October 9, 2008

Global Market Comments for October 9, 2008

1) It's looking like the Treasury will partially nationalize the US banking system, taking equity stakes in hundreds of firms in preferred stock form. This is why secretary Hank Paulson was so mum on the details of his program. Socialization of the American financial system would not have garnered a single republican vote in the house. It is ironic that the chief legacy of the free market Bush administration will be the government takeover of a large part of the nation's businesses. Milton Friedman must be rolling over in his grave, and probably Karl Marx too.

2) The Dow and the S&P 500 indexes are now down seven days in a row for the first time since 1987. Right now the well diversified portfolio has half of your money buried in the back yard and the rest in the mattress. Technicians now see solid support for the Dow at 8,000, close to the 2002 low. Futures were trading 200 points lower after the close, and if we open very low tomorrow, like down 500, that might be the end of the selling.

3) GM fell 31% today to $4.50 on bankruptcy rumors. The company's market capitalization is now below $3 billion, less than where it was in 1929. Investors are betting that the company does not have enough cash to make it through the year and can't borrow any more. If General Electric (GE) and Goldman Sachs (GS) have to pay 10% for their capital, how much will GM have to pay? Are there interest rates at infinity?

4) The short selling ban expired last night, and was not renewed because it was generally perceived to be a disaster. Hedge funds wouldn't cover shorts because they couldn't initiate new ones. Long side investors wouldn't buy stocks they couldn't hedge. A whole host of strategies like convertible arbitrage were put out of business. The great majority of short sales are market neutral, involving buying one security and going short against it. What naked shorting there was came mostly from banks shorting each other to hedge their own business. The SEC was so out of touch with the market they didn't know this, but were forced by politicians to do something.

5) The 'Escape from Berkeley' race starts tomorrow where participants attempt to drive 600 miles to Las Vegas on one gallon of gas. One participant plans to fuel his vehicle only from trash picked up along the freeway. First prize is $5,000.

6) Weekly jobless claims dropped 20,000 to 478,000. No one cares. Nobody has looked at economic data for about a month now because it doesn't matter.