September 26, 2008

Global Market Comments for September 26, 2008

1) The government seized WAMU and sold it to JP Morgan without even telling WAMU's senior management because they were all on a plane to meet with a potential buyer. Common, preferred, and debt holders were all wiped out. Morgan immediately wrote off $31 billion of WAMU's debt, about 20% of the total.

2) From 2002 to 2007, $100 billion poured into BRIC country stock markets. In the last three months $25 billion has come out, taking these markets down 39%-58%.

3) The five largest sovereign wealth funds are the United Arab Emirates (Dubai) $625 billion, Norway $322 billion, Singapore $215 billion, Kuwait $213 billion, and China $200 billion.

4) The trailing ten year return on the S&P 500 is the lowest since 1974. This signals that the market is in the process of forming a major multi decade bottom. It has made this low only four other times in history.

5) It's looking like China's economic slowdown is more than just a post Olympic hangover. The US Christmas selling season is expected to be a disaster this year and that will make a big dent in Chinese exports, the main driver of the economy. Home prices in Southwest China are down 20% and may enter a US style meltdown. The Shanghai and Hong Kong stock markets are already reflecting as much, down 68% and 45% respectively. Economic growth may fall from an 11% annualized rate earlier this year to under 8%. If it falls to zero, there will be a revolution. Expect bulk commodity prices to fall further.


Time to come out of the bull cylinder I recommended yesterday. The congressional talks are obviously in trouble, and with the WAMU failure there is a real chance of a crash on Monday. And there is already a big profit in the position. Time to say 'thank you very much Mr. Market', take the gift and retreat to the sidelines. If your friends make a killing on a giant up move on Monday, just let them pay for dinner next time. Capital preservation is key here. The October mini S&P 1100 puts you sold yesterday for $13 you can now buy back for $10 because the market is taking the weekend's time decay out in advance and short dated volatility has come in a bit. The Dec mini S&P 1300 calls you bought for $18 you can now sell for $25 because of a 200 point move up in the market and because longer dated volatility is holding up. The overnight net profit on the position is $15, or $750,000. Just trying to show you how I operate. Take the money and run.