November 7, 2008

Global Market Comments for November 7, 2008

1) The dreaded October non farm payroll came in at minus -240,000, much worse than expected. The unemployment rate soared from 6.1% to 6.5%, a 14 year high. These figures included the Boeing strike and the full brunt of the credit freeze. We have lost 1.2 million jobs in the first ten months of this year. Despite this depressing news the market managed a 248 rally, a classic case of buy the rumor and sell the news. This renders the Q3 GDP figure of -0.3% meaningless. It was probably more like -3.0%.?? I believe that we are currently enduring two extremely sharp down back to back quarters of?? minus 7-8%?? GDP combined, which is getting us uncomfortably close to the legal definition of a depression of -10%. I believe we will see a gradual recovery next year. There is so much liquidity flooding the system I can't see otherwise.

2) More fascinating data about the car industry. Car production peaked at 17 million units/year two years ago. It is now at a run rate of 11 million units/year. This is the lowest absolute rate since 1980, and the lowest population adjusted rate since 1945 when the government lifted its wartime ban on civilian auto production.

3) General Motors (GM) announced a Q3 loss of $4.2 billion. The cash burn was $6.9 billion, or $2.3 billion/month, more than double the worst case scenario. The company called off its merger with Chrysler. Fasten your seat belt. November car sales could be as bad or worse than the cataclysmic October numbers.

4) I saw an interesting interview with Kenneth Lewis, CEO of Charlotte, North Carolina based Bank of America (BAC), which after the purchase of US Trust, MBNA, Countrywide Financial, and Merrill Lynch, is now the largest bank in the country, with nearly $3 trillion is assets. The current holding company is descended from the North Carolina National bank and Nationsbank. One out of every two Americans is now a BAC customer in some way of another. The company pulled out of sup prime lending in 2001 because it didn't like the risks, and shut down its in house hedge fund at the end of 2007. It just received a $25 billion capital injection from the Treasury which it didn't need which will expand its lending capacity by $250 billion. It will lend this money, not use it for more acquisitions, because new lending is now extremely profitable, and because of moral suasion from the government.

TRADE IDEA

The 1,100 point sell off in the Dow over the last two days, the worst since 1987, has taken the VIX back up from 54% to 64%. As long as the sun doesn't explode and incinerate the solar system I don't believe the market is going to a new low before the next options expiration on November 21. Use volatility spikes to go short the November S&P mini 830 puts for $20, taking in $100,000 in premium on 100 contracts.

QUOTE OF THE DAY

When asked what kind of dog he was going to get president elect Obama said 'I might get a shelter dog, and as you know, most shelter dogs are mutts, like me.'