Friday, October 31, 2008

Credit Markets Continue To Show Improvement

The credit markets continue to show improvement today. 3-month LIBOR rates are down -5.3%, the TED spread is lower by -6.4%, and US commercial paper soared its most on record after the Fed CP program kicked in. This is all good news, and as the credit markets heal, it should improve sentiment in the stock market as well.

The insurance stocks are all down materially today (HIG, PRU, CI, etc), and those are the worries du jour. I suspect these companies will look to the Fed as so many other companies seem to now be doing.

Asian markets were mostly lower overnight, despite the Bank of Japan cutting its lending rate to 0.3% from 0.5%. Some were disappointed that they didn't go to 0.25%. Nonetheless, these low rates could spark another round of yen carry-trade action if and when sentiment improves. Also, Japan's stock market had bounced some +26% in just 3 days, so a pullback is expected.

The dollar is higher today, after resting for a few days. Oil is trading lower, near $65. Energy and material stocks are lower as well. The 10-year yield is down at 3.91%.

And the VIX is also lower, to 61.86, after a nice drop yesterday. I would like to see the VIX move below 60 for starters, and then continue to work its way lower from there.

The market has retested its October 10th lows successfully, and now looks poised for a least a multi-week move to the upside. How much gusto it has remains to be seen. But the market is still oversold, and a 10-15% move would not surprise me.

I have started adding to some of our positions. The 2 ETFs (IEO, MOO) I started with last week are both higher this week. And yesterday and today I began adding to AAPL and GOOG, as both stocks are depressed and should lift with the market.


Thursday, October 30, 2008

GDP Contracts For First Time Since 2001

The markets are higher across the board this morning, despite an economic report that showed GDP contracted for the first time since 2001.

Our markets likely took their cue from Asian markets, many of which soared greater than +10% overnight on enthusiasm about global rate cuts and optimism that credit markets are improving.

This sentiment seems to be trumping, for the moment, the realization that the U.S. economy has likely slipped into recession, officially. Initial estimates show 3Q GDP contracted at a rate of -0.3% (vs. -0.5% consensus). Personal consumption showed a -3.1% decline.

I say "officially" because most parts of the economy has been in recession all year, but strong exports in 1H08 kept GDP growht in positive territory, and the govt. won't call it a recession until GDP shows back to back quarters of negative growth.

The dollar is stable this morning, while the Yen is weak again (good sign). The 10-year yield is slightly higher at 3.92%. I think if there were more fear of a very deep recession, the 10-yr yield would be a lot lower. Oil is lower today, but most energy stocks are higher, after some good earnings reports from the oil patch.

The VIX is down nearly -7% today, another good sign, or at least a start. I haven't done any buying yet, but I am still leaning toward using any weakness to put some cash to work.

Wednesday, October 29, 2008

Fed Cuts Rates By 50 Basis Points To 1.00%

The FOMC lowered interest rates today by 50 bps, as expected. Given the fragile markets, I don't think the Fed wanted to do anything to upset the markets, so it gave them the 50 bps cut that everyone was looking for.

Here are some of the comments from the press release today:
  • The pace of economic activity appears to have slowed markedly, owing importantly to a decline in consumer expenditures. Business equipment spending and industrial production have weakened in recent months, and slowing economic activity in many foreign economies is damping the prospects for U.S. exports.
  • Moreover, the intensification of financial market turmoil is likely to exert additional restraint on spending, partly by further reducing the ability of households and businesses to obtain credit.
  • In light of the declines in the prices of energy and other commodities and the weaker prospects for economic activity, the Committee expects inflation to moderate in coming quarters to levels consistent with price stability.
  • Recent policy actions, including today's rate reduction, coordinated interest rate cuts by central banks, extraordinary liquidity measures, and official steps to strengthen financial systems, should help over time to improve credit conditions and promote a return to moderate economic growth.
  • Nevertheless, downside risks to growth remain. The Committee will monitor economic and financial developments carefully and will act as needed to promote sustainable economic growth and price stability.
The market was up quite a bit with 15 mintues left in the trading session, and then out of nowhere a sharp selloff erased the entire day's gains. Here is how described the bizarre action:

"The Dow dropped almost 450 pts in the last 13 minutes of trading following a Dow Jones headline indicating that GE wants to keep 2009 profit the same as 2008. Based on current consensus estimates, GE is seen earning $1.96/share in 2008 and $1.78 in 2009. Hence, flat earnings would actually represent upside to current consensus. However, the price action in the stock (GE fell 5.3% following the headline) suggests that traders/investors assumed that the comment was an earnings warning -- leading them to sell GE. This swift move lower in GE pulled down the Dow and S&P 500, leading traders to hit the exits and causing the market to cascade lower."

"Coincidentally, the GE news hit at the exact same moment that the Dow was testing its intraday highs, which also triggered a technical sell signal. Given the volatility that always occurs on FOMC policy days, traders were sitting with their fingers on the sell key. The GE breakdown and intraday technical failure gave them a reason to unload."

The VIX was also lower on the day, but a late spike pushed it back up near 70, so it looks like we are still going to have to wait for a lower VIX. That said, I am growing incrementally bullish for a trading opportunity. I think the recent test of SPX 850 was successful, and that the market should enjoy an upward bias for a least a few weeks.

I will be looking to use near-term weakness in the market to add some expsoure via more ETFs and add to a few large-cap tech favorites.

long VIX puts

Market Hangs On To Gains Awaiting FOMC

The market looked like it might give back some of yesterday's outsized gains after the open this morning, but so far it has been hanging in well. The Fed meets today at 2:15p ET and the fed funds futures are fully pricing in a 50 basis point cut in rates. That would take the target rate from 1.5% down to 1.00%.

There is continued talk that Japan could cut its interest rates further, to help stem the rise in the Yen. This helped spur the Japanese stock market +7.7% higher. Other Asian markets were mixed.

Also, China cut its interest rates overnight by 27 basis points. China is attempting to take several measures to support its ailing stock market, including private talks with insurers to persuade them to stop selling equities.

There were more solid earnings reports this morning, from companies like P&G, Kraft, and Kellogg. Even a few companies that reported disappointing earnings are seeing their stocks rise on the news, an indication that maybe stocks are fully washed out here and are pricing in most of the bad news that is already out there.

The dollar is lower again today, helping to boost commodities. Oil is up $3 to $66, and gold is up also. The 10-year yield is steady at 3.84%.

The VIX had a nice -16% drop yesterday, but is still high at 69.50. To me, this signals that any future gains won't come in a straight line. A high VIX means that more market volatility is likely, in both directions.

long VIX puts

Tuesday, October 28, 2008

Chart of the Day: Yen carry-trade

Yesterday, after the market closed, I posted on my blog that I felt "...there is a big, fierce, snapback rally brewing". I'm not sure if today's strong +10.8% rally qualifies, but it sure is a nice start.

