December 18, 2008

Global Market Comments for December 18, 2008
Featured trades: (VIX)

1) Weekly jobless claims fell slightly to 554,000, while continuing claims stayed at a very high 4.38 million. While the 'official' unemployment rate is only 6.8%, the real rate is almost certainly into double digits now because these figures don't include people who have run out their unemployment benefits and given up looking for work. In the meantime the Treasury bond frenzy continues, with the ten year yield closing in on an unimaginable 2%!

2) Stability is returning. The volatility index (VIX) fell below 50% for the first time in two months, and briefly tickled the 44% level. Vols historically drop over year end, when a lot of time decay occurs over holidays. But it is still outrageously high.

3) Bernie Madoff was taking in new investors at the end of November, some literally from widows and orphans, who then saw a total loss on their investment in two weeks! As long as this kind of thing is going on, people are not going to want to play. They'll wait until next year to see who is still standing. With all of the accounting scandals going on, auditors are going to be on the warpath.

4) Corruption is expensive. The State of Illinois has been forced to pay an extra $20 million in interest cost since the Blogojevich scandal broke. Standard and Poor's put the state on negative credit watch, joining California as only the second state with this status. I can't believe this guy hasn't resigned yet. Hasn't anyone told him he has absolutely nothing to negotiate with? It shows you how detached from reality people at the top can get. At least Elliot Spitzer had the sense to leave in a day.

5) California State Treasurer Bill Lockyer said that 'our financial house is burning', when he announced a freeze on 2,000 infrastructure projects worth $3.8 billion. The move highlights the desperation in the Golden State, which is facing a $17 billion budget deficit, a gridlocked State Assembly, and is expected to run out of money by February. The free fall in real estate prices is rapidly eroding revenues, 72% of which come from taxes on real estate. Capital gains taxes revenues have also atomized. Unlike municipalities, states cannot go bankrupt. They can, however, default on their debt, which will deliver a body blow to the muni bond market, and impair the ability of all public entities to raise money. Large scale layoffs of public employees will follow, which now account for 15% of employment in the US. Another shoe to fall.

6) Some 344 hedge funds were liquidated during Q3. Another 112 new funds started up. There is always opportunity in the ashes of a disaster.

7) BRIC Watch: Traders were impressed that while they were still counting bodies in Mumbai, the Sensex, the Indian stock market index, went up. That is what a Q3 7.6% growth rate will do. Terrorism is not new to India, and has been at the back of most Indian's minds since their 1948 independence. Remember, Gandhi was assassinated. India has the world's greatest concentration of untapped intelligence, and in the Internet age this will not go untapped. Only 5% of Indians have internet access now, and history shows that when that rate goes up, productivity and profits explode. Corruption, lack of infrastructure, government bureaucracy, and the dominance of public policy by the poor in the world's largest democracy, are all problems. Regulations make it impossible to lay people off, which retard hiring. More than 260 million still live at the subsistence level. But Indian engineering schools, which charge only $1,000/year in tuition, are graduating 1,500 students a day! India is a strong long term buy for anyone who can stand the short term heat.