October 13, 2008

Global Market Comments for October 13, 2008
Special Post Apocalypse Issue

1) I spent my weekend convincing people that we are not entering a thirties style Depression and not to sell their stocks. We are entering a recession that will be longer and deeper than previously forecast. The net decline in GDP has probably jumped from 1% to 5%, and the duration has extended from 18 to 24 months, finishing by early 2010. After that, we are facing several years of sub par growth with a real estate albatross hanging around our necks. But we will not see 12 years of soup lines that will only end with a World War (although we may have some investors jump out of windows). Things happen at warp speed in the internet driven world, and that counts for slowdowns as well as recovery. We also have the experiences of the Great Depression and the Japanese ‘lost decade’ to draw on.

2) The PE multiple for the stock market is now under 10 X, and the dividend yield at 3.8% is higher than the ten year bond yield. The last time stocks were this cheap was after the first oil shock in the late seventies, when short interest rates were at 12%, or during the mid thirties. This may be the only opportunity to buy stocks at Depression level valuations this century. Many technical indicators hit once in a century marks on Friday. The S&P hit 35% below its 200 day moving average, and over 60% of stocks hit new 52 week lows. Last week investors redeemed a staggering $47 billion of equity mutual funds.

3) Chesapeake Energy (CHK) CEO Aubrey McClendon disclosed on Friday that he?? sold virtually all of his 33.5 million shares in his company, making the $12 spike bottom in the stock, down from $75. He had built up a position on margin, which at the peak was worth $2.5 billion, and the 80% drop in only three months triggered a monster margin call that flushed him out at the bottom with a total loss. This is what happens when you drink your own Kool Aid. Looks like the Swift Boat Veterans for Truth is going to have to look elsewhere for funding. The Right Wing Conspiracy sheds a tear. The stock is an extremely strong buy here. It’s a way to buy gas for $2/btu when the market price is $6.70.

4) Just for the record books, the VIX volatility index hit 76.9% on Friday afternoon, almost double the previous record of 48%. Today it closed at 54%. At the market bottom on Friday, Morgan Stanley (MS) at $6.78/share had a market cap of only $7 billion. Amazing. It closed today at a $20 billion capitalization.

5) I wondered where Hank P5ulson got his $700 billion figure from. Turns out that it is enough to buy 49% of the entire US banking system and still have plenty of money left over. This may have been his plan all along.

October 10, 2008

Global Market Comments for October 10, 2008

1) The mother of all margin calls hit the market this morning, opening the Dow down 700 at 7,800, just 100 points above the 2002 low. I went to the next room to refill my coffee and when I came back the market had rallied 800 points, pushing the VIX up to another record high over 70%. Then Bush spoke to the nation, and his characteristic platitudes drove the market down 500. The PE multiple for the market is now under 10, back to levels not seen since the seventies. The stock market has lost $6 trillion in value in a week, the same amount of money the US housing market has lost in three years. The cavalry has been dispatched, but the good guys may get wiped out by the Indians before they arrive.

2) The meltdown in Iceland is nothing less than amazing. The banks have all been nationalized. The stock and currency markets are closed. Somehow a country with a population smaller than Toledo, Ohio (300,000) ran up $150 billion in debts, or $500,000 per person. The locals were oblivious to it all, but when I was there a few years ago everyone was driving big, flashy new SUV’s. The country became a super leveraged hedge fund and is now bust.

3) Copper has had a huge route, like everything else, falling from $4.08 to $2.25. Keep a laser like focus on the red metal, because when it turns everything else will follow. It is the only commodity that has a PhD in economics, and is especially sensitive to the China trade.

4) In 1979 the average Fortune 500 CEO made 30 times what the average worker earned. Now it is 250 times. I think it is going down from here. The amount of money a billionaire earns has remained remarkably constant over the last century. Today $1 billion roughly equals the earnings of 20,000 workers, who today take home $45,000/year.

