Traderbill's Financial Markets Weblog

…rather than have you go to the overnight summary…although you should…let TB point out two ‘sets’ of headlines:

*Gulf Citizens Beg for Bailouts as Stock Rout, Oil Slump Spell End for Boom

*’Panic’ Strikes Hungary, Poland Borrowers as Banks Cut Dollar, Franc Loans

There is a reality check you don’t need…the Gulf depends on handouts from the government…meanwhile their sovereign wealth funds are investing in U.S. and European financial stocks…and losing their shirts…overnight they pumped in money to Barclays which avoided a U.K. capital infusion…that cannot be good for stability in the Middle East. Then there was this set of headlines:

*U.S. Auto Sales Probably Fell For 12^th Straight Month as Credit Tightened

*Consumer Spending in U.S. Probably Fell in September as Job Losses Climbed

This caught TB’s eye because he BARTed to the City last night to have dinner with a friend (Green’s at Fort Mason…vegetarian and not only is the food incredible, but it has the best view of the Golden Gate TB has ever seen from a restaurant), and as usual he took along his sheaf of reading material for the ride. Readers know that TB likes John Mauldin and his latest Outside the Box had an 18 page Annual Forecast 2008 by the Stratfor Group. It was so comprehensive that TB’s head is still spinning and he never did get through the entire piece.

What shocked him however was their prediction that the worst is over in the U.S. financial markets but they fully expect Europe to get much worse as Emerging Markets growth slows…and then this:

“The American recession will probably be over by year’s end, but Europe’s will likely stretch through most of 2009.”

With all due respect, we haven’t even had the ECRI declare we are in recession…you noted how the stock market rallied on Q3 GDP (Advance) being down just 0.3% when consensus was -0.5%. Now go back and reread those two headlines. With credit tight, even if we have fixed the problem…which TB does NOT believe, as we are still trying to solve it by putting out fires instead of addressing the entire problem.

Do you honestly believe the consumer will be back…by the end of the year no less? Remember those six credit cards that the average American has…mostly tapped out…with high payments and home equity?…forget it! Remember the watch word last year after the stock market peaked? Our economy will slow but the rest of the world will carry us.  Well, that fizzled. Also, remember that oil and gas prices would rise for as far as the eye can see due to peak oil and rapidly increasing global demand. Of course, TB warned you that that was BUNK! That the surge in commodities prices was not due to increased demand (with the exception of Rough Rice due to Malaysia having that huge typhoon destroy the rice paddies and the price is still high per a friend who is a custom blender of grains and former commodities trader who is still shaking his head). Rather, it was due to $60 billion of public pension fund money moving into commodities index funds which in turn did commodities swaps with major banks…think JPMorganChase. JPM in turn using an obscure CFTC rule (and distorting it as it applies only to the underlying commodity), purchased all the contracts they needed with no limit unlike all other players including speculators and commercials! When the CFTC finally got it thru their collective skulls they had to have approached the banks and warned them off or else they would publicly change the rules…and you saw how quickly prices dropped at that point. Gasoline is no problem…first, people have shifted to mass transit or are driving less as we know…although Europeans think we are nuts complaining about $5 gas. If they could they would buy it all up and ship it home. Last night TB saw not one but two gas stations in SF at $2.995 a gallon…when was the last time you saw that??? But food prices are another thing…first is the conversion of corn for ethanol…a stupid concept whose time has went (as Leo Carillo, the Cisco Kid’s sidekick, Pancho would say). But more importantly producers have reduced the size of packages elevating the price per ounce so that even if they cut the prices you will pay more than you did at the onset. This happens every time without fail.

True, we won’t have unemployment at Great Depression levels but thanks to Wal-Mart and others (which Jim Cramer lauded last night), wages are going nowhere so how does one reduce debt and increase consumption at the same time. Do we honestly think this will be a ‘green’ Christmas? The worst thing is that after throwing trillions of dollars at this and in the end it will be, what will we have solved? Nothing! We will have FIXED it but not solved it…like putting your finger in a dike…it works until you get tired of standing there then comes the onslaught.

There is only one permanent way to solve our spending spree problems and that is to save. Unfortunately, that unleashes a whole set of new problems as it means paying off bills and credit cards first so you can save in the first place…and saving in stocks sure hasn’t worked over the past ten years…twice! This implies even lower consumption and that means lower corporate earnings and thus more layoffs, like AmEx (p/e 10x) announced yesterday…laying off 7,000 workers…yet the stock rallied…as did Visa and Mastercard who will not see increased transactions but fewer and smaller ones and are still trading at p/e’s of 20x and 16x respectively!

So it escapes TB how we can be out of a recession by yearend that we haven’t officially even entered…even though Martin Feldstein, Chairman of ECRI says we are in one, but unofficially. Do any of you doubt we are in a recession? Do you believe it will be shallow and short? You decide.