One of the biggest factors for today's rally was the plunge in the Japanese Yen. The Yen has been on a tear recently, as has renewed fears about the unwinding of the Yen carry-trade. The last time I wrote about this phenomenon was back in March (search archives), when the spike in the Yen back then (see chart below) sparked the same worries. Both instances were associated with dramatic selloffs in global stocks.

The chart above shows the dramatic reversal in the Yen etf (FXY) today. This was the largest one-day decline since Jan. 1974, a month that touched off a huge rally in the stock market. The reversal in the yen could be indicative that large players that had been selling equities to buy back their yen positions are finally finished.

This would bode well for global equities. Last night, Asian markets surged higher, and right now it looks like they are set to open higher again. The Bank of Japan said it is considering cutting its already low interest rates from 0.50% to 0.25%. This would further pressure the yen, and help the overall cause.

I think the unwinding of the yen carry trade is related to the overall deleveraging that we have seen in the markets, and that has contributed to the unprecedented and relentless selling pressure in the markets. Any reprieve from this selling pressure would allow the markets to further lift, which could take the pressure off of funds seeing redemptions.

In recent weeks, these surges in the stock market have been one-day affairs. So it will be interesting to see if we get some follow-through to today's action. Tomorrow, the FOMC meets and will cut interest rates (I am now in the 50 bps camp). Will traders sell into the news? One has to wonder.

Market Bounces After Asian Markets Surge

Last night I said I thought the market was very close to a bounce. Could today be the day? Maybe. The markets are strong in early trading, but lately all you have had to do was watch the last hour of trading, so we'll have to see if we can hang on to these early gains.

Asian markets surged overnight. Hong Kong spiked +14%, after falling -12% the day earlier. Japan rose +6.4%. And Europe is strong too. Germany is currently +8% higher.

The dollar is taking a breather today, after a huge, multi-day run. The Yen is also lower today, which is a good sign. The 10-year yield is higher at 3.76%.

There were some strong EPS reports this morning, from companies like X, BP, OXY, and VLO. The energy sector is bouncing as a result. It also helps that oil is higher this morning.

The CaseShiller home price index showed home prices in 20 major metro areas fell -16.6% yr/yr as of August. Only 2 areas posted gains, and one of them was Cleveland?!? Go figure. Maybe people are getting excited about the Cavs prospects this year.

The FT is reporting that Boeing (BA) has reached a tentative agreement with its union. This would be great news from the aerospace industry.

The VIX is -7.5% lower at a still high 74. I remain astounded that the VIX has not broken its recent, sharp utrend line.

long VIX puts

Monday, October 27, 2008

Chart of the Day: Are We Close To A Bounce?

Once again, the market sold off in the final minutes of trading. The Dow was still positive with just 15 minutes of trading left. I know because I contemplated leaving for the gym, but then I thought I better stick around to see how the market closes.

I don't know where all those sell orders came from, but in the last 15 mintues of trading, the market totally fell out of bed, such that the Dow fell -200 points by the bell. Volume wasn't especially high today, it was more like another example of too few buyers willing to step up. Frustrating.

If you look at the chart above, you might notice that the S&P 500 is now -25% below its 50-day moving averge (blue line). Raymond James noted that "since 1928, there have only been five other periods where the SPX has been more than 25% below its 50-day ma".

Raymond James looked at the ensuing 50 days in each case, and calculated the rallies in the market. The minimum rally they found was +14%, which occurred in 1937. The maximum rally was +66%, in 1932.

The hard part is that the market wasn't being liquidated by deleveraging hedge funds back then, at least not that I know of. That said, I agree that there is a big, fierce, snapback rally brewing out there. I hope that I am nimble enough to take advantage of it. And then the question will be, how quickly does any rally get sold?

Monday Morning Musings

The markets have opened lower this morning, following material weakness in Asian markets overnight.

Asian markets were lower across the board, as the sharp rally in the Yen is hurting Japanese exporters. The sharp rally in the yen prompted the G-7 to issue a warning about the "excessive gains" in the currency.

S. Korea cuts its benchmark interest rate by 75 bps to 4.25%, its largest cut ever. But it did little to stem the selling in the short-term. ECB President Trichet said the ECB may cut rates again at its November 6th meeting.

The dollar is up again today, and commodity prices are lower. Oil is down below $63, and gold is down as well. The 10-year yield is lower at 3.68%. And the VIX is off -5% from its record highs Friday to 76.

The Fed is rolling out its new commercial paper facility today, and this should alleviate some of the pressures in the credit market. The Fed will buy commercial paper (short-term debt) from companies at rates well below LIBOR, which should help bring short-term rates down.

The bank index is higher this morning, led by regional banks. Energy stocks are the weakest group so far.

The FOMC meets this week, and there is much debate about whether they will cut 25 or 50 basis points. I don't have a good feel either way. They have so many other programs going on right now, they probably only need to do 25. But we shall see.

Friday, October 24, 2008

UK Growth Hits 16-yr Low

The Asian markets were sharply lower overnight, with Japan down as much as 9%, as concerns about the global recession and a continued unwinding of the carry trade continues. The Yen is up a whopping +4% today. Our futures were down sharply before the open.

The UK said that GDP there contracted -0.5% last quarter, the lowest rate in 16 years. But the fact that the UK is slipping into recession isn't all that surprising given what is taking place around the globe.

Oil is trading down below $65, despite OPEC announcing a big cut in production in an attempt to support prices. The dollar is also higher again today, weighing on commodities. Gold is hovering around $700.

PNC Financial announced it will acquire National City (NCC), which is good news. We need more consolidation in the banking sector. Treasury Sec. Paulson is preparing to take more stakes in a number of regional banks, and will likely push for more mergers.

Existing home sales rose +5.5% in September, the highest level in more than a year. Prices are down -9% overall, but it appears there are some early signs of stabilization in the housing market. This would go a long way to helping stabilize the credit markets, and then the stock market.

It was another panicky open, with the fear index, the VIX, spiking more than +20% to 89. It has since fallen back to 77, but we need to see this uptrend in the VIX broken.

The S&P 500 has not broken below its lows from October 10th. The Fed meets next week and will cut rates, although another coordinated rate cut could even come before then. I don't know what sparks it, but it feels like the rubber band is getting pulled back so far in the market that we could see another +10% spike at some point. Just saying.

Thursday, October 23, 2008

Sweden Joins The Rate Cut Party

The market is hovering in positive territory, despite more declines overnight in Asian markets. This morning, Sweden cut its key interest rate for the second time in as many weeks, to 3.75%. We are also hearing that the IMF may be ready to make loans to some emerging markets facing troubles, and there are plenty of them.

Remember the 'decoupling' thesis that so many were spouting a couple of years ago? The notion was that even if the US and Europe slowed, the emerging markets would continue to grow. That theory just seems silly now.

