Thursday, October 09, 2008

Uh-Oh, Throw Money at the Markets, Watch Them Crash, Rinse, Repeat....

Just once, I'd like to be able to say "Well, nothing much happened in the markets today".

A) The market meandered through the day, until we hit the magically 3pm hour. Traders keep working hard to pick the bottom and they are continuously getting their heads handed to them. Despite all the best efforts of the G-7 they can only intervene, they can't stop redemptions and selling. The charts seemed to indicate there was a floor around 9,000 on the Dow, but we blew through that in a matter of minutes today. The next floors for the chart readers are 8,200 and then 7,200. If we take out those supports (which I view as unlikely, but more likely than I would have thought yesterday) the technicals are so ugly you don't want to even think about it (we're talking 4,500 on the Dow, that kind of ugly).

By the way, if anyone is keeping track the Dow is now down 20% since Congress passed the bailout last FRIDAY. Remember the bailout that we had to pass to avert a crash? How's that working out for you?

Again, if the market focused on fundamentals there is good reason to see stocks falling another 15-20% from here and then stabilizing, but all rational thought is out the door right now. I'm not going to be surprised by a 1,000 point swing either way tomorrow (Japan's Nikkei index is currently down 10% as I write this). While we're on the subject of the Nikkei I think it's worth noting that as of today, the Nikkei is still down 78% from it's all-time high nearly 20 years ago. I'm not predicting that type of long-term result for the US, but we are doing the exact same things that Japan did to address their banking crisis 20 years ago and you can see how that has turned out.

B) GE - This is real wild card. Earnings from GE will be out tomorrow morning and expectations have been dramatically lowered so there is a chance that they might even surprise on the upside. Unfortunately, given the wild financial operations within GE it's almost impossible to have a clear understanding of where the quarter will fall. GE will move the market initially one way or the other, but as with IBM today the move will be overshadowed by other issues by the end of the day (and don't underestimate the influence of insurers and automakers tomorrow - look at what happened to XL and Prudential today).

C) Trader talk - The most insane comments of the day took place on CNBC where they summarized what the traders are looking for to put a floor in the market. Apparently, the rate cut, $700 billion bailout, $85 billion for AIG (and then an extra $40 billion for AIG), commercial paper facility, etc, etc, etc, wasn't enough. So this is what they want now:

* Guarantees from from major governments of interbank loans.
* Have the US Government actually buy banks.
* Have the US Government actually buy stocks.
* Waiving the mark-to-market rules.
* Another stimulus package of some sort.

This sounds like science fiction. I can't believe this is the new reality. If this is what the market is pinning it hopes on, I'm not optimistic. Tomorrow is also, settlement day for $400 billion of Lehman CDS's - that might cause a lot of dislocation.

D) From the files of "Well, it could be worse"... at least we're not Iceland.

Home to just 304,000 people, tiny Iceland is emerging as the biggest casualty of the global financial crisis. On Oct. 9, the government took control of the country's largest bank, Kaupthing, and halted trading on the Reykjavik stock exchange until Oct. 13. Authorities also used sweeping new emergency powers to hive off most of the domestic assets of the country's second-largest bank, Landsbanki, into a separate entity to be called "New Landsbanki" that will be fully owned by the government.

In a stunning turn of events over the past week, the vast majority of Iceland's once-proud banking sector has been nationalized. The government has taken control of Kaupthing, Landsbanki, and the No. 3 bank, Glitnir. Kaupthing also was forced to take an emergency $702 million loan from Sweden to prop up its Swedish arm, while the Norwegian Banks' Guarantee Fund offered $819 million in liquidity support to the local unit of Glitnir.

Now some believe that Iceland, which has transformed itself from one of Europe's poorest countries to one of its wealthiest in the space of a generation, even may face bankruptcy. In a televised address to the nation, Prime Minister Geir Haarde conceded: "There is a very real danger, fellow citizens, that the Icelandic economy in the worst case could be sucked into the whirlpool, and the result could be national bankruptcy."

Look for updates throughout the day tomorrow.

Cheers!

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