Let’s hope we don’t get a lot of ‘tricks’ today…only ‘treats’…but that sure is asking a lot these days…the pain is excrutiating.

Have a terrific weekend!

TB

Trader Bill thinks it is clear to anyone reading these missives that they are merely commentaries…as he sees it…and do not necessarily reflect the views of anyone other than his own. Information is gathered from sources he has found reliable, but no guarantees of accuracy are implied. These are merely observations of events in the marketplace offering in an attempt to offer a non-mainstream viewpoint. Hope you find it useful. Copyright TBD Capital LLC October 31, 2008.

…more blame being thrown at Alan Greenspan today. Furthermore, former Japanese Vice Minister of Finance (1997-99 and worked in the MOF for 20 years), Sakikibara was on CNBC (just when I am determined to tune them out forever they come up with a fantastic interview). He made several key observations:

*This crisis is due to a total lack of supervision

*We are in a terrible situation and there will be more problems ahead

*The US Government moved too slowly…not to quickly as we have been led to believe

*The Japanese situation in the 90’s was similar but theirs was local, this is global!

To the last TB would add two things:

*Through faulty accounting standards we allowed Wall Street to create the global problem…and it could have been prevented…the pain will be with us for years

*The Japanese were savers…remember when we tried to convince them they needed to consume more?…we are debtors…25 years of credit expansion with no savings will not be cured quickly…or painlessly.

Ayn Rand was a Russian born novelist…as in fiction, but two of her books The Fountainhead and Atlas Shrugged reached cult status and influenced many intellectuals including Alan Greenspan and the ideas of the Objectivist Movement are key to the Neo-Con philosophy that unbridled capitalism is the best way to grow a democracy. This is the cornerstone of the problem today as eight years of regulatory neglect, championed by Greenspan while incompetent regulators appointed by Bush and controlled by Cheney did nothing. Rand’s philosophy in a perfect world would work but it ignores the human element: greed. Perhaps if we were the savers our parents and grandparents were…kids you have to go back to your great grandparents as the credit disease has infected your parents and if you are young enough your grandparents too.

Of course the U.S. prospered for the past 25 years and it was believed that we could engineer the economy so that economic cycles would be mitigated and ideally be a thing of the past. But greed at every level got in the way:

*Credit card companies sent out unsolicited cards till the average American had six!

*Congress decreed that every American should own a home

*Glass Steagall was eliminated under Clinton but the GOP drove it

*Housing boom began in the wake of the Dot Com bust

*Realtors hyped prices, banks lowered credit standards, appraisers inflated values

*The SEC under Donaldson deregulated the big five brokers

*Deregulation allowed the exponential growth of derivatives…especially CDS and CDO

*The SEC under Cox weakened protection for investors and then failed to act even when it reached crisis proportions

*Panic set in…as well it should as a government with no contingency plans struggled to solve a U.S. problem that we allowed to infect the entire world

*Banks and other financial institutions were ‘semi’ nationalized…in a democracy?

*All of this happened a year before and culminated in the final three months of a presidential election year…the worst possible time for this to happen

*Each problem was treated on an individual case basis when it was systemic problem so that trying to solve one problem merely created another

*With lightning speed money flows around the world (except from one bank to another) as a flight to safety takes it to the country with the best guarantees…never mind whether they have the ability to honor those guarantees…witness Iceland and Ireland.

*Global trade has dried up as banks will not guarantee shipments (letters of credit and bankers acceptances), this has caused shipments to plunge (Bloomberg users see article under NI GILBERT).

*States and local governments are being forced to cut budgets…imagine this: GOP Governor Schwartzenegger has proposed raising the sales tax…and he backs McCain? Of course, the increase will be temporary: until hell freezes over!

*Unemployment is rising and will continue to rise…not at Depression levels but that ignores the fact that the average wage is not supported by manufacturing anymore…or housing construction…or even cost of living wage increases while costs of food and health insurance become an ever growing burden…more people working part-time for minimum wage too.

(Feel free to add to the list…it was getting simply too long for TB…but add CEO compensation at ridiculous levels why the workers get nothing and exporting jobs to emerging markets countries…so you see, credit is all that was holding it all together. Yet despite an incredibly large wage gap we are told that the wealthy must preserve their tax cuts which were supposed to be temporary in the first place. Think about it.)

Thus it was that the Fed cut rates by 50 basis points yesterday…to a market that expected 75! From the new 1% that allows them two more 50 basis point cuts till we reach zero, so it was irrational to expect anything more than 50. Yet that was what they did and the gyrations in the equity markets proved it. Then they added swap lines to emerging market economies and therein lies the source of the overnight rally.