5) The Lehman hearings in congress gave us a preview of next year, especially with a democratic election win. 2009 will be the year of the perp walk. Today $400 billion of Lehman’s credit default swaps settled at auction at 90 cents on the dollar, requiring 358 companies that wrote this insurance to pay out $360 billion to the swap owners. Some hedge funds that bought this stuff made a killing.

October 10, 2008

Global Market Comments for October 10, 2008

1) The mother of all margin calls hit the market this morning, opening the Dow down 700 at 7,800, just 100 points above the 2002 low. I went to the next room to refill my coffee and when I came back the market had rallied 800 points, pushing the VIX up to another record high over 70%. Then Bush spoke to the nation, and his characteristic platitudes drove the market down 500. The PE multiple for the market is now under 10, back to levels not seen since the seventies. The stock market has lost $6 trillion in value in a week, the same amount of money the US housing market has lost in three years. The cavalry has been dispatched, but the good guys may get wiped out by the Indians before they arrive.

2) The meltdown in Iceland is nothing less than amazing. The banks have all been nationalized. The stock and currency markets are closed. Somehow a country with a population smaller than Toledo, Ohio (300,000) ran up $150 billion in debts, or $500,000 per person. The locals were oblivious to it all, but when I was there a few years ago everyone was driving big, flashy new SUV’s. The country became a super leveraged hedge fund and is now bust.

3) Copper has had a huge route, like everything else, falling from $4.08 to $2.25. Keep a laser like focus on the red metal, because when it turns everything else will follow. It is the only commodity that has a PhD in economics, and is especially sensitive to the China trade.

4) In 1979 the average Fortune 500 CEO made 30 times what the average worker earned. Now it is 250 times. I think it is going down from here. The amount of money a billionaire earns has remained remarkably constant over the last century. Today $1 billion roughly equals the earnings of 20,000 workers, who today take home $45,000/year.

5) The Lehman hearings in congress gave us a preview of next year, especially with a democratic election win. 2009 will be the year of the perp walk. Today $400 billion of Lehman’s credit default swaps settled at auction at 90 cents on the dollar, requiring 358 companies that wrote this insurance to pay out $360 billion to the swap owners. Some hedge funds that bought this stuff made a killing.

October 9, 2008

Global Market Comments for October 9, 2008

1) It?s looking like the Treasury will partially nationalize the US banking system, taking equity stakes in hundreds of firms in preferred stock form. This is why secretary Hank Paulson was so mum on the details of his program. Socialization of the American financial system would not have garnered a single republican vote in the house. It is ironic that the chief legacy of the free market Bush administration will be the government takeover of a large part of the nation’s businesses. Milton Friedman must be rolling over in his grave, and probably Karl Marx too.

2) The Dow and the S&P 500 indexes are now down seven days in a row for the first time since 1987. Right now the well diversified portfolio has half of your money buried in the back yard and the rest in the mattress. Technicians now see solid support for the Dow at 8,000, close to the 2002 low. Futures were trading 200 points lower after the close, and if we open very low tomorrow, like down 500, that might be the end of the selling.

3) GM fell 31% today to $4.50 on bankruptcy rumors. The company’s market capitalization is now below $3 billion, less than where it was in 1929. Investors are betting that the company does not have enough cash to make it through the year and can’t borrow any more. If General Electric (GE) and Goldman Sachs (GS) have to pay 10% for their capital, how much will GM have to pay? Are there interest rates at infinity?

4) The short selling ban expired last night, and was not renewed because it was generally perceived to be a disaster. Hedge funds wouldn’t cover shorts because they couldn’t initiate new ones. Long side investors wouldn’t buy stocks they couldn’t hedge. A whole host of strategies like convertible arbitrage were put out of business. The great majority of short sales are market neutral, involving buying one security and going short against it. What naked shorting there was came mostly from banks shorting each other to hedge their own business. The SEC was so out of touch with the market they didn’t know this, but were forced by politicians to do something.