The dollar is flat today, and oil is bouncing a bit, near $68. The 10-year yield is also steady at 3.61%. The VIX is back near its record highs above 70, which means traders still expect continued volatility. We really need to see this indicator move lower to signal some stability.

The energy sector is leading the way so far, +4.47%. Housing stocks are the biggest laggards (-4.29%), followed by retail stocks.

There were more solid earnings reports last night and this morning, from stocks like MO, BMY, UPS, UNP, AMGN, and DOW. Amazon, like eBay last week, offered conservative guidance given the uncertain economic environment, and that has the stock trading lower.

The Dow just touched +200 as I am typing. Let's hope this rally sticks.

Wednesday, October 22, 2008

Global Recession Fears Drag Down Markets

The markets had another ugly day, no other way to put it. Volume on the NYSE was not that heavy, so it was not the same level of panic selling that we saw a couple of weeks ago. But there certainly were not enough buyers willing to step up, and that is why the market continued to slide in the last 2 hours.

There were a couple of rumors swirling today: one was that a large hedge fund of funds was liquidating; the other was that a large quantitative hedge fund was also selling today. If true, that would account for the selling pressure in the market.

The ARMS Index closed a 5.0, which could be the highest closing level this year (I'm not 100% sure), and highlights the selling pressure.

The S&P 500 closed at its lowest level this year, although it has been lower twice on an intraday basis. If you look at the chart above, you can see that today's lower is actually the 3rd higher low in the last couple of weeks. If this pattern holds, it could be construed bullishly. Notice I said "IF".

They say its always darkest before the dawn. I'm surprised the sun is still out here in LA.

Tech Hangs In As Market Opens Lower

There was a lot of selling pressure overnight in Asian markets, as concerns rose over the extent of a global recession and a slowdown in China. The Bank of England governor said that U.K. recession seems likely. Gee, thanks.

Nowhere are these worries more evident than in commodity prices. Oil is down -5% this morning below $68. But all the commodities are lower, including gold. The action in gold not only screams that inflation concerns are over, but that deflation concerns are surfacing.

Credit market angst is easing more, as LIBOR rates have fallen for the 8th straight day. Overnight LIBOR fell to 1.12%, its lowest rate in four years.

The dollar is higher again, pressuring commodity prices further. The 10-year yield is lower to 3.64%.

There were several good earnings reports (AAPL, VMW, EMC, MCD, WLP), but there were also some cautious ones, as companies remain uncertain about the economic environment, and several companies announced job cuts.

The Nasdaq 100 is showing relative strength this morning, as many big-cap tech stocks are bucking the weakness and trading higher. Hopefully, this will be a good "tell" for later in the day. The VIX spiked +20% at the open, highlighting the spike in fear. The put/call ratio also opened at an extremely high reading of 2.13.

Yesterday, I started to dip my toe back in the water with a purchase of the agribusiness ETF (MOO). If the market can find its footing, this beaten down sector should be due for a nice bounce.

long AAPL, MOO

Tuesday, October 21, 2008

Understanding Credit Default Swaps

You have probably heard the term "Credit Default Swaps", or CDS in the financial media a lot lately. While these instruments are meant to sound very sophisticated, in actuality they are very much like insurance products.

Here is a video I came across that does a good job simplifying the whole situation:

Early Look: France Joins The Bailout Parade

The markets are lower in early trading, but not materially so in light of yesterday's outsized advance.

Credit markets continue to show improvement, with the TED spread falling for the 7th consecutive day. Also, the Fed announced a new facility to improve liquidity for U.S. money markets, which are having difficulty selling commercial paper assets.

France said it will inject $14 billion into six of its largest banks. Also, the Bank of Canada cuts its benchmark lending rate by 25 basis points to 2.25%.

Asian markets were mixed overnight. The dollar is higher again, and has been up for 5 days in a row. Commodities are lower. Gold is down near $775, and oil is back down below $72.

The VIX came down -24% yesterday, a good sign. But it is still hovering around 53.4, a very elevated level. Until the VIX gets back down below 30, we should continue to expect big swings in the market, in both directions.

There were several more solid earnings reports this morning, including: 3M, Pfizer, American Express, Lockheed Martin, Schering-Plough, and Biogen. Semis are lower after Texas Instruments reported a larger-than-expected drop in earnings. Banks and brokers are higher so far.

Monday, October 20, 2008

Monday Morning Musings

Asian markets rallied overnight after the Korean govt said it will guarantee some foreign debt and inject $30 billion into its financial system. Also, India cut its key lending rate, and the Netherlands will inject $13 billion into ING. All of this helped improve sentiment in overseas markets.

The good news washed up on our shores this morning, and the market is trading higher. Energy stocks are leading the way following oil prices bouncing near $74. Nat. gas is higher also.

The dollar is up again vs. the Euro, and the 10-year yield is steady at 3.93%. Credit angst is easing as Libor rates are down across all maturities this morning. And the VIX is falling 11% to 62.42. This is a good sign, but that is still a very high level.

Bernanke is testifying before the House Budget Committee this morning, and saying that another fiscal stimulus program would be appropriate, given that credit has become costlier. Paulson will speak later.

There were some more solid earnings reports this morning from Eaton (ETN), Halliburton (HAL), and Hasbro (HAS). This week also will see more important tech earnings reports from the likes of Apple (AAPL), Microsoft (MSFT) and Amazon (AMZN), among others.

I have been waiting patiently to put new money to work, but I think this week will see some action on my part. I am looking at some of the beaten down natural gas stocks, a couple big-cap biotech and medical tech names, and the big tech leaders. (I will update with specific names if I buy any).

The markets remain very oversold, and due for a nice tradable bounce. I plan to trade around my positions, both long and short, as volatility remains high.

long AAPL

Saturday, October 18, 2008

Market Wrap

Here is's weekly recap:

Does it get any crazier than this past week? Let's hope not, unless of course the end result remains the same.

In the week that just concluded the S&P 500 managed to record both its largest, single day point gain ever as well as its second largest, single day point loss ever. Meanwhile, the intraday swings throughout the week were epic.

The S&P moved in a 9.5% range in Thursday's session alone. For some perspective, consider that the S&P gained 3.5% for all of 2007.

The volatility was a by-product of a host of factors that ranged from reports of forced liquidation by hedge funds to reports of strains easing in the credit market after massive liquidity injections by central banks.

To be sure, the week got off to an eye-popping start as the market soared 11.7% in a snapback rally from greatly oversold conditions.

Word that Morgan Stanley (MS) completed a deal to receive a $9 billion capital injection from Japanese bank Mitsubishi UFJ, central bank plans to provide as much dollar liquidity as needed for short-term funding markets, and news that several European countries were guaranteeing interbank lending provided the spark for Monday's rally.

In addition, speculation that the U.S. Treasury would be making a direct capital injection of as much as $250 billion in U.S. banks, that it would guarantee bank debt, and that the FDIC would guarantee deposits in non-interest bearing deposit accounts also fueled the buying efforts.

