September 18, 2008

Global Market Comments for September 18, 2008

1) Now is the best time ever to start a hedge fund. It is like going into the insurance business the day after the 100 year flood. All of the model busting worst case scenarios have happened. Dow up 450 on RTC type bail out rumor.

2) The global liquidity crisis accelerates. 90 day T-bills traded at 0% yield yesterday, which means that net after fees they yielded negative interest rates. Investors are solely interested in preservation of capital now and could care less about returns. The same thing happened in Japan for most of the nineties.

3) The Fed injected $155 billion overnight into the global financial system through a series of central bank swap lines. Eurodollar borrowing costs spiked up to an historical high of 3.20%, 120 basis points over the Fed funds rate. No corporate bonds have been issued since September 10. The yield on the 30 year long bond fell below 4% for the first time in history. They have to be a screaming short here.

4) The dollar fell back to the $1.45 level as traders figured out that the $1 trillion in Fed bail outs announced so far, will be highly inflationary down the road. I would have stopped out of my long dollar position at $1.39. See earlier recommendation to go short 30 year Treasury futures at 124!

5) Gold moved up $143 in two days, and it is not just the Indian wedding season that is doing this. Don't touch it here. Gold will collapse at the first sign of stability.

6) Dow Jones announced that it is replacing AIG with Kraft (KFT) in the Dow 30 index. The Dow is now heavily underweight financials, but Dow Jones is afraid to add any new names in these conditions. The world is running low on shorts in the financial sector because so many have gone to, or are close to, zero.

7) I met with some senior officials from Toyota last night. They are not going to bring out an all electric car, believing that the green trend in the auto market will stop with a plug in gasoline hybrid with a long range initial charge of 40-120 miles. A plug in Prius comes out next year.

8) The VIX volatility index hit 38% yesterday, up from 18% in July. The historic high was 48% in 1998 when Long Term Capital Management had a trillion dollar short volatility position to unwind. This is the most reliable