Ayn Rand wrote fiction…but what she left behind is a sad reality.

…that is all that was accomplished by yesterday’s rally. It was NOT capitulation, it was nothing. Sure 900 points sounds great but it didn’t mean anything technically, in fact the indices that looked good only moved from supporting on one technical level to resistance at another…just as we went thru for months before the latest plunge the ranges are incredibly wide to the speed and slope of the decline since the beginning of October.

Consider:

1. We had key reversals (higher high, lower low, and close higher than the prior day days high) in the Dow Transports, Utilities, S&P 500, Russell 2000 and the Barron’s 400. The problem is the lows were only slightly below the prior day’s low…not a capitulation trade. Note also that did not happen with the two Nasdaq indices.

2. Volume was 1.73B shares which looks good of late but is only about 100 million above typical average volume…we would have needed 2-3 billion shares to be meaningful. On the Oct. 10 capitulation trade volume was 2.95B, which followed the record 2.997B of 9/19 a rally which took us up to the 40 day moving average but was not a capitulation trade as we failed and started back down the very next day. So rather than a capitulation we had a sellers strike…they were burned out.

3. Advance/Declines were positive but the best, the NYSE was just 4:1, well below levels of the selloffs…the Nasdaq was half the NYSE! Breadth too wasn’t stellar; NYSE 22x but we saw double that on the selloff and the Nasdaq was just 6.7x…no biggie

4. New 52 week highs/lows. In a capitulation the new highs would remain small as they were yesterday…just 19…while the new lows would surge on the downdraft, instead there were 1505 about where they have been lately and well below the 5294 set on Oct. 10…the first capitulation trade…even though it only held for one more day.

4. TB in creating the market summary reviews all the movers…normally stocks that move at least 1% except on the huge moves where it could be 5-10% of the index value. The movers yesterday were, for the most part, the same stocks that were the big movers down the prior day…and in virtually the same order: AAPL, XOM, CVX, etc. Not coincidentally, these are all big cap stocks that the hedge funds love to play in: they can take big positions without moving the stocks as much and at the same time greatly impact the broad indices. Also, note that while the gains yesterday exceeded the prior days declines it was not significantly so when you look at the total amount of the decline.

Now let’s look at that rally and its causes. First, we had a sizeable selloff Friday and Monday. While we did not, with a few exceptions, take out the cycle lows we had a string of new low closes…so while everyone was saying it was positive we were not building a base…we were still selling off! The impetus for our rally was the global rally so we followed, rather than led as has been the case, the other bourses. Also consider that we had a record low in Consumer Confidence…of 38% when the consensus was 52% and the bears were at 50%….is that a reason for a rally?…especially of double digit magnitude as a percentage? Then there are the earnings…which are either dropping or if the company matches or beats the estimate is accompanied by a lowered forecast.

There was some euphoria on capital infusions again globally…while the reaching out by the Treasury now looks to be extended to all insurers…imagine rallying on socialist/nationalizing moves…this flies in the face of capitalism but then so did a total lack of regulation do its best to destroy it by allowing greed to prevail over judgment.

How about Porsche, with a market cap of 8 billion Euros increasing its stake from 45% to 75% of Volkswagen? How can this happen? Well it wouldn’t in the U.S. with mark to market accounting as obviously VW is being carried at cost. Over the past week there have been articles in Barron’s, WSJ, Bloomberg on how VW is grossly overvalued, especially in comparison to BMW and Daimler. So what happened and how did Porsche do it? Porsche had on swaps with VW and was distressed by the amount of shorts so they engineered the greatest short squeeze in history by that announcement…apparently nobody noticed that they said they intended to increase their stake. So in a series of moves VW soared…overnight VW shares declined by 48% and Porsche soared the most in 12 years.

TB has been grousing for months about the AMEX Composite which with 600 or so stocks is driven by just two: British Tobacco (BTI) and Imperial Oil (IMO)…see the AMEX summary below for the daily changes in these two ‘movers’ for the past dozen or so trading days…it renders the entire composite useless. Likewise, VW is the most shorted stock in the German DAX (note it was the only index that declined overnight). On the Frankfurt Stock Exchange VW was 20% of the index…yesterday it was 27%. So overnight the DAX decline was due to VW entirely…the prior day the 147% increase in VW’s price added 0.9% to the total gain which was 5.6%! Too bad we, in the U.S. aren’t smart enough to drive the shortsellers out…and while TB doesn’t mind shorting he loathes naked shorting…as much as he does SEC Chairman Cox…the do nothing!