The speculation turned to fact Tuesday when the Treasury formally announced like measures. In particular, it said it would invest $125 billion in the preferred stock of nine, major institutions' Goldman Sachs, Merrill Lynch, Bank of America, Wells Fargo, JPMorgan Chase, State Street, Bank of New York Mellon, Citigroup and Morgan Stanley and direct another $125 billion toward other banks in a capital injecting initiative that mandated curbs on executive compensation for participating entities.

In the wake of Monday's surge, however, the market stumbled Tuesday on some profit taking activity and lingering concerns about the economic outlook.

The economic concerns came home to roost on Wednesday in a battery of worrisome updates.
Specifically, it was reported that retail sales declined 1.2% in September, with declines seen across all discretionary spending categories. That news, combined with a downtrodden Beige Book report that revealed slowing activity in all 12 Fed districts, and a reminder from Fed Chairman Bernanke that the economic recovery won't happen right away, even with a stabilization of the financial system, helped drive the market 9.0% lower, marking one of its worst percentage declines in history.

An escalation of selling interest late in Wednesday's trade gave life to reports that there was forced selling by hedge funds.

That selling carried over into early trading Thursday. The S&P 500 fell another 4.6% and the volatility index (VIX), otherwise known as the fear gauge, spiked to an all-time high.

Then, in an instant, sentiment shifted and the market began a furious recovery effort that left it up 4.3% at the close.

That rally saw retailers and transportation stocks bounce back sharply with oil prices dropping below $70 per barrel at one juncture. The drop in oil prices followed a weak industrial production report and reflected underlying concerns about the prospect of a global recession.

OPEC is slated to meet Oct. 24 to discuss oil prices and it is expected that the cartel, having seen prices plummet more than 50% from the all-time high reached in July, will announce a production cut.

Friday's session was another roller coaster ride.
The S&P 500 swung 7.2% between its low and high points of the day amid alternating feelings surrounding the weakest level of housing starts reported since January 1991, Warren Buffett's acknowledgment that he is buying American stocks for his personal portfolio, and encouraging others to do the same, and a heavy load of expiring options on stock indexes, stocks and exchange traded funds.

In the midst of all that transpired, we'd be remiss if we didn't mention that the third quarter earnings reporting season kicked in to full swing this week.

Financial and technology companies led the barrage of reporters that included the likes of Citigroup (C), JPMorgan Chase (JPM), Wells Fargo (WFC), Merrill Lynch (MER), Johnson & Johnson (JNJ), PepsiCo (PEP), Intel (INTC), IBM (IBM), Google (GOOG) and eBay (EBAY) to name a few.

Third quarter results themselves were largely mixed, yet the key consideration for the market was that few, if any, companies really extolled their near-term prospects. Several companies bemoaned a lack of earnings visibility on account of the economic environment.

So, both the earnings results and economic data this week were fairly unimpressive, yet the market still managed a 4.6% gain.

Then again, with the market plunging 18.2% in the prior week, some bargain hunting activity was to be expected.

Signs of improvement in the credit market aided in the buying efforts.

The overnight Libor rate dropped to 1.67% from 5.09% last week; overnight commercial paper rates fell to 1.05% from 3.50% last week; and the TED spread, the difference between 3-month Libor and the 3-month T-bill, narrowed 100 basis points from last week to 3.63%.

However, the fact that 3-month Libor rates didn't come down nearly as much as overnight rates (only ~40 basis points from last week's peak) contributed to a sense of uncertainty about the pace of recovery in the credit market.

Until that uncertainty is removed, the stock market is expected to keep trading in a rudderless fashion as emotion, more so than fundamentals, will steer the action.

Friday, October 17, 2008

Buffett Says The Time To Start Buying Is Now

The markets are lower in the first hour of trading, after Asia finished mixed in overnight trading. There continues to be considerable angst in the market, as the "fear index", or VIX, is again above 70. I would not be surprised to see another bounce in the market, a la yesterday.

But for the first time in years, Warren Buffett is buying U.S. equities in his personal account, not for Berkshire Hathaway. Buffett's mantra is "be greedy when others are fearful", and he says right now "fear is widespread, gripping even seasoned investors."

He also went on to say: "Let me be clear on one point: I can’t predict the short-term movements of the stock market. I haven’t the faintest idea as to whether stocks will be higher or lower a month — or a year — from now. What is likely, however, is that the market will move higher, perhaps substantially so, well before either sentiment or the economy turns up. So if you wait for the robins, spring will be over."

I recommend everyone take a look at his comments. Here is the link--

Libor rates came down a little bit more today, so credit angst is easing some. The dollar is slightly lower today, but it has been up a lot lately, so a breather is in order.

There were some solid earnings reports last night. Google (GOOG) was the standout, reporting much better than expected numbers, and giving a big boost to the stock. IBM also reported solid results, as did Intuitive Surgical (ISRG) and Gilead (GILD).

Today is also options expiration day, so I expect more intraday volatility into the close.

long GOOG, VIX puts

Thursday, October 16, 2008

Charts of the Day: Gold and Baltic Dry Index

One of the interesting charts I have been watching is that of Gold (above). Gold bulls have said for years that a runup in inflation, a weak dollar, and a global financial crisis would all serve to too a flight of investors into gold. They also said that all of this would push prices well above $1000.

Well guess what? We haven't seen it. To be fair, gold did have a nice run, but it didn't surpass $1000. Moreover, look at all of the panic we have seen in the markets lately. And during all of this, gold prices have been unable to make new highs, and have now moved lower.

Gold hasn't even been able to surprass its highs from mid-July. To me, this series of lower highs speaks to lower prices in the near future, not higher. Moreover, if this hasn't been the absolute best period or market phase during which to own gold, what is?!? Gold bugs had better craft a new story to sell.

Last, I wanted to show a snapshot of the Baltic Dry Index (below). This is an index that tracks the activity of global shipping rates, and is a proxy for how robust the global economy is.

As you can see, this index has absolutely plummeted. This is a sign that the global economy is slowing markedly. For those that continue to think that emerging markets will continue to growh through this period without a hiccup, this chart begs to differ.

Weak Economic Reports Should Not Be Surprising

The market was higher in the first hour of trading on some solid earnings reports and news of another European bank bailout. But as the economic news hit the wires, the market began to rollover again. Weak economic news should be expected right now, given the credit crisis. That is a given.

The Philly Fed Survey came in at -37.5, a very weak number. But we knew this after seeing yesterday's NY Manuf. Index. Industrial production also fell -2.8% in September (vs. -0.8% consensus), hurt by the labor issues at Boeing. On a positive note, the CPI report was flat for September, and gas prices continue to fall.

Banks and financials are lower this morning after earnings reports from Citi (C) and Merrill (MER) showed expected losses and additional write-downs. On the positive side, the Swiss govt. will inject $5.3 billion into UBS and assume $60 billion in risky assets from the financial firm.