5) The ‘Escape from Berkeley’ race starts tomorrow where participants attempt to drive 600 miles to Las Vegas on one gallon of gas. One participant plans to fuel his vehicle only from trash picked up along the freeway. First prize is $5,000.

6) Weekly jobless claims dropped 20,000 to 478,000. No one cares. Nobody has looked at economic data for about a month now because it doesn’t matter.

October 9, 2008

Global Market Comments for October 9, 2008

1) It?s looking like the Treasury will partially nationalize the US banking system, taking equity stakes in hundreds of firms in preferred stock form. This is why secretary Hank Paulson was so mum on the details of his program. Socialization of the American financial system would not have garnered a single republican vote in the house. It is ironic that the chief legacy of the free market Bush administration will be the government takeover of a large part of the nation’s businesses. Milton Friedman must be rolling over in his grave, and probably Karl Marx too.

2) The Dow and the S&P 500 indexes are now down seven days in a row for the first time since 1987. Right now the well diversified portfolio has half of your money buried in the back yard and the rest in the mattress. Technicians now see solid support for the Dow at 8,000, close to the 2002 low. Futures were trading 200 points lower after the close, and if we open very low tomorrow, like down 500, that might be the end of the selling.

3) GM fell 31% today to $4.50 on bankruptcy rumors. The company’s market capitalization is now below $3 billion, less than where it was in 1929. Investors are betting that the company does not have enough cash to make it through the year and can’t borrow any more. If General Electric (GE) and Goldman Sachs (GS) have to pay 10% for their capital, how much will GM have to pay? Are there interest rates at infinity?

4) The short selling ban expired last night, and was not renewed because it was generally perceived to be a disaster. Hedge funds wouldn’t cover shorts because they couldn’t initiate new ones. Long side investors wouldn’t buy stocks they couldn’t hedge. A whole host of strategies like convertible arbitrage were put out of business. The great majority of short sales are market neutral, involving buying one security and going short against it. What naked shorting there was came mostly from banks shorting each other to hedge their own business. The SEC was so out of touch with the market they didn’t know this, but were forced by politicians to do something.

5) The ‘Escape from Berkeley’ race starts tomorrow where participants attempt to drive 600 miles to Las Vegas on one gallon of gas. One participant plans to fuel his vehicle only from trash picked up along the freeway. First prize is $5,000.

6) Weekly jobless claims dropped 20,000 to 478,000. No one cares. Nobody has looked at economic data for about a month now because it doesn’t matter.

October 8, 2008

Global Market Comments for October 8, 2008

1) The global interest rate cuts brought the world’s stock markets exactly one hour of respite. The Dow rallied 1,000 points, then sold off 900. From top to bottom, the Dow has dropped 1,800 points since passage of the bail out bill on Friday. The Fed is running out of bullets. People are now talking about Armageddon scenarios which see negative GDP of -5% in 2009, unemployment at 10%, and the Dow down to 7,000. You always hear this kind of talk when you are close to market bottoms. It says a lot that the only positive Dow stock year to date is Walmart (WMT).

2) The UK partially nationalized the banking system, taking up to $87 billion in preferred stock in private banks. The European financial system was grinding to a halt. Stores in Germany were refusing to take credit cards from UK banks.

3) On a positive note, pending home sales for September came in at a blistering +8.8% and +18% in the West. Over half of all sales are from foreclosures. Buyers are clearly responding to lower prices, those who can get financing, that is. Over 16% of US homes now have negative equity, with the greatest concentration of negative equity in California and Florida.

4) Another market bottoming indicator: when the number of stocks hitting new 52 week lows exceeds 50% markets usually turn. Yesterday the figure was 60%. The average bear market decline is 35%, and so far the S&P 500 has plunged 40% from 1,590 to 960 in just a year. It has dropped an amazing 26% in just the last 13 trading days. On the other hand, we are only 250 days into this bear market. The average postwar bear market has lasted 400 days. But these days everything moves with warp speed. The stock market has now fully discounted a recession. The question remains, will it go on to discount a Depression. We are probably days away from a tradable bottom.

