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By Bill Cara | 11 October 2008
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Just how bad are things? Bloomberg summed it up this way:
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'Leaders of the world' will now attempt to rewrite the rules of international finance [[over a week-end! : normxxx]], and may have to shut the capital markets for a time to accomplish this, says a G-7 leader. Finally; a responsible politician has admitted the system is broke and must be replaced.
Where else have you been reading that a General Agreement on Currencies would be needed before global leaders could go on about their business of building a new financial system? Yes, if you search this site in the window on the sidebar, you will find at least 180 citations for General Agreement on Currencies. You will not find that anywhere else you look, at least not until today.
Moreover, who else in the Wall Street Journal, as early as June 2006, was warning of this disaster, while others demanded that markets run free? My arguments were laughed at. But; who among these skeptics is laughing now?
Who else has been opining that since he was hired by the White House every move by the Treasury Secretary Henry Paulson has been an unmitigated disaster for the ordinary people, calling it, from the beginning, ‘Paulson’s Folly’?
The world has arrived at precisely that point that I strongly argued it would, inevitably, with then current practices, over the past three years would be the result of a bankers’ 'self-regulatory' system run amok. The world must put an end to financial 'self-regulation' and conflict of interest dealings [[aka, 'self-dealing' or double-dealing: normxxx]] by bankers [[and others in the financial community, eg, brokers: normxxx]]. Now!
I will not write a Saturday Report today because this financial system is finished. What happened yesterday illustrates that markets no longer work as value discovery mechanisms. But, yes, I will cover Friday’s destruction in Sunday’s Week In Review, and I will also attempt to answer your fears and concerns.
Moreover, I will restate why the system is broke, what surely needs to be done to replace it, and why many of the key people in charge today— the central bankers and the Wall St bankers who have been recruited into the Office of the Treasury Department— must not be allowed to make the most important decisions in the history of the world.
For now I will just publish the automated portion of my Report. Since it is the people’s capital— your portfolios, your Funds, your pensions— that has been destroyed over the past one, two, four, and 52-weeks, it is important that you face up to your naïveté and/or your denial. Trust me; your banker is never going to make that statement.
In fact there is, in Canada, the ludicrous, ubiquitous, TV commercials of ScotiaBank ("You’re richer than you think you are!") that tell you all you need to know of just how morally corrupt many bankers have become and why those at the source of the global financial crisis cannot be trusted to be part of the decision-making group that develops a solution that meets the needs of the people.
Let’s get the foxes out of the henhouse, now! Get yourself in the proper frame of mind to do so by scanning the 15 tables at the bottom of this report. It ought to be enough to make you sick.
Daily Report For Friday Morning, 10 October 2008
Markets Re-Cap, Friday
The last hour of a trading session is typically the most important because, in times of pressure, it best shows us whether the emotional bias of traders is one of fear or greed. Yesterday the loss of -350 points in the important DJIA index in the final hour showed extreme fear [[as panicked selling by funds fearing redemptions overwhelmed the PPT, aka, the Plunge Protection Team: normxxx]]. This morning that fear showed up in the form of panic as pre-market opening orders sold the DJIA index down about -700 points within minutes.
The core of the issue now is whether the US automobile industry can survive the present credit market crisis that has effectively shut off credit to everybody, including the buyers of cars and trucks, because of the failure of many banks. [[Unfortunately, it really IS true, "as GM goes, so goes the nation!": normxxx]]
At precisely 3:00pm ET yesterday, General Motors (GM) was trading at $5.57— a huge loss from $13.00 (57%) in just the past three weeks [[not to mention a maximum value of nearly $100 in late '99 — early 2000, and over $40 about a year ago: normxxx]]. But in the final hour, GM stock plunged a further -16.5% to $4.65, eventually closing at $4.89. GM now has a market capitalization of just $2.7 billion, but as of June 30 had a $20 billion deficit on its balance sheet and an underfunded pension liability of -33.1 billion.
If markets were truly 'free', GM would be forced to declare bankruptcy, from which there would be no hope for recovery. Ford Motor and Chrysler are in the same position. The Federal government needs to nationalize these companies immediately along with the top five to ten banks to protect a couple of million workers— the most important in America today because if these jobs are lost there surely will be depression.
That is the state of the union today [[and, indeed, of the entire world! : normxxx]]
Yesterday and overnight, the losses on the international equity markets were massive, including in NY where the DJIA (-678.91 -7.33% to 8579.19), S&P 500 (-75.02 -7.62% to 909.92) and NASDAQ Composite (-95.21 -5.47% to 1645.12) were smashed. The Toronto Composite (-456.13 -4.54% to 9600.18) was hammered as Canada’s top two financial companies (RY -11.1% and MFC -18.5%) plunged on selling from foreign investors under immense duress. The Venture Board (-30.97 (-2.89%) to 1041.67) actually slowed its descent, having been down almost -20% in the prior three days.
In NY, the best performing sector (XLK) was down -3.32%, largely because of the positive earnings report from IBM. All sectors were bad, but Energy (XLE -14.4%) and Financials (-10.4%) were worst hit. In the Financials, the Banks ($BKX -11.9%) and Broker-Dealers ($XBD -12.3%) took immense losses for a single day.
In fact, while not compacted into a single trading session like Black Monday October 19, 1987, the past few days this week has been every bit as bad. Yesterday alone, the global equity index (Dow world index) dropped -4.2%. So this crisis is a global one.
Overnight today, the Asia-Pacific equity markets were also smashed: All-Ords of Australia (-8.20% to 3939.5); Shanghai Composite (-3.57% to 2000.6), Hong Kong (-7.19% to 14796.9), India Sensex 30 (-7.07% to 10527.9), and Japan’s Nikkei 225 (-9.62% to 8276.4). Over just three days, the Nikkei Dow has plunged -20%.