I have talked about the deleveraging at hedge funds, as well as investor redemptions that are causing forced selling. Today, Highland Capital said it is unwinding and closing its flagship fund, which at one point had as much as $3.5 billion in assets. This fund is a credit product, so its unwinding surely has exacerbated some of the angst in the bond market.

There were some good earnings reports. United Tech (UTX) posted better-than-expected earnings and slightly raised its guidance. That is a strong showing in this environment. Conversely, EBAY reported good earnings but lowered its guidance materially. I think some of this has to do with market share loss to Amazon (AMZN) and other online retailers.

Asian markets were down significantly across the board overnight. The dollar is higher this morning, and commodities are lower (oil, gold, etc). The 10-year yield is lower at 3.94%.

Fear is rampant again this morning, with panic selling. The "fear index", or VIX, hit a new high at 81.17. This is an extraordinary level, to say the least.

I think another tradeable low is coming in the market, but I have not bought anything yet. I will likely look to use some ETFs to mitigate the individual stock risk in this environment.

Wednesday, October 15, 2008

Forced Selling Makes For Another Tough Final Hour of Trading

Today again felt like forced selling in the markets, some sort of combination of margin calls, investor redemptions, etc.

The Wall St. Journal ran a story yesterday about big hedge fund players raising cash and moving to the sidelines. There have also been margin calls on many funds in relation to the frozen assets from the Lehman bankruptcy. And all of this has led to panicked selling among individual mutual fund investors.

All of this adds up to a rough day, a rough month (so far), and a rough year. The hard part for investors is that this selling has more to do with structural factors as opposed to fundamental reasons at the specific companies.

The news looks grim, but that is how it always is during bear markets. With the new Treasury plan, I would point out that the backdrop is more positive than last week, when there was still a lot of uncertainty about our large financial institutions.

I still have my small hedges on, and have not deployed any of the cash I have been sitting on for over a month. Yesterday, I sold one of our holdings (SLB) for a loss, which was tough. But today it was down -18%, so I felt vindicated.

Today's volume was lower than the last three 5%+ declines, so maybe the selling pressure is exhausting itself. Today felt more like a buyers strike, where there simply were not enough buyers to meet the selling pressure, and that is why the price declines were so severe.

Get some rest.

Stocks Slide On Weak Retail Sales Report

Stocks are sharply lower in early trading on the heels of some weak economic data. The September retail sales report showed a decline of -1.2% (vs. -0.7% consensus), as consumers reigned in purchases amid the economic turmoil.

The NY Manufacturing Index plunged in October, hitting -24.6 (vs. -10.0 consensus). And the latest PPI report showed inflation fell -0.4% last month, helped by easing commodity prices.

Commodity prices are lower again this morning, aided by a bounce in the dollar, but also on concerns that demand growth in China is slowing further. Oil is trading down to $75, its lowest level since August 2007.

Credit market angst is easing a bit more today, with dollar libor rates (the rates that banks charge each other for short-term loans) falling modestly. But T-bill rates are also lower, as investors continue to look for the safest securities to own.

The 10-year yield is higher at 4.07%. And the VIX is up +10.6% currently near 61.

There were a handful of companies that reported earnings in the last 24 hours that were better than expected, and their stocks are bucking today's weakness. These include: JPMoran (JPM), Schwab (SCHW), Coke (KO), Intel (INTC), Abbot Labs (ABT), and Hudson City Bancorp (HCBK). Apple (AAPL) is also higher after introducing a refreshed Mac lineup yesterday.

long AAPL, VIX puts

Tuesday, October 14, 2008

Early Look: Dow Spikes +400, Then Fades

This morning's enthusiasm has not been able to hold up the markets, unlike yesterday's historic spike. The Dow surged as much as +400 points at the open, but selling kicked in and all of the major indexes are currently negative.

The Nasdaq may have been the early "tell", as big tech stocks didn't really participate as much, and were the first group to give up their early gains. All that said, it is still early.

In an update to its plan, the Treasury said it will buy up to $250 in preferred stock from US financial institutions. A maximum of $25 billion will be available to each institution, and to participate, firms will have to agree to executive compensaiton limits among other things.

The program is starting with the 9 largest financial firms in the U.S., who really didn't have a choice about participating. I heard that Paulson basically told them they would take the money. This plan is closer to the deals Warren Buffet made with GE and Goldman Sachs, as opposed to the plan to start buying mortgage assets from the bank.

In a joint statement, Paulson, Bernanke, and FDIC Chair Bair said the majority of banks in the U.S. are strong and well-capitalized. The actions are being taken to increase confidence in the financial system and improve liquidity.

In that sense, dollar libor (the rate that banks charge to lend each other) is declining across all terms, indicating that the liquidity situation is improving. Other measure of credit angst are also falling a bit from elevated levels.

The dollar is slightly weaker again vs. the euro, and this is helping commodities. Asian markets soared overnight, with Japan spiking +14.2% (I think that's a record). Oil is slightly lower, but still above $80. The 10-year yield is higher at 3.99%. And the VIX is still high at 55.65, up 1% today.

long VIX puts

Monday, October 13, 2008

Chart of the Day: Historically Oversold Market

Oversold markets are tough to time. The problem is that sometimes, oversold markets simply get more oversold, and then you are quickly underwater on the buys you make. Fortunately, you know that I have been sitting tight on the cash I had built up, so at least I didn't try to pick a bottom.

That said, I saw the following graph over the weekend on's website. It shows a monthly graph of the RSI indicator (relative strength) for the S&P 500 going back to its inception in 1928.

If you look at the graph (I think you can click on it to enlarge), you'll see that the RSI has only dipped below the 30-level three other times throughout history. Those instances were: 1929, 1973, and 2002. All of those were at or near market lows, and pretty good buy opportunities for patient investors.

While looking at how oversold this market was getting, I quipped that we could easily see a +1000 point rally in the Dow. Today, the Dow rose a record +936 points. Unfortunately, it only erases 2 days worth of damage. But all rallies have to start somewhere, and this bounce could go a little more before the oversold condition is fully alleviated.

I did not put new money to work today. I would rather use a further bounce to sell some of the things I no longer want to own, and then look to use pullbacks and retests to add to stuff that is holding up well. I also want to see how stocks react to earnings reports that start in earnest this week.

They say bear market rallies are always the most vicious. Today was a nice respite...let's hope it wasn't a one-day wonder.

Monday Morning Musings: Finally A Bounce

The markets are getting a big bounce this morning, on the heels of more government announced support plans. The Dow has bounced almost 500 points this morning (which barely erases any of last week's damage), and all 10 economic sectors are positive.

The Fed and other central banks announced plans to provide as much liquidity as needed in short-term funding markets. Also, the UK govt. said it will inject up to $63 billion into its 3 largest banks. And Germany will guarantee up to 400B Euros in interbank lending.

