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Market Highlights 12/1/08: “Space Mountain”

Posted by Larry Doyle on December 2, 2008 11:05 AM |

I was never one that “enjoyed” roller-coasters. In fact the last time I went on a roller-coaster at an amusement park I went on it strictly to “surprise” my son. On that ride I closed my eyes, held on for dear life and figured that within a few minutes, I’d be back on terra firma. If I did not make it, the premiums were all paid and the family would be just fine. If today’s roller-coaster were only that easy.

While I did not get overly ebullient about the 15% move upward in the equity markets from 11/21 through 11/28, I am not reading too much into today’s 8% selloff. The fact is we remain very much in a delevering process, will continue to see exceedingly weak economic reports, and are far too focused on what is coming out of Washington than what and how businesses are handling this downturn. I still believe that we will largely remain in a trading range of between 7000 and 7500 on the downside and 9500 on the upside. Overall trend lines remain negative. Be better sellers of rallies !!

In fact, please look at this graph of the price action for the Dow over the last decade. On 10/06/02 we had an an intraday low of 7177. The market got down to the low 7200- to 7500 range a few times before holding and moving higher. We have been down there once so far on 11/20th. I think it is an easy call to say that we will revisit at least once more if not a few times. Check it out

A quick review of today’s “lowlights” and then some commentary. 1. The Institute of Supply Management (ISM) reported a reading of 36.2 for a manufacturing index. You may ask what that means. Let me respond that that is the lowest reading for that index since 1982 and that’s not good.

2. The National Bureau of Economic Research “officially” announced that we are in an economic recession (really!!??) that started in December 2007.

3. Laszlo Birinyi ( I have referenced Laszlo as being one of the most astute market mavens) opined today that he believes that the market bottom of 7500 on the Dow established on Nov 20th will hold. I respect Laszlo but also offer that his most recent post prior to today’s was that anybody offering opinions on the market price action was offering “strictly guesswork”.

4. Paul Tudor Jones is one of the most successful hedge fund managers of all time but even he is not unscathed in this turmoil. He suspended “redemptions” (meaning you can’t get your money back…not good) in one of his largest funds and established a separate fund to hold less liquid investments.

5. Along those same lines, Harvard University’s endowment has been one of the largest investors in private equity (non-publicly traded investments) and has “overwhelmed” the market in an attempt to liquidate some of these positions. It is this sort of event which causes me to prescribe serious caution for those looking to put money to work.

6. Commodities (specifically gold and oil) had had a nice pop but gave up the ghost today as the market action is indicating that the recession will be both long and deep. Gold closed down almost 7% and oil closed down 10%. I will offer though that although OPEC met over this weekend and did not announce any cuts in production they are scheduled to meet again in mid-December and it is widely forecasted that they will announce cuts in production at that meeting. Oil’s price for forward delivery one year out is a full 50% higher than the spot (current) price. That spread is an indication that the market believes we will see a combination of increased demand (likely from a strengthening economy) and decreased supply (due to less investment in new wells).

7. The price action in U.S. Treasury has nothing to do with value and everything to do with “government intervention”. I used to joke that price action like this is akin to what Adam said to Eve, “stand back I don’t know how big this gets”. The 10yr Treasury had another 20 basis point rally to a level of 2.72%. Who would want to buy a 10yr U.S. bond at that rate? Not me!! Ben Bernanke said that he may very well have the Fed buy U.S. Treasury debt. Why?? Very simply both he and Paulson are doing everything they can to literally drive longer term rates down in an attempt to bring mortgage rates and other consumer rates lower as well. How to play this? First off, if you own a U.S. government bond fund, I would recommend that you closely monitor the market and pick a point to sell that fund. Move the proceeds into a 6mo or 1yr FDIC insured CD where you can likely still get rates approaching 4%. I mentioned yesterday that I think the U.S. government bond market is likely to be one of the next bubbles. The chief market strategist at Merrill Lynch concurs and shared that very opinion and wording with their clients today.

8. Last week Merrill Lynch, Goldman Sachs, and Morgan Stanley issued upwards of 17bln of 3yr government backed debt (FDIC insured) at app 3.5% vs the app 8% cost of money for their non-govt backed paper that is trading in the market. Well that “punch” was so sweet that Bank of America announced today that they plan on selling 9bln of this FDIC backed debt for their own corporate interests. Clearly Paulson and Bernanke are working with these institutions to help them place this debt. While Paulson/Bernanke are using their own wallets to drive rates lower they are helping the banks raise 3.5% funds with a likely implicit mandate that they use the proceeds to lend to consumers. Who wins?? Consumers who are in a position to borrow money for a fixed rate mortgage at 5.5% or less. Who loses?? Consumers/Taxpayers who aren’t in a position to get those mortgages. Freddie/Fannie who will likely end up purchasing these mortgages. This priming of the “mortgage and housing pump” is a decent attempt to generate housing activity but IMO will not help those homeowners who are delinquent or on the precipice of default.

Now for some commentary and references from articles I found particularly insightful.

If you are trying to make rhyme or reason out of this madness and focus on your own portfolio, I thought this article, “Market Strategies for the Very Brave” was particularly helpful. Thinking of what to buy or should you sell, read more.

None other than the Sunday New York Times lead editorial, “Bailing Away” addressed the main concern I highlighted in my last piece, that is, the prospect of vicious inflation. “Another danger is that in fighting today’s crises, the government is teeing up the next one. To finance the bailouts, the Treasury is borrowing money and the Fed is printing it. That bodes ill for a heavily indebted nation, presaging higher interest rates and higher prices–perhaps sharply higher. That is not an argument for inaction. But frank acknowledgement of the dangers would put a premium on getting the rescues right today.”

For a second, I thought the Times was going to put a plug in there for embracing the private sector and a reference of No Quarter as well. Oh well, in due course!!

Lastly, on last night’s radio show (pleased to hear that we had a record listening audience of many thousands and an overwhelmed chat room…thanks for spreading the word and a big shout out to Nocturnal Warrior for his fabulous job as host!!)

A caller asked what lessons can we learn from this economic turmoil and what I would recommend to people. With that question in mind, I was pleasantly surprised to come across the following piece written in the most recent edition of Barron’s by Sally Glassman. Sally writes in “Lessons From This Downturn” that “your best investment is in yourself.” I totally concur!!

Invest in yourself!!


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