Well known shortseller Bill Fleckenstein says shorts are good and doesn’t separate naked from covered ones…he has made use of them as has Bill Ackman. Not only do the hedge funds short…they have been known to spread false rumors which cause their demise if either of these guys did that…to TB’s knowledge they did not but instead went public with their negative views…they should be sent to jail. After all this brought on the demise of Bear Stearns and then on to AIG, and Lehman. Perhaps they would have failed and Merrill would have had to be taken over but they eliminated the buyers and in the end, we, the U.S. taxpayer have to pick up the pieces…as well as citizens of other countries.

You keep being told that these are not evil funds merely investors…well that is bull and while some are responsible others are not…and Wall Street…including JPMorganChase for its part along with other banks in effectively cornering the entire global commodities market by buying unlimited contracts then doing swaps with commodities index funds. The pain caused by that and the failure of the CFTC to move quickly to curtail it is what has driven the world to the brink of financial market collapse and perhaps a global depression. Everyone needs to play by the rules and in a capitalist society the government must not allow greed to destroy itself…unlike the preachings of the Neo-cons including those running this Administration. Go on…hate TB because you are a loyal Republican but you better think about the fact that those great tax breaks you got are small repayment for the destruction in your wealth today. Nobody asks the right questions. We hear that:

*proportionately the wealthy pay their fair share so why should they pay more? True they pay about 38% of total income tax revenues and only comprise 2% of the population..or 5% if you take it to $250,000. But it is the wealth gap that is ridiculous and dangerous for a democracy. They would like to see everyone pay a 25% tax so it is ‘fair.’ Fair, when if you are in the top 10%, earning $100k in California that that is nothing? The logic is so biased as to be pitiful. Don’t forget all their other advantages such as generation skipping and other tax shelters…

*since when did restoring a tax cut …that was done due to a recession…then immediately argued that it must be made permanent even as the U.S. economy soared…become a tax increase? By that logic rates would simply decline in every crisis till they reach zero…but my wealthy friends…who will bail you out then?

“We gotta get out of this place
If it’s the last thing we ever do…”

Doff your hat to the Animals…show me anyone who spent any time in Nam and that is their song…wonder if McCain hummed it for five years? Well, TB is disgusted once again with this Administration…you send guys over their…some for three or more tours…their time is up and you extend them…for the cohesion of their units??? TB’s  got their cohesion…send Sen. Stevens and Rep.  Charlie Rangel over…in fact send the whole lot of ‘em for serving the lobbyists rather than the people. TB remembers carrying his shorttimers book in his last three months…tear off a page a day…when it was gone so was TB…he would have gone mad if they did that to him, not just gotten mad! TB is convinced those men and women are the only ones left who deserve to live here and the government won’t let them…wait a minute there was a point…something Tb was angry over….uh….oh well…it will come back.

OK, can’t avoid the markets any longer….damn! What is there to talk about?…the same old patterns new lows, new low closes, almost new lows, more new low closes, inside days, etc. Long Bond up ¾ in the morning -3/16 on the close with down a point or more in between. Long TIP -1 point overnight then –almost 3-1/2 points intraday and closes -2-3/16. Meanwhile Crude down for a second straight day…down $4.50 in two days…only thing is OPEC cut production 15%…and gasoline had a record price drop last week. Oh, and we need Natural Gas…cheap and abundant…yet they totally destroyed both Devon Energy and Chesapeake yesterday…whew, TB was just about to buy it too! That’s what TB’s talking’ about

Remember that little town in Norway that was wiped out by investing in CDS which had been billed to them as safe? Germany following suit. First, a ‘landesbank’ is a bank that was designed to make loans to farmers and producers. Then the name became capitalized and they began to do much more such as corporate loans…that when the Europeans were obsessed with privacy (given the history there you might feel the same way). Then about 10 years ago (?) the government lifted the guarantees and suddenly they were on their own and began more speculative investing to boost earnings and growth and thus attract more deposits. A Liepzig, Germany Landesbank is the latest victim of the derivative debacle having invested in a Dublin-based fund on advice from Lehman Brothers. The towns money was invested in the Landesbank which took a heavy hit and is now close to insolvency. This is what TB meant by the U.S. exporting our greed and that is not conducive to being called the ‘financial capital of the world’ as Mark Haines is so proud of saying on CNBC…fleecers of the world may be more appropo and can we argue the point when our government stood by and let this happen? Vote Republican…sorry TB couldn’t resist that…and recall he is a former GOP’er..no longer! Yet the fear continues to be spread that the Dems will tax you to death, take your property, business and firstborn child. Ah, the legacy of Karl Rove (note he spells it with a ‘K’).  