The bond market is closed here for Columbus Day, so we can't really see the bond market's response. But in Europe, LIBOR is down only slightly. The ECB has said it will continue to work to bring down LIBOR rates. If these key lending rates do come down, it would go a long way to supporting a further bounce in the stock markets. This is one of the key sticking points in the credit markets freezing.

Asian markets soared overnight, with Hong Kong spiking as much as +10%. Many European markets are also +5% or more so far.

Morgan Stanley (MS) and Mitsubishi UFJ finalized their deal for $9 billion, or a 21% stake. Also, Abbot Labs (ABT) announced a $5 billion share buyback program. We need to see more of these, like we saw after the 1987 crash.

The dollar is lower vs. the Euro today, as the flight-to-safety trade eases a bit. Oil is higher, trading back above $80. And the VIX is falling -9.2% currently, to a still high level of 63.56.

Saturday, October 11, 2008

Weekly Recap: One For The Recordbooks

Here is's weekly wrap:

The week that was on Wall Street won't ever be forgotten as it has now has a distinctive place in the annals of stock market history.

The major stock averages plunged in dramatic fashion amid of torrent of concerns about the economic outlook and a prevailing sense of impatience, and uncertainty, about government efforts to unclog the credit market, which is the engine that drives economic growth.

Sadly, it isn't hyperbole to say the stock market crashed this week. Granted it didn't have that fast-crash sensation like Oct. 19, 1987, when the S&P 500 plummeted 20.5% in a single session. No, this was more of a slow-motion crash with the S&P dropping 3.9% Monday, 5.7% Tuesday, 1.1% Wednesday, 7.6% Thursday and 1.2% Friday.

The relentless selling pressure was said to be a byproduct of forced liquidation by hedge funds and mutual funds needing to honor redemption requests, efforts by investors to meet margin calls, and plain old short-selling by bearish-minded participants.

The most remarkable aspect of the week is that the selling persisted despite another litany of initiatives announced by central banks, and governments around the globe, that were aimed at bolstering liquidity and restoring confidence in the banking system.

The seminal event in that regard was a coordinated rate cut announced Wednesday by six central banks, including the Federal Reserve and the European Central Bank. The Fed for its part cut the fed funds and discount rates by 50 basis points to 1.50% and 1.75%, respectively.
This move by the Fed followed an action Monday to double the outstanding balances of its Term Auction Facilities to $900 billion and an announcement Tuesday of a new Commercial Paper Funding Facility that will provide a liquidity backstop to U.S. issuers of commercial paper.

The commercial paper market is where many companies obtain the financing that enables them to run their daily operations. It is traditionally one of the safer markets, but it had seized up of late on concerns about counterparty risk.

Elsewhere, Germany guaranteed all bank deposits, England put forth a plan to inject as much as $87 billion in new capital into eight, major banks, the Russian government said it will invest in Russian stocks and bonds, and the Chinese central bank lowered its key lending rate.

Iceland, meanwhile, took control of its largest bank, but then made the startling admission that it is at risk of national bankruptcy.

Each of these efforts underscored the global nature of the financial crisis and how it is going to take a global approach to fix things.

Mindful of the latter point, the meeting of G7 ministers in Washington on Friday was widely talked about. Nothing official had been communicated about that meeting as of this posting, yet conflicting reports about whether there would be another sweeping, coordinated initiative agreed to at the meeting caused some angst during Friday's trade.

Notwithstanding the market's behavior itself, there were plenty of other sources of angst throughout the week as well.

To begin, Bank of America (BAC) pre-announced a third quarter earnings miss, cut its dividend by 50%, warned of rising credit losses, and raised $10 billion in a stock offering that priced at $22 per share, which was a 32% discount to where BAC was trading ahead of its pre-announcement.

Shares of General Motors (GM) hit their lowest levels in more than 50 years on concerns about the company's financial condition, Alcoa (AA) missed third quarter earnings estimates badly, and a multitude of retailers slashed their third quarter earnings outlooks after communicating disappointing same-store sales results for September.

IBM (IBM), meanwhile, had a positive third quarter earnings pre-announcement while General Electric (GE) reported third quarter results in line with estimates.

While all of these happenings had an impact on the stock market, they ultimately took a backseat to the dealings in the credit market.

On the bright side, there were a few marginal signs of improvement. Overnight Libor rates moved down noticeably Friday (to 2.47% from 5.09%) while 1-day commercial paper rates also dropped noticeably in the wake of the Fed announcing its new funding facility.

The prevailing message in term funding rates, though, was that banks remained reluctant to lend to one another for anything other than the shortest of terms.

Separately, the TED spread, which is the difference between what banks charge each other for three-month dollar loans (three-month Libor) and what the government pays (three-month T-Bill) spiked 77 basis points on the week to 464 basis points. Prior to the subprime crisis hitting in July 2007, that spread was under 50 basis points.

The push for capital preservation in the midst of the stock market sell-off manifested itself in the 1-month T-bill. Its yield dropped 20 basis points to just 0.06%, yet the real rate, which is adjusted for inflation, is actually negative.

In other developments, the plunge in oil prices drove home the market's concerns about the specter of a global recession. Oil prices hit $77.09 per barrel Friday, before closing just shy of $81.00 per barrel. Still, that closing price marked a 14% decline for the week and a 46% decline from the all-time high hit in July.

The CRB Index, which is a broader measure of commodity prices, followed a similar course, losing 11% for the week.

As for the S&P 500, its closing price Friday marked an 18.2% decline for the week, leaving it just shy of the worst week on record, which belongs to the week of July 22, 1933, when the S&P dropped 18.5%.

A furious wave of buying interest in the final hour of trading Friday helped the S&P avoid "the worst week ever" label, although it was down as much as 23.6% for the week at its low Friday.
The Dow Jones Industrial Average wasn't as fortunate. Despite Friday's late recovery try, its 18.2% decline did indeed mark its worst week ever.

The bond market will be closed Monday in observance of Columbus Day. The stock market, however, will be open for a full day of trading. Like Columbus, it will be hoping to discover something special. Whether it does or not could hinge on the agreements reached -- or not reached -- at the G7 meeting.

Friday, October 10, 2008

Midday Update: Wild Ride After The Open

Boy, was that a wild ride after the open today. I didn't sleep much last night, after seeing the Asian markets reeling (Japan declined more than 9%), so I came in extra early this morning.

The futures closed at their lows before the open, and once the regular trading session began, stocks immediately swooned. The Dow broke below 8000, but soon began to find support, and quickly rallied roughly +800 points to move back into positive territory.

There was a load roar on the floor of the NYSE, but they may have celebrated prematurely. There is still plenty of time left in today's session, and Friday market closes have not been very kind to investors this year (nor Mondays).

Morgan Stanely and Goldman Sachs are both under pressure this morning, even as the bank index is higher on the day. Apple is higher today also. But the big declines in MS and GS are certainly worrisome, as the leverage unwind parade continues.

