October 16, 2008

Global Market Comments for October 16, 2008

1) Rumors of the country's biggest hedge funds closing down savaged the market again, knocking it down 400 at the opening, only to be followed by a 700 point rally. The volatility index (VIX) hit an all time high of 81%. If you feel depressed, go buy a tank of gas, now that crude is at $68, down 54% in three months. Look for $2 gasoline by next year.

2) Dozens of technical, mathematical and fundamental models are converging on 800 in the S&P 500, or 7,600 in the Dow, as the final line in the sand for the stock market. This level very neatly gives you a double bottom on charts going all the way back to 2002, a rare occurrence. If you chop corporate earnings forecasts from $95 to $60 to account for a severe recession, that gets you a market PE multiple of 13, book value of under 2 X, with Fed funds at 1.5% and gas at $2/gallon. Looking at the total package it is a 35 year low.

3)  The credit markets led us into this crisis and has already started to lead us out. The stock market doesn't know this yet. Among the panoply of measures rolled out this week is a Treasury offer to insure all bond issues by banks for three years for a fee of 75 basis points. This effectively means that all American bank bond issues are now government guaranteed. All bank deposits are now FDIC insured for unlimited amounts, wiping out the old $100,000 limitation. PIMCO is taking over the Fed's commercial paper program at the end of the month, guaranteeing liquidity in that sector. One month CP rates have already dropped 170 bp to 1.85%. This much liquidity should break the lock on LIBOR, now the main impediment to global liquidity.

4) There is $65 billion in hedge fund capital trapped in the Lehman bankruptcy in London where they were being held by the prime broker. Inability to tap these funds to meet margin calls accelerated the selling of stocks yesterday. Hedge funds suffered $43 billion in redemptions in September, and are down an average of 17% this year.

5) I thought McCain did an amazingly good job in last night's debate for a 72 year old, but it's too little too late. One poll this morning has Obama ahead 59% to 41%. From an actuarial point of view, McCain only has a 50% chance of living 4 ½ years. A vote for McCain now is really a vote for president Palin.

6) Reality check: Google (GOOG) hit $310 today, down 58% from its $740 high. This is a company that will see earnings grow 20% next year, is selling for 14 X earnings, has no debt, monstrous cash flow, and a near global monopoly in the search business. It is a screaming buy here.