Global Market Comments for October 31, 2008

The Sell in May and Go Away Season is Now Officially Over!!

1) The ‘sell at any price’ mentality is now broken as the steady improvement in short term liquidity salves investors’ nerves. The market is now pricing in a ‘U’ type recession with a prolonged recovery, not a quickie ‘V’ type recession. Day traders are looking for the Dow to trade in an 8,000 to 10,000 range for the foreseeable future as the glass flips back and forth from being half full to half empty. After this week’s global bout of euphoria (Tokyo was up 26%!), investors still have some sobering demons to deal with. The election will sharply increase capital gains taxes, deleveraging continues, the hedge fund industry is imploding, and the crisis in Detroit is getting worse. Oh yes, did I mention the recession?

2) The average daily range in the Dow this month has been 4%, more than double the previous record. There were only three days when the market moved less than 100 points. These are all classic signs of uncertainty, the bane of businesses.

3) The next forced seller in the markets is going to be the US Treasury, which has to sell bonds along the entire maturity range to fund the trillions of dollars in promises it has made. Short 30 year Treasury bonds, and stay short for the rest of your life.

4) University of Michigan consumer sentiment for October collapsed from 70.3 to 57.6. This indicator normally moves a couple of points a month. Consumer spending fell 0.3%, the biggest drop in four years. Watch out for October car sales. They are expected to be the lowest in 20 years.

5) There is a growing view that this month’s crash has permanently impaired equities as an asset class, and that we may lose an entire generation of investors. It didn’t pay to be a contrarian on the Titanic. The end result will be a lower PE multiple ranges for many years. My grandfather never bought a stock in his life. His relatives that did ended up living in his basement for the duration of the Great Depression. During my career, I watched the PE multiple for Japanese stocks go from 10 to 100 and then back to 10, where they stayed for years in the face of zero interest rates.

6) US gun sales are up 10% this year. Demand from hunters is weak because of high gas prices and poor weather. But they are being more than offset by NRA members buying weapons for home defense in advance of an Obama win, who they believe will bring in tighter gun controls.

Global Market Comments for October 29, 2008

1) The Fed cut rates by 0.50% to 1%, justifying yesterday’s monster stock rally. But doesn’t 1% sound familiar? Isn’t that the rate that Greenspan targeted that planted the seeds of the current crisis? Beware of the unintended consequences!

2) On Monday, when the commercial paper market reopened, Treasury bought $61 billion in paper, ten times the normal volume in that market. M1 is now growing at a red hot 20% rate. A tidal wave of money is hitting the financial system. LIBOR has fallen every day for three weeks, and 30 T-bill rates have made it all the back up to 0.45%. But as the Japanese learned in the nineties, you can make all of the money in the world available, but there will be no takers without business confidence. It’s like pushing on a string. You can lead a horse to water but you can’t make him lend. Am I mixing metaphors here? Faith in the future, which Treasury secretary Hank Paulson managed to destroy in a mere week, could take years to rebuild.

3) The S&P Case-Shiller home price index for August produced its usual horrific result, showing a 16.8% decline for the 20 largest home markets. Only Cleveland and Boston where up marginally. If you add in closing and carrying costs, every buyer of real estate since 2000 is now underwater.

4) Sweden announced a $200 billion bail out package to rescue its banks for the second time in two decades. Iceland raised its key interest rate to 18% to defend the kroner. ??Every day a new country drops like a piece of rotten fruit off the credit tree.

5) More than 90% of the world’s economic growth in 2009 will occur in emerging markets, with the largest portion coming from China. The average growth rate is expected to be 5%. The US and Europe are expected to show no growth at all. Many emerging markets with huge reserves are going into this recession in better shape than the US. In China the savings rate is 40%, compared to zero here.

Global Market Comments for October 28, 2008

1) All the recent trends reversed today on imminent Fed and ECB rate cuts. The Dow soared 900, crude and commodities popped, while the dollar and Treasuries sold off. The yen short I strongly recommended yesterday at ??92/$ fell back to ??97/$. The VIX fell back from 80% to only 66%. Please see last Friday’s ‘strategy call of the decade’ warning of an imminent sharp recovery in stocks. Looks like we will be in an 8,000 to 10,000 range in the Dow for a while, which will define the bottom of this bear market.

2) I was looking at homes in Stockton over the weekend, the foreclosure capital of the world. I was offered an FHA loan at a 30 year fixed rate, 3% down, requiring a credit score of only 650. That works out to a monthly payment of $2,000/month on a 3,500 square foot home brand new out of the box. The bad news is that it is in Stockton.

3) A disastrous unwind of a pairs trade gone wrong has inadvertently caused Volkswagen’s market cap to shoot up to $303 billion, making it the world’s largest company. Figuring the company was overvalued, hedge funds shorted Volkswagen and went long Porsche. The trade accounted for 12% of VW’s float. A surprise increase in margin requirements forced everyone to come out of this trade ad once, creating a gigantic short squeeze that drove VW’s stock from ???200 to ???665 in just two days. This is a perfect example of what happens when too many big hedge funds bunch up in a single stock, and is why I never do pairs trades.

4) Consumer confidence for September produced a record fall from 61% to 38%. We knew it was going to be bad, but this is off the charts bad. It was the largest month on month drop to the lowest absolute level in history.

5) After being suspended for a week, the Icelandic kroner opened for trading today and promptly fell 50%. Watch for great vacation packages to this fascinating but newly impoverished Nordic country. Great for girl watching, sardines, spa treatments and puffin watching.

6) You know times are tough when Howdy Doody dies. E. Roger Muir, the star behind the NBC fifties children’s’ show we all grew up on, was 89. The last four decades had been kind of slow for him. Howdy Doody ran for president against Truman in 1948. Buffalo Bob mourns.

QUOTE OF THE DAY

‘Control everything. Own nothing’, John D. Rockefeller, founder of the Standard Oil Company.