TB went on vacation the last 10 days of August and was so glad he did as the markets were BORING. He returned on Sept. 2 and it hasn’t been since…worse it is accelerating in the ability to inflict pain on market participants of all stripes. The 2^nd began with an outside day in the Dow that narrowly missed being a reversal day down and tht set the tone with the oscillations growing by the day but still in relatively narrow ranges of 200 points or so …but by the 15^th the downturn started in earnest and despite generally low volume the gyrations increased to 400, 500, 700 or more point days, sometimes offsetting but with a defined downward bias. Much has been made of the fact that we have not put in a new low or at least a significant one…but that is actually worse because you cannot get a capitulation when the market continues to ‘drift’ down…if 200 points or more can be called drifting! Since rallying 400 points on Oct. 20, the Dow has been down 4 of the last 5 sessions for a total of 1100 points or 12% and the only up day was just 170 points.

The past four days have had lower lows and produced the lowest closes of the cycle. The rally that commenced after the 10/10 low could be properly called a ‘dead cat bounce’ as it only recovered about half of the losses from the beginning of the sharp declines and only lasted for two sessions. 10/10 was labeled a capitulation trade since it was 2.95B shares, the second highest on record and only surpassed by the 9/19 2.996B share day…that on a rally that took us up to the then 40 day moving average of 11,483 and reversed the very next day without looking back. So call it a capitulation if you like…the others did not qualify but to TB it was a best faux capitulation si vousplait.

Now ask yourself how we go that capitulation and what has been happening as global governments have thrown over a trillion dollars at this monster…and for naught. The economy’s downward momentum has increased, corporate earnings are looking worse and retail sales of all forms are declining…yet the bulls point to the declines in food and energy…emphasis on energy since smaller packaging means prices will never get back to where they are. Also, gas prices instill fear on the upside but not confidence on the downside…first, they are not that significant…it is the other things that come from oil that matter…like heating your home and that won’t be cheap this winter. But the really insidious thing is that all we have done is erase the gains which were caused by the commodities index fund binge which was exacerbated by the banks…and it will be proven, led by JPMorgan…driving commodities prices up senselessly at the expense of the entire world…and like the sharp rise in home prices…also senselessly…the correction implies an overshoot…and that is what we are now in….but it could get worse depending on how permanent the damage that was done by speculative investment.

The Dow needs to get back to at least 10,197…as that is the 40 day moving average while the truly meaningful number is 11,729 the 200 day moving average of the past 10 years. Until that occurs consider this a countertrend rally in a secular bear market and act accordingly.

So Ted Stevens was convicted of seven counts of fraud…yet unless the Senate votes him out, nothing prohibits him from staying…does this tell you anything about the state of our government? Wonder if Obama will blast Palin for associating with him…naw, he has too much class for that. Wait a minute…doesn’t the governor get to appoint a replacement in that case….can Sarah appoint herself so she can get some experience? Then there is Charlie Rangel…living in subsidized housing and fails to report income from an apartment in the Dominican Republic. Yet, every one of them says they are doing the peoples business. This has got to stop and until all of you stop calling yourselves Republicans or Democrats it will continue…we need major reform and quickly. Also, for several months they have been sitting on their committees grilling whoever might come before them when it was THEY who passed the legislation allowing this mess to occur and THEY who failed to regulate it. Stop the world!  

But you know what is galling about Stevens in this? Each count could get him 5 years in prison…yet they say because of being an elected official it might be a matter of only months! The case cited is Martha Stewart??? Isn’t that lowering the bar just a tad too much? Martha lied to investigators, that was her crime…also selling on insider information but had she not formerly been a broker that wouldn’t have been a big deal…and besides the tip was wrong. She did not violate the public trust! Stevens even lied under oath saying he tried to give back the gifts…gimme a freaking break! Now as the McCain campaign shows, no Senator should ever be able to run for President since they all consort with known felons…follow the logic!

Hey, let’s throw the whole lot of ‘em out (course then we have to pay them their retirement…gawd!) replace them with a bunch of Mike Singletary’s…quarterback has an ego and screws up…don’t let the other team sack him…YOU sack him…loved this: go shower and come back and sit on the bench…you’re worth more to us that way! Whatever happened to team sports…well Mikey, an interim head coach and an incredibly nice guy is what football…and baseball needs…did TB say a nice guy? …remember those eyes of his on his game face? Not on your life would TB get in his path…ever!

TB

Trader Bill thinks it is clear to anyone reading these missives that they are merely commentaries…as he sees it…and do not necessarily reflect the views of anyone other than his own. Information is gathered from sources he has found reliable, but no guarantees of accuracy are implied. These are merely observations of events in the marketplace offering in an attempt to offer a non-mainstream viewpoint. Hope you find it useful. Copyright TBD Capital LLC October 28, 2008.

