October 24, 2008

Global Market Comments for October 24, 2008

We are building up to a textbook capitulation in global stock markets, and I believe that equities will hit multigenerational valuation lows sometime in the next ten days. The extremely rare limit down move in the S&P Index futures at the opening today, driving the VIX to another new record high of 89.5%, shows us that the end is near. More than 11,000 contracts, or $2.7 billion worth of stock equivalent, were for sale at market at the opening. Many people did not expect the stock market to open at all today, but in fact the Dow closed down only 316. Use the opportunity to load up on a portfolio of equities which you can put away for the rest of your life. There is no way to know when or where the final low will come, so put scale in bids at throw away levels well below the market. When the rally comes it will be vicious and you won't be able to buy stock. Focus on liquid, cash flow positive, best of breed names that will lead the charge upward like IBM (IBM), Intel (INTC), Cisco Systems (CSCO), General Electric (GE), Goldman Sachs (GS), Boeing (BA), Caterpillar (CAT), Microsoft (MSFT), US Steel (X), Exxon Mobile (XOM), and Walmart (WMT). You can also load up on long dated calls on the S&P 500 and NASDAQ.

1) American traders were stunned to find the world down 10% overnight. Hong Kong hit 12,600, down 60% from the year's high, and this is for an economy with a long term growth rate of 10% a year. Gold fell as low as $663, down from $1,050 in the spring. A massive unwind of the carry trade pushed the yen up 5% to ¥92. Any buying of anything gets run over by a stampede of hedge fund selling, which has been ordered by lenders to cut positions and reduce leverage. The market is now fixated by two dates: October 31 when mutual funds close their books for the year, and November 15, the deadline for annual hedge fund redemption notifications. The last Monday in October is historically the most likely day to put in a low for the year.

2) PNC Financial (PNC) buys National City (NCC) with Treasury financing for $5.2 billion in stock, making it the 5th largest bank in the country. The strong are eating the weak at fire sale prices. Expect more to come.

3) OPEC announced production cuts of 1.5 million barrels/day when 4 million was needed, driving prices down $4 to $63. This guarantees a glut early next year which may drive prices down to $50. Then they will cut production by 4 million  barrels. Expect local gasoline price to drop below $2 before this sell off is over. US motorists drove 15 billion fewer miles than a year ago, a record drop, saving 12 million barrels of crude (24 super tankers full) for that month alone. Can you believe that crude has fallen by $85 since July?

4) LIBOR has dropped 10 consecutive days. The commercial paper market reopens next week. The medicine is on the way as long as the patient doesn't die first. The futures market is pricing in a likelihood of a 75 basis point cut in rates in November. The ECB may cut rates as early as Monday.