companies led the downturn. Exxon (XOM) is now down to a 7 X earnings multiple. Traders are sitting in front of their screens with their mouths agape.

2) Wells Fargo and JP Morgan announced decent earnings today. Their stocks are unchanged YOY. Going long these two and shorting the rest of the financial sector would have been the mother of all pairs trades. You would have made 80% on a non leveraged, market neutral position.

3) Equity mutual fund redemptions for the first two weeks of October came to a staggering $55.8 billion, a multiple of the previous record. This is another classic sign of the market hitting bottom. On Friday 97% of all stocks were below their 200 day moving average.

4) Earnings. Remember those? Intel reported Q3 revenues of $12 billion and a net of $3 billion, giving a gross margin of 58.9%. They don't borrow, financing 100% of their spending from a massive cash flow. It is still an amazingly profitable business. Did I mention that the stock has plunged by half from $28 to $14 this year?

5) A New York Times/CBS poll today showed Obama ahead 53% to 39%. I guess voters looked at their 401k statements over the weekend and threw up.

6) September PPI fell 0.4%, retail sales plunged 1.2%, and August inventories rose by 0.3%, all good recessionary numbers.

TRADE IDEA

Use this run to retest the 7,700 low in the Dow to load up on November S&P 500 1000 calls on the cheap. Today they closed at $22. You can count on a 1,000 to 2,000 Dow rally going into and after the election. The technical indicators show us at 1929, 1973, 1982, and 2001 lows. Because of a fluke in the calendar, November equity options have an unusually long maturity this month.

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