In Europe at 8:52am ET, the French CAC (-8.61%), German DAX (-9.02%) and UK FTSE 100 (-8.24%) were crashing, awaiting the dire opening in NY.
The $USD soared yesterday +0.49% to 81.25 and is up this morning in the futures to 81.97. The $CDW (Cdn Loonie) plunged -2.33% to 86.95 after dropping -1.67% the previous day and almost -2% over the two days before that. The Loonie’s fortunes are tied to the Western Canada oil patch, which is being smashed as Crude Oil prices plunge. Those prices are plunging because the banks have called the loans of speculation based hedge funds. Now there are margin calls. The leverage in futures trading leads to such a result where Crude Oil has fallen from $147 to under $82 from just mid-July.
The inter-relationships in capital market trading are now quite obvious.
Yesterday Crude Oil dropped -$1.81/bbl to $86.62, but the futures this morning had crashed to $81.85. That move has strengthened the $USD to 81.97, and taken the bloom (for a short time) off the precious metals. $GOLD contracts yesterday (starting late in the previous day’s session) sold down -$20.00/oz to 886.50. Later gold rallied to well over 900.
In the spot market this morning, the precious metals have backed down from overnight highs (in brackets) to be— early to noonish Friday— (9:10am ET) for gold, palladium, platinum and silver: 907.03 (931.70), 190.5 (201), 1009 (1024), and 11.46 (12.24). Volatility here is extreme.
The DJIA futures were at 8320 at 9:10am ET, fully 1000 points down from yesterday morning. The DJIA this morning opened down almost -700 points in 5 minutes. The selling wave continues. In fact this is a tsunami. BUT, this selling wave continues to present incredibly good buying opportunities, in my opinion.
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Comments & Outlook, Friday Morning
Morgan Stanley (MS) and Goldman Sachs (GS) a week ago filed to become banks, which required their moving from a position of over 30 to 1 leverage to well under 10 to 1. That deleveraging process is now killing hedge funds and [[even conservatively : normxxx]] margined clients, forcing them to sell securities and futures positions, which is greatly exaggerating the market crash.
For this reason, ie, to allow deleveraging to go as smoothly as possible, there was recently a period where short-selling was not permitted in many stocks. The monetary authorities, however, misjudged the impact the Morgan Stanley and Goldman Sachs decisions would have on capital markets. At the point where investment banks were deciding to become commercial banks, under the protection of the Fed, the bail-out package legislated by Washington was found already to be inadequate.
The market has since been in an all-out rout.
The Treasury Secretary, who is the last person who should be managing a solution because these investment bankers are his friends and former colleagues, has now deemed the advisability of using Treasury capital to buy preferred shares of the banks. Doing so would be the worst possible decision for the government [[and everybody but the bankers and their 'fellow-travellers': normxxx]]. Bank failures would happen in any event because the system is broke.
Believing that certain industries like banks and automobile manufacturing are critical to the future of the American economy, the federal government must immediately backstop the potential failure of the largest companies in those industries, however weak they might be.
As I see it, the government, and not the Fed [[and probably NOT Paulson, who should recuse himself: normxxx]], must open a window of opportunity where— until the end of 2008— there will be a bid to buy all the common stock that any leading company (from a select list) chooses to sell to bring order to their balance sheet. Selling control shares to government should be at the discretion of the company directors, but in my view those directors who reject the offer and who later fail in their duty to protect the employees and vendors with other means should be considered at fault [[and subject to at least pecuniary damages: normxxx]] should those companies fail.
What this means, of course, is that the US government must take emergency action to 'nationalize' those economically crucial companies that can no longer survive on their own. It also means that the present bondholders and shareholders of those companies have probably lost their financial stake. The offset however is that the public treasury will earn back a very significant return when the economy stabilizes and comes back to good health. With effective legislation, those profits would later be distributed back to the taxpayer, which would be worked back into the economy.
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The action I recommend is the ultimate back-stop in a crisis where the financial system has failed. Everybody wants 'free' markets, and in time they will get them if the proper legislation is put in place [[but only if the more drastic action is taken today: normxxx]]. …private investors who today put further capital into any company that relies on a smoothly functioning credit market system are fools. The system has failed and needs to be replaced.
That reminds me of the joke of the Scottish regiment which, after the regimental condom used by all had broken, held a vote on whether to repair or replace. This is no time to make stupid, petty decisions; the current financial system needs to be replaced.
The capital market, however, can survive if only legislators can remove the control that bankers have over it. There are [[fundamental: normxxx]] values out there still in the Energy and Basic Materials companies, and other like companies, some of which are trading at 1 to 2 times annual cash flow. Others can be bought literally for the net cash on their balance sheet. There are industrial companies that make essential products that continue to build their order book. There are healthcare companies like Genentech, Pfizer and Merck, for example, that will continue to manufacture essential products.
This is a time, while legislators are replacing the failed financial system, to be investing long-term capital in those parts of the market I recommend. [[Capital you are unlikely to need for 5 - 10 years or so! : normxxx]]
M O R E. . .
See also
Lessons From the Trader Wizardby Bill Cara.
Sarah Barham, Carol Bonnett , Eleanor Bramah Editors.
Normxxx
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The contents of any third-party letters/reports above do not necessarily reflect the opinions or viewpoint of normxxx. They are provided for informational/educational purposes only.
The content of any message or post by normxxx anywhere on this site is not to be construed as constituting market or investment advice. Such is intended for educational purposes only. Individuals should always consult with their own advisors for specific investment advice.
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