Speaking of unwinding leverage, our monthly client letter went out today and discusses this in more detail. If you would like a copy, just post your e-mail in the comment box below (I'll delete it after I send out the email).

Oil continues to plunge today, hitting $80. The dollar is up today vs. the Euro. The 10-year yield is also up, at 3.86%. The VIX made a new record high at 74.45, an amazing level. And the put/call ratio opened at 2.05, something I don't think I've ever seen.

Back after the close--

Thursday, October 09, 2008

What Is It About My Birthday?

Today is my birthday. I was hoping to sleep in for once, but not in this market! At least the futures were nicely higher when my alarm went off at 5:30am. Small comfort.

Maybe if the market gods are in a forgiving mood, today will mark the start of a new rally. On this day (October 9) in 2002, the bear market bottomed, and we went on to enjoy a 5-yr bull market. Coincidentally, it was also on October 9th last year that the bull market peaked. I don't know what it is about my birthday.

Today is also Yom Kippur, so I hope all of those credit derivative swap (CDS) sellers are atoning for their participation in pushing some of America's largest financial institutions into market lore.

The ban on short-selling was lifted last night, so there is some concern in the financial stocks that short sellers could reload. But so far today the action looks mixed.

Credit market angst is higher again today, despite all the moves by global central banks. The TED spread is up by 1.8%, and 3-month LIBOR is at its highest levels of the year at 4.75%. Amazing.

Last night, three Asian central banks joined the rate cut effort and cut key interest rates. S. Korea, Hong Kong, and Taiwan all participated. The Asian stock markets finished mixed nonetheless, as concerns about an economic slowing outweighed the delayed benefits that come from interest rate cuts.

IBM preannounced better-than-expected Q3 earnings last night, which was a nice surprise. The Wall St. Journal is reporting that MetLife (MET) and Hartford Financial (HIG) held merger talks. They also said that National City (NCC) is in talks with a group of banks regarding a possible sale.

The 10-year yield is higher at 3.76%, which to me is a positive sign for the economy longer-term. If recession fears were really high, I would expect the yield to be falling. The VIX is down -5.58% right now, but still incredibly high at 54.32.

The AAII investor survey showed 61% bears this morning. Not surprisingly, this is the third highest level on record for the survey.

Wednesday, October 08, 2008

Early Look: Fed Cuts Rates, Sparks Wild Trading

The trading so far this morning has already been fast and frenetic. The Fed announced a coordinated rate cut before the open, but stocks opened lower nonetheless. The Dow has already traded in a 400-point range in the first hour. Currently the market is flat.

The Federal Reserve, European Central Bank, Bank of England, Swiss National Bank, and the Bank of Canada made an emergency inter-meeting 50 basis point rate cut. The fed funds rate is now 1.50%. China cuts its key rate by 27 basis points. And Britain announced an $87 billion plan to bailout its banking system.

Despite the rate cuts, the credit markets remain tight this morning. These liquidity injections take some time to work usually, but I think they are a much needed step in the right direction. The Treasury also needs to move as quickly as possible to implement the TARP program and start putting some of that $700 billion to work in our markets.

September same-store sales came out this morning, and have been mostly disappointing. No big surprise there, as the slowdown and market shock of September have probably given consumers pause.

But pending new homes sales for August were surprisingly strong, coming in at +7.4% vs. consensus of -1.3%. So maybe some of that money on the sidelines is starting to find value in the decline of home prices.

Asian markets were pummeled overnight. The dollar is slightly lower this morning, while gold is higher. But oil inventories showed a big build, and that has helped push crude prices down near $88. The 10-year yield is higher to 3.57%. And the VIX remains incredibly high at 55.15. Earlier, it tested it recent highs from Monday above 58. Yesterday, I bought puts on the VIX.

I think if people weren't worried about the short-selling ban expiring tonight, the market would be up more. I actually hope they either extend the ban, or reinstate the uptick rule.

Nonetheless, markets don't often move down in a straight line like they have. As soon as everyone jumps on a trend, the market usually throws them a curve ball. As such, I would not be surprised to see a 500-1000 point Dow rally at some point.

long VIX puts

Tuesday, October 07, 2008

Credit Markets Show Small Signs of Easing Strain

The market got a big bounce at the open, but is struggling to hang on to those gains. Big tech stocks like AAPL and GOOG are still negative, which is weighing on the Nasdaq.

The Fed announced it is creating a Commercial Paper Funding Facility (CPFF), which will provide liquidity for the strained commercial paper market. Banks and corporations rely on commercial paper for short-term borrowing, and this market has been under pressure as investors have flocked to Treasuries and away from money-market funds.

The CME also announced a joint venture to create a regulated clearing market for credit derivative swaps, one of the culprits blamed for much of the financial morass this year.

Across the pond, Australia cuts its benchmark rate by 100 basis points, twice as much as expected. Hopefully this will become the template for the upcoming G7 meeting. Already, Israel has followed suit and cut its benchmark rate by 50 basis points.

The surprise rate cut by Australia helped lift most Asian markets overnight. The dollar is getting a breather today, which is helping commodities. Oil is up a couple of bucks, back above $90. The 10-year yield is also higher, to 3.51%.

After hitting its highest level since October 1987 yesterday, the volatility index (VIX) is -8% lower today, to a still elevated level of 47.82. The VIX won't be back to "normal" levels, signaling investor fear has subsided, until it gets back below 30.


Monday, October 06, 2008

Late Day Rally Stems Declines

I don't think I've ever been relieved to see the market close down -370 points. But given how things were looking with an hour or so to go, the late-day rally was an improvement.

I think the markets are really anticipating some sort of coordinated rate cut, and won't be satiated until they get one.

The volatility index (VIX) hit a new high today, spiking more than +20% to 58.24. I believe this is the highest level since October 1987. And I would be surprised to see this level exceeded this year.

There were more than 1600 new lows on the NYSE, well surpassing July's levels. The market is now as oversold as I've seen it. To wit, only 9% of stocks are above their 200-day moving averages.

The Yen had a big bounce today, as it looks more likely that the Yen carry-trade that we used to watch closely is all but over. Everyone on the planet is trying to deleverage. The problem is, there aren't enough entities on the other side of that trade to absorb the assets (except the U.S. government).

I raised even more cash this morning, even as I feel we are reaching some sort of bottom. But the need to preserve capital is trumping capital appreciation at this point. I know at some point we will likely get a vicious snapback rally that makes these sales look silly, but in the interim I need to increase the sleep factor.

Is it only Monday? Have a good night--

Monday Morning Musings

The market is back under severe selling pressure this morning on the heels of big losses in foreign markets. The fear is now that there will be more financial bailouts needed in Europe, as the credit crunch takes its toll overseas.

Most foreign stock indexes fell -5%, and some even more than that. Our markets are down significantly right now, with the Dow dipping below the 10,000 level. Crazy.

