September 30, 2008

Global Market Comments for September 30, 2008

1) The Bail Out Bill II will be voted on Thursday. That took the Dow up 485.

2) Three month LIBOR hit 7% overnight, a 500 bp premium to Fed funds. During the 1987 stock market crash the premium only got up to 200 bp. Mortgage backed securities are now trading at levels implying a 55% default rate. During the great depression the default rate peaked at 12%. Things are way out of whack.

3) A number of indicators are pointing to a major long term bottom in the stock market soon. The S&P 500 volatility index hit an all time high of 48% on Monday. Every time the VIX traded at this level the market was up 7%-15% within a month. The market PE multiple is down to 13. The Index is now 30% off its year ago high. The hedge funds told us yesterday that big cap tech will lead the next bull market with their massive selling of the sector yesterday. This is where they had their big long positions. The BRIC countries are also very attractive here.

4) Wachovia Bank went under because of its 2006 acquisition of Golden West Financial for $24 billion. The company was the inventor of option arms, and had a portfolio almost entirely made of these high risk loans, 60% of which were made in Florida and California. Citibank immediately wrote off $42 billion of Wachovia's loans. This has to go down as one of the worst takeovers in history, which vaporized the buyer within two years. Talk about 'caveat emptor' with a turbocharger. Unfortunately, along with the WAMU deal, this means that the greatest destruction of loan capacity is going on in California. JP Morgan was the largest bank in the US for a whole weekend until Citibank passed it with this deal on Monday, taking its deposits up to $1.3 trillion.

7) The really important move yesterday was not in the stock market but in the Baltic Dry Shipping Index ($BDI), which has melted 70% from 1,200 to 3,746 since May. The index measures the average cost of chartering carriers of iron ore, coal, wheat, and other bulk commodities, and is a very accurate, but volatile measure of marginal global economic activity. Especially affected is the Brazil-China route. An entire fleet of ships is sitting idle off the Brazilian coast hoping for charters at any price.


'To say derivative accounting in America is a sewer is an insult to sewage': Berkshire Hathaway's Charlie Munger.