…TB woke up with an entirely different idea of what he would write today. He walked into his office (across the hall from the bedroom), looked at his email alerts…there were none…then saw a note from Bloomberg reporter Mark Gilbert: NEW YORK STOCK EXCHANGE SAYS MARKET WILL OPEN TODAY…what’s that all about??? Next he turned on CNBC and heard money manager David Kotak speaking from Hong Kong and saying that the credit default swap market had blown up overnight. Then he recited the numbers on the Hang Seng…brutal. This is the fallout from the Lehman collapse! Picture untold numbers of hedge funds thinking they were hedged…but if Lehman was the counterparty they lose on either side of the trade. If they sold insurance they had to pay and if they bought it they weren’t going to get paid…that means both long and short positions were exposed. Why we weren’t aware of the problem for this long escapes TB. Just this week TB said that the decision to let Lehman fail would go down as the worst of the entire crisis (Paulson says there was nothing he could do to stop it)…but even TB had no idea of the magnitude of the problem. Bankruptcy fees alone could run $1.4 billion, probes at every point….it is a mess.

First, we heard of hedge funds that used Lehman London as their prime broker and saw those funds frozen…and any stocks they held there. Then, we saw the auction for Lehman bonds go at $8.25 per $100…or $1.50 below the consensus (TB can’t find anything on it but believe there were no bonds shown in at the auction Tuesday). Now this. Why did it take so long for the market to unwind…recall how yesterday TB hoped for a 500 point of so down day, setting a new low which would trigger a massive capitulation trade? Instead, what we got a market that went from green to red to green 11 times in the session yesterday and was down 275 points at most and closed +172, 104 points off the high. Worse the Nasdaq 100 had a new low yet closed up just 2 points! The Nasdaq Composite and SOX had a new low and low close…the lowest since 10/10/02,  the Russell 2000 and Barron’s 400 (best fundamental stocks) both had new low closes!

Now for what TB intended to write and the source of the title. A client gave me Art Laffer’s piece on how the Fed not increasing the monetary base quickly enough…until the did that $250 billion infusion of capital into the biggest banks (now Paulson says he has to do the same for the regional banks to unseize the credit markets…GM is also going to dump their commercial paper on the Fed to take pressure off that market!). Laffer and Kudlow are best of friends and it shows…both conservatives…both supply-siders…both oblivious to the plight of the working class…this is not meant to be mean-spirited…they simply do not think in terms of them…cannot relate. He blamed the government for bailing out Bear, Stearns, and AIG rather than letting them fail…a typical conservative view…yet he made no mention of Lehman…well, Art…there is your answer…you are living with it now…but will it possibly change your opinion…TB doubts it. That is the problem of starting with a view on economics that begins with your political beliefs, which is precisely why TB has had so many comments on the GOP in general and this Administration specifically…and even more to the point SEC Chairman Chris Cox! Yesterday, he had the audacity to call for more rules and creation of a new panel to regulate Credit Default Swaps! This man has not done one thing to help…in fact had he only restored the uptick rule and banned naked shorting instead of prohibiting all shorting of financial stocks (eventually), that would have done more than anything to alleviate the problem and restore confidence in market fairness…what a bad joke he has been.

If you think TB is being political or too harsh on Kudlow and Laffer consider that they have been in favor of unregulated capitalism…and that folks, is exactly what ruined the game.

Now we have a new problem…we had central bank coordination but yesterday Poland raised rates to defend the Zloty…they do not have swap lines with the Fed…today, Denmark raised to defend the Krone…they DO have swap lines…right?

Now for the biggest irony TB can think of: last night he was at the opening of Bloomberg’s opulent SF office…on Pier 3 which has been completely gutted and replaced with a new building…the room is huge with gobs of reporters and sales people…Mike loves salt water fish tanks so there is a 12 foot long reef tank that is incredible! TB and friends stood talking with a Bloomberg editor…right by her desk with the terminal right by her…nothing…nothing was going on…as it turned out at the time the Nikkei was off about 5% but had gotten there slowly….the reception ended at 7pm…TB took BART home then went to bed…still nothing…then he woke up at 3:45 to see the meltdown…that was mindblowing…how could so much happen in less than nine hours???

Stay calm…stay cool…stay put…because even if this is for real …what will your dollars buy you? Think about it!

TB

Trader Bill thinks it is clear to anyone reading these missives that they are merely commentaries…as he sees it…and do not necessarily reflect the views of anyone other than his own. Information is gathered from sources he has found reliable, but no guarantees of accuracy are implied. These are merely observations of events in the marketplace offering in an attempt to offer a non-mainstream viewpoint. Hope you find it useful. Copyright TBD Capital LLC October 24, 2008

Before you read be sure to go to the Overnight Summary…a lot happened but sadly it isn’t pretty….we squandered an opportunity yesterday. TB

TB’s trivia question: what man has run the most times for President and beat Ross Perot in the North Dakota primary in 1992 and Bill Clinton in New Hampshire in 1996  Here are two of his quotes (the answer follows the commentary with more quotes):

“I don’t believe in the right to bear arms, I believe in the right to arm bears.”

