September 19, 2008

Global Market Comments for September 19, 2008

1) The Treasury announced a blockbuster rescue package which has triggered a global buying panic, but without the details. It is creating an RTC type entity which will buy distressed assets from the banks. Short selling has been banned in 799 financial stocks. Restrictions have been lifted on company stock buy backs. The Fed has started accepting commercial paper at the discount window. The Dow jumped 1,000 points from the Thursday low. Bonds had record down moves, the ten year Treasury yield soaring from 3.3% to 3.8% and the 30 year from 3.9% to 4.4%. The Treasury-Eurodollar (TED) spread vaporized. All of this has at the very least put in a short term bottom in the stock market. But the major problem remains in that there is still insufficient lending capacity to maintain home prices at current levels.  And the plan is too late to save Bear Stearns, Lehman Brothers, AIG, Fannie Mae, Freddie Mac, and 5 million home owners now delinquent or in foreclosure. There is the small matter of the fact that we are still going into a global recession. And if the Democratic congress does nothing on the Paulsen Plan over the weekend, the markets could give it all back on Monday.

2) The US government has now become the world's largest hedge fund, specializing in distressed debt, derivatives, credit default swaps, and insurance. Will it next add automobile manufacturing to round out its portfolio?

3) I found the article about Better Place very interesting. What I hadn't realized was that the replaceable batteries for cars have to be so big that they can only be moved with a fork lift. It is noteworthy that the two countries that have stepped up to this plan have small areas with an abundance of electricity generating alternative energy sources, wind in Denmark, and solar in Israel. Israel has the additional incentive in that all of its crude has to be expensively imported from the US. I suspect that there will be several alternative transportation systems on offer out there in a couple of years, much like existed in the early 1900s, when gasoline, diesel, alcohol, electric, and steam all competed equally. Gasoline won because it was the cheapest. It is not the cheapest anymore.

TRADE OF THE MONTH

The Goldman Sachs September $75 puts, which I recommended on Tuesday that you short at $1, expired worthless today, generating a paper profit of $150,000. The stock closed at $129, $54 out of the money. In fact, if I had been actively trading this week I could have made three round trips in these puts between $1 and $0.25, generating a total profit of $400,000. This shows you the opportunities that are begging out there.

GS.png picture by sbronte

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