October 2, 2008

Global Market Comments for October 2, 2008

1) One month T-bills are at 0.50%. The credit markets are still locked. If the house bill fails, the Dow will drop another 1,000 very quickly. Even if the bill passes, traders are starting to realize that it may bail out the banks, but not the economy or the stock market. That is what took the market down 350 today. Commodity and transportation names like POT, CHK, CSK, MOS, MON, all hedge fund favorites, were sold off bigtime. Friday is going to be a hairy day because not only do we get the house vote, we also get the September non farm payroll, which could show job losses surging to 150,000. Today weekly jobless claims hit 497,000, a seven year high.

2) I spoke at length with Robert Reich last week. The recession that is unfolding has so many structural elements that a recovery will be won't begin until 2010, so look for a lot of pain and much lower house prices in 2009. The house will pass the bail out bill tomorrow because a dozen fence sitting congressmen were able to extort funding for favorite programs. Next year we will see a witch hunt and show trials of Wall Street leaders on par with the McCarthy hearings of the fifties. He was brilliant, funny, and insightful as always. It turns out he went to Yale with Hank Paulson and the Clintons.

3) The European Central Bank left interest rates unchanged, causing the dollar to hit a new high for the year at the $1.37 handle against the euro. With the US entering into recession, our chronic trade and current account deficit is about to shrink dramatically, while the surpluses of foreign export countries will drop big. This means there will be fewer sellers of dollars in the several hundred billion dollar range. This has been a major factor supporting the dollar. Investors would rather own a currency in trouble, than own a currency in trouble, but doesn't know it yet.

4) CNBC did an interesting series of interviews with the CEOs of companies in 20 different industries to see how the credit crunch is affecting them. It appears that the local effects of the credit crisis are being exaggerated by the administration and the press in order to get the bail out bill through. The net net is that prime and medium quality credits still have adequate liquidity, although interest rates and spreads may be higher, especially if rollovers are due. The real crunch seems to be happening to lesser credits and small businesses like those of fast food franchisees and highly leveraged SUV oriented car dealers (think GM). Surviving banks are clearly skimming off the best customers from failing banks and leaving the dross behind.

5) Another indicator that the global recession is accelerating is the Baltic Dry Index ($BDI), which has had a record fall of 75% from 12,000 to 3,000 since July. This is another index of international shipping rates, with China as the biggest factor.