The dollar is up again today, as is gold. Both are viewed as safe havens when investor confidence is shaken. Concerns about global growth are hitting oil prices again, pushing crude prices below $90.

Libor rates have only eased very slightly, while our 10-year yield is down to 3.48%.

The VIX has soared to its highest level since October 1987. It spiked nearly +20% today to hit 56.32. This is a level I did not think I would ever see, and shows there is true panic out there. The NYSE also showed an all-time record number of new lows (I have heard), at something like 1499.

I have raised some more cash, just to get through this period. I bought a couple of trading positions last week, but was quickly stopped out. Stop-losses are key in this market.

We need some sort of catalyst for a reversal. Many are calling for a coordinated global rate cut. The ECB has their key rate at 4.25%. What are they thinking? With the market this oversold, and the VIX at record highs, we could see a pretty strong snapback. I know it feels like the markets will never rally, but that is usually how it feels near the bottom.

Friday, October 03, 2008

All Eyes Are On The House

The market is bouncing this morning amid optimism that the House will get it right this time and vote in favor of the $700 billion asset purchase plan (does this thing have a real name yet?)

The bounce came despite a weak jobs number this morning. Nonfarm payrolls fell -159,000 in September, the 9th consecutive month of declines. This figure was above consensus for -105,000, but last month's figures were revised higher to reflect declines of -73,000.

Credit market angst is still high this morning, as 3-month Libor has climbed to 4.33%. The fed funds futures in this country are pricing in a 98% probability that the Fed will cut rates 50 bps to 1.5% at its next meeting.

In a strange turn of events, Wachovia (WB) said it was being bought by Wells Fargo (WFC) for $7 per share. This comes despite the FDIC already backing a purchase by Citi (C), so there looks to be some legal haggling there.

Asian markets were lower across the board overnight on concerns about a recession here in the U.S. The dollar is up again, as is the 10-year yield, to 3.68%. Oil is up just a touch, near $94. And the VIX is -5.7% lower to 42.73, which is still a VERY high level, signaling continued angst in the stock market and above-average levels of volatility.

I don't think that the House will put the bill to a vote unless they are sure they have the votes. Let's just hope there are no surprises.

Thursday, October 02, 2008

Midday Check: Market Shrugs Off Senate Approval

The market has been under heavy selling pressure all morning, despite the Senate passing the mortgage relief plan last night by a 3-to-1 margin.

The European Central Bank left rates unchanged at their meeting at 4.25%. This was expected, but I think they are beginning to realize that despite their misplaced concerns about inflation, the next move for them is to lower rates.

I say "misplaced" because this whole credit crunch is a hugely deflationary event. Economic growth is slowing quickly, and inflation will follow suit. Just look at any economically sensitive stock groups. They are plunging. Commodities? They are plunging as well. Our central bank (The Fed) is at least well ahead of the curve on this one, and will likely lower rates further in October.

GE is down nearly -9% after pricing a big stock offering at around $22.25 per share, which is below yesterday's closing price.

Fertilizer company Mosaic (MOS) missed EPS estimates, and that is weighing heavily on the whole ag group.

The SEC also extended its ban on short selling certain financial stocks through October 17th. I wonder what will happen when they lift this ban?

Asian markets were mostly lower overnight, as concerns for the global economy outweighed positive sentiment surrounding the moves in the Senate. The dollar is sharply higher today, which is adding pressure to energy and commodity prices. Oil is down near $96, and gold is down considerably.

Angst is still high, both in the credit markets and the stock market. Libor rates are up today. The VIX is up another +10% to 43.85. And the put/call ratio is very high at 1.38.

I am currently bidding to sell my small-cap inverse ETF hedge that I have had on. It never feels good to take off downside protection into a big selloff, but these trades were put on to profit from, and a profit is a profit.

selling TWM

Wednesday, October 01, 2008

Third Quarter Roundup

Third quarter was pretty ugly, across the board. The S&P 500 declined -9.0%, which was relatively less of a decline than most markets across the globe.

Here is how the major indexes stood for the year, as of 9/30:
  • S&P 500: -20.7%; Nasdaq 100: -24.0%; Russell 2000: -11.3%
  • China: -56.4%; Japan: -26.4%; Brazil: -22.5%
  • The dollar spiked +11.7% during Q3, and is +3.4% for the year
  • Oil tanked -28.1% during Q3, and is only +4.9% on the year currently

Off all the mutual funds in the universe that I follow for our firm, only ONE remains in positive territory for the year: Rydex Managed Futures (+0.3%).

Many of the growth funds and International funds in our universe are down between -25% to -40%. Legg Mason Opportunity Fund is down -41.15%. Ouch.

Amongst the sector ETFs I follow, the biotech ETF (XBI) is still up +2.45% for the year, but most others are down. The leading commodity ETF (DBC) lost -24.39% during Q3. The metals and mining ETF (XME) lost -50.3%. Talk about brutal declines.

Even bond funds fared poorly. My #1 bond fund, Loomis Sayles Bond (LSBDX) lost -13.1% last quarter. Our PIMCO Developing Markets fund (PLMDX) lost -8.52% for the quarter.

All of the bond funds I follow are down for the year. From corporate bonds to global, munis to high yield, they are down across the board. That is painful, since the reason you own bond funds is to provide ballast from the storm. Not this year.

Markets almost never go down in a straight line. Big picture, I think it is likely that we will see a relief rally in Q4. The question will be one of timing. Will the market bottom in October? Or maybe after the election?

The bank stocks did not make a lower low during the recent panic selloff. This could be a meaningful signal, and I am watching these financial stocks rally today even in the face of broad market weakness. I am still sitting on my large cash balances for now, but looking closely for entry points.

long SDS

Morning Update: Credit Markets Remain Tight

The equity markets are lower this morning on continued tightness in the credit markets, which is spilling over and affecting GE today.

The credit derivative swaps for GE Capital are spiking this morning, which is putting the stock under heavy pressure. This is despite the fact that GE is a AAA credit. Just shows you how whacky these markets are. Nonetheless, GE is currently -8% lower today.

Bank stocks are actually bucking the weakness and up on the day. The bank index is up +2.9% right now, while the oil index is down -3.3%, along with the broader market being lower.

The volatility index (VIX) is still high at 41.59 (+5.6%), even after yesterday's plunge lower. Libor rates are also still elevated, though lower than yesterday. The tight credit markets are likely to begin having a pronounced effect on the overall economy as well, not just here in the U.S., but in Europe and Asia as well.

The Senate is going to vote on its version of the relief plan this evening. Their version is said to include a provision to increase FDIC insurance to $250,000, which would be a good idea. The SEC also said that it will provide guidance on mark-to-market accounting. I know this sounds like manipulating the fair market process, but you can't have these illiquid securities bringing down more financial institutions.

Yesterday was the last day of Q3, a quarter most would like to forget. I will be back later with a roundup of how the various financial markets fared for the quarter.