“I’ve upped my standards. Now up yours!”

…after trying to put on a happy face yesterday suggesting a change might be in the offing, once again TB paid for his optimism but at least not with currency of the realm!

He warned that the rally merely wiped out 8 days of losses but didn’t do anymore than erase the negativity…today that negativity was back but like yesterday’s pattern of meaningless ‘inside’ days, so was today’s selloff on the lowest volume since September 2^nd! This is surely taking a toll on everyone and the shortage of dollars globally is so great that the dollar is roaring except against the Yen where it is holding its own, so that the Dollar Index closed the strongest since 3/8/07! Sterling lost nearly 5 cents yesterday dropping the weakest point since 1/12/03, while the Euro fell almost 3 cents for the lowest close since 2/27/02!!! Furthermore Gold fell $22 to $768 and the intraday low was $766.40! for the lowest low and low close since 9/12/08. Worse yet was Energy (other than Natural Gas. Dec Crude closed at $72.18 with an intraday low of $68.92. Both of these have wiped out the entire rally. While everyone has focused on disinflation and now sees inflation down the road, could the real problem be deflation…hopefully not!

For months now, TB has been commenting on the volume levels and shaking his head at the volume levels and the volatility that has been created, especially when they are low.

Since July 25, the average daily volume on the NYSE has been just 1.45B shares or about average but those figures are misleading:

*the range has been from 820M on 8/27 to the record 2.997B shares on 9/19.

*there have been just two weeks where volume exceeded the average all five days: 9/15-9/19 and 10/6-10/10…excluding these the average daily volume was just 1.2B shares!

*9/15-9/19 averaged 2.31B shares and 10/6-10/10 averaged 2.17B shares or 2.24b for the combined periods, these are the highest on record. In the first period, with little volatility, the Dow rose by 4.3%, while in the latter it declined by 15%! That decline was due to hedge fund redemptions…and is the only decline that can be explained.

*Since the 9/15-19 period the Dow fell by 25% to the 10/10 low (note this ‘coincides’ with the beginning and end of the two periods!), and has bounced by just 7% since then so it is still down a net 17%.(since the 10/9/07 record high it is down 34.5% w/divs).

So while we have been led to believe that hedge funds are evil and shortselling is evil, it is just the opposite. Both provide liquidity to the marketplace and anyone who believes there is liquidity hasn’t been paying attention to the markets or the actions of governments around the world. In the examples above the first period was one of uncertainty when everyone wanted the market to rally for quarterend while the second was marked by hedge fund redemptions. TB believes this also accounts for the record levels of volatility on both the VIX and VXN as hedge funds resort to options to hedge their long positions.

The tragedy in this is that had the SEC not removed the uptick rule on July 2, 2007, which on most indices barely preceded the peak while it took till October for the Dow, this allowed shortsellers to run the markets…as they could outmuscle any buyer on the plethora of bad news, both credit and later economic. Had the uptick rule been in force (with a 10 tick limit instead of the redundant 1 tick), and the SEC merely enforced rules, and strengthened them, much of the decline could have been eliminated as well as the volatility. Be careful what you wish for…and are we better off with the government owning major stakes in virtually every significant financial institution, not only in the US but globally? Where do you think the foreign governments are getting the dollars to bail out their institutions? …thru swap agreements with the Fed, of course. We are the world!

If you doubt TB’s research look at this piece from www.ft.com, the Financial Times site:

 Spooked hedge funds prompt low trading volume

By Anuj Gangahar in New York

Published: October 21 2008 17:51 | Last updated: October 21 2008 17:51

Some of the steepest sell-offs and gains witnessed in an especially volatile few weeks for Wall Street could have been exacerbated by relatively low trading volumes as frightened hedge funds sat on the sidelines.

This decoupling of volume and volatility in equity markets is just another example of the reluctance of traders to speculate against a backdrop of uncertainty over the global banking system and economy, say analysts.

On October 15, for example, when the S&P 500, Wall Street’s benchmark equity index, dropped 9.9 per cent, its largest one-day drop in more than 60 years, volume was only 11.5bn shares. This was the third lowest volume day that month, with only October 1 and 2, when the ban on short-selling financials was still in effect, having lower trading levels.

Indeed volume was only 58 per cent of the record reported on October 10 when the S&P 500 fell just 1.2 per cent.

This suggests that the perceived linear relationship between volume and volatility is being challenged as late day sell-offs and gains have been fuelled by far fewer participants because high volatility has caused many usually active traders to stay their hands.

