October 8, 2008

Global Market Comments for October 8, 2008

1) The global interest rate cuts brought the world's stock markets exactly one hour of respite. The Dow rallied 1,000 points, then sold off 900. From top to bottom, the Dow has dropped 1,800 points since passage of the bail out bill on Friday. The Fed is running out of bullets. People are now talking about Armageddon scenarios which see negative GDP of -5% in 2009, unemployment at 10%, and the Dow down to 7,000. You always hear this kind of talk when you are close to market bottoms. It says a lot that the only positive Dow stock year to date is Walmart (WMT).

2) The UK partially nationalized the banking system, taking up to $87 billion in preferred stock in private banks. The European financial system was grinding to a halt. Stores in Germany were refusing to take credit cards from UK banks.

3) On a positive note, pending home sales for September came in at a blistering +8.8% and +18% in the West. Over half of all sales are from foreclosures. Buyers are clearly responding to lower prices, those who can get financing, that is. Over 16% of US homes now have negative equity, with the greatest concentration of negative equity in California and Florida.

4) Another market bottoming indicator: when the number of stocks hitting new 52 week lows exceeds 50% markets usually turn. Yesterday the figure was 60%. The average bear market decline is 35%, and so far the S&P 500 has plunged 40% from 1,590 to 960 in just a year. It has dropped an amazing 26% in just the last 13 trading days. On the other hand, we are only 250 days into this bear market. The average postwar bear market has lasted 400 days. But these days everything moves with warp speed. The stock market has now fully discounted a recession. The question remains, will it go on to discount a Depression. We are probably days away from a tradable bottom.

5) Russia used its oil wealth to bail out Iceland with a $5 billion loan, which couldn't get help from the US or Europe. What a strange world it has become! The Russian stock market has collapsed 65% to 900 in just two months. The leases for Russian submarine bases in Iceland won't be far behind.

6) The Chicago Mercantile Exchange increased margin requirements for all products as their risk models blow out to historic highs. This will force day traders to pare back their books, if they haven't already.

7) Crude inventories soared by 8 million barrels as global demand destruction kicks in. Prices collapsed like a wet taco, down to $86. Unfortunately, prices have fallen so far that it will prolong America's dependence on foreign oil. Yesterday I filled up at $3.49/gallon.