5) Russia used its oil wealth to bail out Iceland with a $5 billion loan, which couldn’t get help from the US or Europe. What a strange world it has become! The Russian stock market has collapsed 65% to 900 in just two months. The leases for Russian submarine bases in Iceland won?t be far behind.

6) The Chicago Mercantile Exchange increased margin requirements for all products as their risk models blow out to historic highs. This will force day traders to pare back their books, if they haven?t already.

7) Crude inventories soared by 8 million barrels as global demand destruction kicks in. Prices collapsed like a wet taco, down to $86. Unfortunately, prices have fallen so far that it will prolong America’s dependence on foreign oil. Yesterday I filled up at $3.49/gallon.

October 8, 2008

Global Market Comments for October 8, 2008

1) The global interest rate cuts brought the world’s stock markets exactly one hour of respite. The Dow rallied 1,000 points, then sold off 900. From top to bottom, the Dow has dropped 1,800 points since passage of the bail out bill on Friday. The Fed is running out of bullets. People are now talking about Armageddon scenarios which see negative GDP of -5% in 2009, unemployment at 10%, and the Dow down to 7,000. You always hear this kind of talk when you are close to market bottoms. It says a lot that the only positive Dow stock year to date is Walmart (WMT).

2) The UK partially nationalized the banking system, taking up to $87 billion in preferred stock in private banks. The European financial system was grinding to a halt. Stores in Germany were refusing to take credit cards from UK banks.

3) On a positive note, pending home sales for September came in at a blistering +8.8% and +18% in the West. Over half of all sales are from foreclosures. Buyers are clearly responding to lower prices, those who can get financing, that is. Over 16% of US homes now have negative equity, with the greatest concentration of negative equity in California and Florida.

4) Another market bottoming indicator: when the number of stocks hitting new 52 week lows exceeds 50% markets usually turn. Yesterday the figure was 60%. The average bear market decline is 35%, and so far the S&P 500 has plunged 40% from 1,590 to 960 in just a year. It has dropped an amazing 26% in just the last 13 trading days. On the other hand, we are only 250 days into this bear market. The average postwar bear market has lasted 400 days. But these days everything moves with warp speed. The stock market has now fully discounted a recession. The question remains, will it go on to discount a Depression. We are probably days away from a tradable bottom.

5) Russia used its oil wealth to bail out Iceland with a $5 billion loan, which couldn’t get help from the US or Europe. What a strange world it has become! The Russian stock market has collapsed 65% to 900 in just two months. The leases for Russian submarine bases in Iceland won?t be far behind.

6) The Chicago Mercantile Exchange increased margin requirements for all products as their risk models blow out to historic highs. This will force day traders to pare back their books, if they haven?t already.

7) Crude inventories soared by 8 million barrels as global demand destruction kicks in. Prices collapsed like a wet taco, down to $86. Unfortunately, prices have fallen so far that it will prolong America’s dependence on foreign oil. Yesterday I filled up at $3.49/gallon.

October 7, 2008

Global Market Comments for October 7, 2008

1) There was a pretty dramatic improvement in credit spreads today after the Fed announced its entry into the commercial paper market. We saw it in LIBOR, TED spreads, and a stronger euro. One month Treasury yields rocketed up to 0.35%. The Fed is now massively flooding every credit market of any description. While I believe this will solve our problems short term, over the long term they are laying the foundation for the next crisis. That will be an explosion in inflation in a couple of years.

2) Despite all of the Fed efforts, the stock market still sold off 500 on a run on Morgan Stanley stock, which fell $10 to $14 on a rumor that the bail out financing from Mitsubishi Bank had fallen through. Also, the ban on short selling comes off tomorrow night.

