10/7/08

Economics

Recent Data

Other

ACORN, Fannie Mae and the credit crisis:

http://article.nationalreview.com/?q=ZjRjYzE0YmQxNzU4MDJjYWE5MjIzMTMxMmNhZWQ1MTA=

The declining cost of food and fuel:

http://bespokeinvest.typepad.com/bespoke/2008/10/cost-benefit-of.html

Politics

Domestic

This article from 1997 on the Ayers/Obama connection:

http://chronicle.uchicago.edu/971106/justice.shtml

International War Against Radical Islam

Christopher Hitchens on Afghanistan:

http://www.slate.com/id/2201622/

The Market

Technical

More technical analysis:

http://www.thestreet.com/p/_htmlrmd/rmoney/technicalanalysis/10440855.html

Market performance following the broad weakness like we have had of late:

http://traderfeed.blogspot.com/2008/10/look-at-broad-weakness-in-stock-market.html

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Having traded down huge during the day, yesterday the DJIA (9955) managed to close above the 2004 support level of 9707; unfortunately, the S&P (1056) wasn’t as successful (?). The volatility index closed at 52, which is approaching an historic high, a good sign that some kind of bottom could be near. Volume, however, was pathetically low--not positive at all.

Mid afternoon with the DJIA down 500-600 points, I was hopeful that we would get a selling climax where stocks traded down another 500-600 points (we almost got that), volatility spiking to the high 50’s-low 60’s (we almost got that), on huge volume (not even close). Understand that when I say that I was ‘hopeful’, the meaning is that since I think that the end of this decline is going to look like that described above, the quicker it happens, the sooner this agony is over.

Fundamental

In yesterday’s Morning Call, I said that I would like to ‘sell bits of some of our holdings today. However, based on what looks like a big down opening, I am waiting to see if we get any kind of rebound’. Well, we never did (get a rebound), so our Portfolios made no additional sales.

By about noon, I was regretting not having sold on the open and was trying to decide whether or not to go on blow them out, when a funny thing happened--the news started getting better as stock prices were sinking. By the ‘news started getting better’ I mean that details of Fed and Treasury actions related to the rescue plan began leaking out to the public. Here is some of the clarifying information that we received yesterday:

(1) the Fed is meeting today with two exchanges with the purpose of setting up a market making function for the exotic instruments that are causing the valuation problems for financial institutions. [a solution will solve the problems of regulatory oversight and transparency, i.e. an easily understood valuation process] That doesn’t mean the effort will be successful; but it does mean our regulators are focusing on a major cause of current difficulties. Positive.

(2) the Fed announced that it would begin paying interest of bank’s required reserves which will help un-freeze these assets [sources of liquidity], Positive.

(3) the Fed is working on a solution to illiquidity in the corporate commercial paper market [heretofore much of this paper was sold to money market funds which are now shunning it]; talk is that it will either lend directly to corporations or act as a guarantor between the lender and borrower, Positive. [ 8:05am a plan was just announced]

http://www.bloggingstocks.com/2008/10/07/biggest-fed-step-ever-buy-debt-from-companies/

(4) the Fed is making massive injections of money into the banking system which is starting to show up in growth of the money supply [remember, this could lead to future inflation problems; but that is not the issue today. Deflation is; and the Fed’s action helps], Positive.

(5) the Treasury and Fed are moving very rapidly implementing the rescue plans. The head of the project was announced yesterday and meetings are scheduled with firms who are expected to assist in valuing [and bidding on] the illiquid assets that are causing the current problem, Positive.

(6) the Treasury confirmed that the rescue plan gives it the authority to directly inject capital into problem institutions. Positive.

http://paul.kedrosky.com/archives/2008/10/06/treasury_to_sta.html

Bottom line: we are likely in the midst of a bottoming process (the technical aspects are negative and the fundamentals are more positive than stock prices indicate). The problem is a supply/demand--we simply don’t know how much more stock is left to be puked out by the hedge funds or a panicked public. Until we see a pick up in volume on the buy side, stocks will most likely continue to decline irrespective of the fundamentals. However, in my opinion, it is too late to sell [yes, this reverses my inclinations to sell yesterday] into a decline. And of course I could be wrong about some sort of panic sell off; and yesterday was the bottom.

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