The absence of some of the largest hedge funds from trading is thought to be behind the low volume seen of late. Hedge funds such as SAC Capital, Paulson & Co and Millennium Partners have been shifting into cash.

Todd Steinberg, head of equity and commodity derivatives at BNP Paribas, Americas, says: “Hedge funds are continuing to sit on the sidelines. While we have seen some return of institutional investors, many of the most active hedge fund traders are still sitting on the large cash balances they built up as part of the deleveraging process that has been occurring in recent months.”

SAC, along with other active traders such as Citadel, was thought to be responsible for a sizeable chunk of daily volume on many of the world’s exchanges before its more recent shift to cash. That means that the record volatility of October has not resulted in meaningfully higher volumes, according to Rich Repetto, analyst at Sandler O’Neill.

Equity trading volumes have historically been correlated with changes to the Chicago Board Option Exchange’s Vix index, a measure of implied volatility, known as Wall Street’s fear gauge.

But normally active traders have been running shy of an environment in which the Vix index hit a high of more than 81 last week. The Vix has fallen back this week on tentative signs of a recovery.

But traders, many of whom have been burned badly by the turmoil of the past 18 months, are reluctant to engage in the bargain-hunting buying spree some have predicted. Evidence of this reticence can be found in the hedge fund sector in which managers have placed $600bn in cash, says Citigroup.

Despite the recent turmoil, some nimble traders will have been able to make money. But for the exchanges and electronic brokers – which are about to report earnings figures – the thin-volume volatility can only be bad news.

 As TB said…be careful what you wish for…credit has imploded liquidity is imploding.

At least TB kept it short yesterday and is doing the same today. If you need some more help with the trivia question, here is another quote:

If you have time you might want to look at the overnight summary for more details on what transpired…some pretty important things which are only touched on here.

TB’s Quote of the Day:

“The problem with banks’ balance sheets is that on the left there is nothing right, while on the right there is nothing left.” Source not determined…but it is good!!!

…well, maybe. Yesterday, TB heard that real estate sales in Los Angeles jumped 46% (almost entirely foreclosures), so he called his boyhood friend who is one of the largest buyers of foreclosed property in L.A. County. What he said was interesting:

He is selling a lot of foreclosed homes he bought after fixing them up and making money…not lots but enough to finance more purchases. He is optimistic that we are at the bottom or near enough that you can buy. He is seeing banks sell property at depressed prices (although he is buying well below that at the foreclosure sales). He told me that for the first time the banks are pressuring him …one said they wouldn’t finance him any more because his low margins didn’t fit their global profile (US sub of a major European bank). He told me on the holdings he was financing he had earned less than $20,000 on about $50 million…but he isn’t losing money and the property is holding its value…global profile? His other bank, a small well-run local bank, is having trouble getting money from the big banks so they have cut back on what they will lend him but at least they are still there for him.

After saying he wished he had taken TB’s advice a year ago in May to avoid the market, he did say that he feels the market has stabilized and should be bought…real estate, not stocks…in fact he liquidated his stock holdings which were rather small and recycled them into real estate. His demeanor was somewhat cheerful and his optimism cautious.

But his anger came out on the bailout of the banks and brokers who got us in this mess. Let them fail was definitely his motto…until TB explained to him why they had to hold their noses and do it…and what a failure would have meant for him and the entire global economy. Then he began to see…he also said for the first time in his life he is going to vote for a Democrat for President…didn’t say which though…

I hope you found this conversation of interest and enlightening.

As stated in the summary from yesterday, there was nothing of technical significance yesterday…in fact all the major indices had ‘inside’ days (lower high and higher low than Friday), which is a sign of a lack of commitment…the rest managed to rise but only finishing wiping out the losses of the past 8 sessions…so we are back to where the final downdraft began…and that is a very precarious spot…especially with the second and final leg of the Lehman auction today. TB concurs with Hayman Advisors that the decision to let Lehman fail will go down as the single worst decision of the entire crisis. TB further believes it was due to political pressure from the right who, like TB’s friend believed ‘let them fail’ not even considering the consequences…and we immediately saw them…a total seizure of the global credit markets as nobody knew who would be bailed out and who would be allowed to fail…a pity…but perhaps the only way to prove a point and in the end it brought on the necessary action by the central banks of the industrialized nations and even some of those of the emerging markets…but make no mistake: it brought us to the very brink of the precipice! Just shy of a global Chernobyl.

Watch for the results of the Lehman auction today which, given the sharp drop in overnight Libor and especially 3 month which is over yearend, should come in higher than the disappointing 8.25 cents on the dollar from the last one…that could provide a nice psychological lift to the markets as it alleviates some of the risk of credit default swaps blowing up.

TB will leave you there as there is nothing further he can add to clarify the situation.