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Economic/Market Highlights 11/20/08: D-E-L-E-V-E-R-I-N-G !!

Posted by Larry Doyle on November 21, 2008 7:55 AM |

There were major forced liquidations on the parts of hedge funds, asset managers, and insurance companies that went through the markets Thursday. Laszlo Birinyi, a noted market tactician whom I follow quite closely, indicated today that given the market price action that making investment decisions now is “strictly guesswork”.

Equity markets traded down another 5.5% to 6.5% Thursday with much of that selloff occurring in the last hour which is an indication that orders from asset managers and mutual funds built into the close. The delevering process (the selling of assets purchased with borrowed money) continues!! Volume on the NYSE was 8.8bln shares, 44% above average. Clearly a strong indication of massive liquidations. Oil and copper were down 6% and 4% respectively given continued expectations of economic weakness. When does OPEC come out and announce aggressive cuts in production?

Government bonds rallied by 30basis points in the 10yr (a huge move) in a “flight to safety” trade.

While the safest bonds rallied, bonds with a risk component (high grade corporates, mortgage-backed bonds, high yield) either did not move or in the case of high yield traded down in sync with equities.

Check out more about rates for corporate bonds on this piece from Harvard economist, Greg Mankiw. Corporations are and will be hard pressed to finance their operations at these higher rates which will further depress growth prospects for our economy.

Here is Greg Mankiw’s blog.

I have been talking about a trading range of 7500 to 9500 on the Dow so for those who have dry powder and nerves of steel, I can prudently recommend putting a small percentage of that cash to work. Keep the bulk of the powder dry because I think there will be more opportunities at even cheaper levels.

Economic Indicators
A manufacturing index known as the Philadelphia Fed Manufacturing Index dropped to a level not seen in 18yrs.

Leading Economic Indicators showed a decline of .8 …U-G-L-Y…

Expectations by leading retailers is for a holiday season that is flat to +1% vs 2007. A normal holiday season shows an increase of 4-5%. Flat is U-G-L-Y…but given this economy that may be pretty!!

Hedge Funds/Asset Managers
In speaking with a close friend at an asset manager this afternoon, he shared that his fund is expecting a 20% redemption this year for a fund that is only down 10% on the year. That level of redemption is twice what they expected and this is for a stellar fund. This indicates to me that the “baby is being thrown out with the bath water” but also indicates that investors NEED liquidity so they will go wherever they can get it.

If they are seeing redemptions twice expectations, I am sure that other funds will see at least that if not more. These redemptions are why we see markets trade off sharply into the close.

Another very interesting observation about hedge funds that shows the level of distress is the fact that a secondary market has developed that is trading hedge fund participations. I will try to keep this as simple as possible. Say that you had 10k in a hedge fund and wanted to get liquidity. There are investors in these hedge funds who are willing to sell their participation at a significant discount to the fund’s supposed NAV. This occurs in closed end funds but has not occurred prior to this meltdown in the hedge fund world. Another indication of a NEED for liquidity.

Auto Situation
Make no mistake in the midst of this enormously stressful economic situation there is a LOT of politics being played.

Congressional leaders, Reid and Pelosi, informed the markets and the CEOs of the Big 3 (isn’t that a misnomer now) that those CEOS should go back to Detroit, work at developing sustainable and viable business plans in the midst of this tsunami and then come back to Washington (but not on their private jets….coming to Washington on private jets looking for a bailout is not a good move…what were they thinking??) in early December. Congress will reconvene for an emergency session in early December to address.

Reid did offer that if President Bush wants to use any of the funds from the already approved TARP then he should feel totally authorized to do that. Clearly that is a political move on Reid’s part to put pressure on the Republicand and the administration. The Republicans have no problems seeing the Democrats face off against the UAW. The public does not support a check to these companies with little to no teeth. Either through bankruptcy or restructuring, the auto industry in our country will be a much smaller industry with significant job losses and squeezing out of excess capacity. Where it will get very interesting is how the auto companies handle their pension guarantees and payments to retired workers. Will the companies propose an offer of 60cents on the dollar or some reduced number in an attempt to keep the companies viable? This is not easy for all concerned but a business that can’t finance itself and produce a diversified set of products in a profitable fashion is not a business.

Ken Lewis commented today on the need for private capital to come into the mortgage space. He also offered that both lenders and borrowers are equally to blame for “a nation drowning in debt”. He further offered that there will clearly be more consolidation in the banking industry. Thanks, Ken. Tremendous grasp of the obvious but perhaps will help those who have been asleep for the last 24 months.

Company News
Citi closes down another 26% on the day which puts it down app 80% for the year. You know why….embedded losses….!!! We have been highlighting that here at NQ. The status quo is not an option for Citi. They either need to find a merger partner or get a major equity infusion.

Read more about how “Citi Weighs Its Options.”

Freddie Mac announces that they will not exercise any foreclosures on home mortgages that they are holding until January 9th. Very nice of them but on top of that Freddie Mac was delisted yesterday from the NYSE given that its stock has traded below $1 for the last 30 days. How the mighty have fallen.

Keep your head about you as those around you lose theirs….

LD






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