3) $260 billion in cash is sitting on the sidelines waiting to buy distressed mortgage assets from banks once a price is set by the government. $129 billion is from hedge funds, $63 billion from private equity, and $50 billion from a Goldman Sachs fund.

4) Credit comes from the Latin word ‘creer’ which means ‘to believe’. The fundamental problem with the credit system is that no one believes in the creditworthiness of any counterparty, except the US government.

QUOTE OF THE DAY

‘The word ‘politic’ comes from the Greek ‘poly‘, which means ‘many’, and the word ‘tics’, which means ‘many blood sucking insects’. Former labor secretary Robert Reich.

October 7, 2008

Global Market Comments for October 7, 2008

1) There was a pretty dramatic improvement in credit spreads today after the Fed announced its entry into the commercial paper market. We saw it in LIBOR, TED spreads, and a stronger euro. One month Treasury yields rocketed up to 0.35%. The Fed is now massively flooding every credit market of any description. While I believe this will solve our problems short term, over the long term they are laying the foundation for the next crisis. That will be an explosion in inflation in a couple of years.

2) Despite all of the Fed efforts, the stock market still sold off 500 on a run on Morgan Stanley stock, which fell $10 to $14 on a rumor that the bail out financing from Mitsubishi Bank had fallen through. Also, the ban on short selling comes off tomorrow night.

3) $260 billion in cash is sitting on the sidelines waiting to buy distressed mortgage assets from banks once a price is set by the government. $129 billion is from hedge funds, $63 billion from private equity, and $50 billion from a Goldman Sachs fund.

4) Credit comes from the Latin word ‘creer’ which means ‘to believe’. The fundamental problem with the credit system is that no one believes in the creditworthiness of any counterparty, except the US government.

QUOTE OF THE DAY

‘The word ‘politic’ comes from the Greek ‘poly‘, which means ‘many’, and the word ‘tics’, which means ‘many blood sucking insects’. Former labor secretary Robert Reich.

October 6, 2008

Global Market Comments for October 6, 2008

1) Treasury Secretary Hank Paulson stood on the roof of the House and screamed fire!, frightening 58 congressmen into changing their votes to pass the bail out bill. Unfortunately, the rest of the country heard him along with Bush, who warned Americans several times last week that we are on the verge of an economic collapse. This, more than anything else, will cause companies and individuals to pull back on any spending plans, guaranteeing that this recession will be longer and deeper than otherwise. This is what the 1,600 point drop in the Dow since the house passed the bill on Friday is telling you. It was a day of truly extreme moves on every front: Dow down 900 at one point, dollar/euro at $1.34, natural gas at $6.90, crude at $87, 30 year bond yields under 4%. An economic recovery is increasingly looking like a 2010 event. Make your plans accordingly. Obama is going to be left with a bankrupt, empty shell of a country to govern.

2) There is no doubt that panic redemptions of hedge funds are driving this sell off. The fifty stocks most owned by hedge funds fell 19% in September, more than double the rate of decline for the broader market. I always wanted to run a hedge fund that only bought the positions of other hedge funds blowing up, and this is the best time ever to do that. Chesapeake Energy (CHK), the largest provider of natural gas, is down from $75 to $25 in two months?

3) I listened to the House Oversight Committee’s Lehman hearing in its entirety. Dick Fuld feels ‘horrible’. That’s good enough isn’t it? He admitted to taking $320 million in compensation since 2000. He owned 10 million shares of Lehman, which at the peak, was worth $800 million, but along with unexercised options, is now worth zero. He said that the failure was not his fault, but was caused by short sellers, rating agencies, and false rumors. What happened to Lehman could have happened to anyone. 30% of Lehman was employee owned. The Democratic members of the committee were clearly trying to pin him to a statement, times, and dates that would lead to a fraud indictment for him or Hank Paulson.