Thursday, November 20, 2008

To Quote Michael Scott from The Office - No, No, NO, NO, NO!!!

The velocity of the market moves are catching everyone off guard. We are living through historic times in the markets, but the great difference between today and the closest comps we have for these markets (81, 74, 29-33) is the great access to information and the technology that has sped up trading in the markets.

Let's use 1981 as an example. If you were concerned about a stock's prospects in 1981, you'd do some research and eventually make a call to a broker at Shearson to have him sell your shares. Today's electronic order formats make it possible for professional and semi-professional traders to buy and sell that same stock 10 times in the blink of an eye.

Today, the markets were up about 100pts on a rumor of an auto bailout agreement in the Senate. In the midst of that reporting, an email is sent to an on-air reporter at CNBC and he say's that the House views the Senate deal as a "non-starter" and the markets instantly reverse. Simply stunning.

The next 8 days could be very, very volatile with option expiration tomorrow (there were a lot of weird option trades today - it looked like people betting for a huge snapback rally) and a very thin market as the Thanksgiving Holiday approaches.

We've broken through any meaningful support and the markets look to be racing to the next support levels of 7,000. Again, people keep saying "if the S&P earns $75 next year we're trading at 10 times earnings which isn't bad". Right, but it's not cheap either - I think 2009 earnings might be as low as $55 (or lower if things don't get fixed in a hurry) and we could trade at 8-10 times that number. Again, this would be a nightmare scenario, but I think there is a plausible argument for Dow 5,000 next year. I still think it's less than a 40% chance, but I thought that we had less than a 5% chance of breaking through 5,000 about 3 months ago.

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Just to provide a little insight into the level of fear in the markets, the 3-month t-bill (the equivalent of a 3 month CD with the US Government) was yielding 0.015% today. In effect if you invested $100,000 in US t-bills today you'd earn $15 - yeah, you read that right - $15 in 3 months.

In essence investors are so scared of taking any risk they are willing to take practically a zero rate of return in exchange for a just getting their money back in 3 months. The irony of this move is that I'd argue that the US is demonstrably worse credit risk today than we were just 6 months ago when rates were much higher. I think that over the course of the next few years this will reverse itself meaningfully when global investors begin to question our ability to repay our debts. But that's another nightmare for us to deal with on another day.

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Oil - In the midst of all of the global panic, we've lost sight of a major collapse in oil prices. In July oil was $147, today it closed at $48.25. Basically, down $100 a barrel in FOUR MONTHS! This is an enormous collapse and the economic and politically ramifications will be significant.

Economic - cheap oil is, unfortunately, still the grease that moves the global economy. I'm still a believer in higher oil prices in 2009-2010 (weaker US dollar and a resurgent Asian economy), but $48 oil will help every industrial company's bottom line. Think of a company that has huge oil inputs on the costs side that raised prices all summer to catch up with oil prices. Do you think they are cutting prices now? Not a chance. This should bolster many companies in the coming months.

Political - I'm out of my league talking about the politics of oil, but suffice to say that the Middle East, Russian and Venezuela are much calmer places when oil is $100 a barrel. At $48 a barrel, they are stressed out and at $30 a barrel turmoil is sure to ensue.

I still contend that the natural price for oil is in the mid $60's, but we overshot on the high side, and we are going to overshoot on the low side.

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Finally, just when you think you've had a bad day, imagine what this guy's day is going to be like first he gets a speeding ticket and then.......oops!

Cheers.

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