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Economic/Market Review 11/6/08

Posted by Larry Doyle on November 6, 2008 9:00 PM |

****I hope that people can access this article which will appear in tomorrow’s WSJ. This piece gives a great recap of the very painful delevering (unwinding investments made with borrowed funds) for Citadel, one of the higher profile hedge funds in the business. — Wall Street Journal

Markets are down another 4-5% on the day and app 10% for the month. Today’s highlights (or lowlights…) being….

1. Goldman Sachs announces that they expect a loss of 300,000 jobs in tomorrow’s employment reports from Dept of Labor. Consensus estimate is that the economy lost 200-250,000 jobs. Markets are very nervous that this number will be even worse but regardless the overall rate is headed well north of 7%…

2. Cisco announced after yesterday’s market close that they had their first revenue decline in 5 years…

3. Blackstone (one of the largest private equity funds in the business) is down app 15% on negative earnings report and negative outlook…

4. Now for the good news…Wal-Mart has positive earnings and outlook for holiday season…this is a recession play …

5. The Bank of England in unprecedented fashion cut their overnight lending rate by 1.50%. The European Central Bank cuts its overnight lending rate by .50 to 3.25%. These rates are still 2+% over our Fed’s overnight rate as Europeans have traditionally been much more hawkish in regard to inflation (Weimar Republic…runaway inflation…).

6. Yesterday’s selloff was not on very heavy volume but did have a major multi-strategy hedge fund execute a massive liquidation of equities.

7. Credit is easing a little but again there is little to no demand for funds from consumers or institutions. The securitization market (used by banks to bundle assets such as car loans, home mortgages, auto loans, etc and sell them to investors) is virtually dead in the water. Banks thus are stuck with these assets. Investors are concerned about massive defaults and delinquencies and thus have no demand for these assets.

8. Toyota is forecasting the largest sales declines in 18 years….

9. The Big Three (Ford, GM, Chrysler) meet with Nancy Pelosi to plead their case for capital injections. Is Pelosi dealing from a position of creating leverage over Obama or merely hearing these companies out or both? In any event, with all due respect to anybody involved with our domestic auto companies the business model is broken and the cash burn rate is enormous. This industry will be getting smaller either through merger, bankruptcy (I doubt this path) or consolidation. Regrettably I think the capital injection here to ease the pain is money that is in the “good money after bad” camp.

More from Ms. Pelosi right here on stimulus package, tax cuts, and auto situation……http://online.wsj.com/article/SB122600310456906045.html

10. Oil is down to app. $60 per barrel on belief that recession will be long and deep thus slowing any pickup in demand. I would very much like to see BO state that we are going to drill off our shores and create real leverage over OPEC and Russia as they deal with the current weakness in oil prices…..

Wish I could be more sanguine but I can’t. The October low for the Dow was in the 8200 area with interday low of app 7700. Not a bold call to say that we will retest those levels…

11. Chris Dodd will continue to be chairman of Senate Banking Committee…this is also bad news…inmates running the asylum…

12. Very interesting that with the markets down 9-10% over the last two days that interest rates have not moved…remember the article on “crowding out”? With enormous government deficit funding needs, I feel strongly that long term rates are headed higher…

13. Earnings for Qualcomm and Disney miss expectations….not a lot of need for new technology and don’t expect a lot of people going to the parks anytime soon.






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