October Finale: Trick or Treat?

This past week, the market just couldn't make its mind up whether to go to the Halloween Ball as Nouriel Roubini or Hank and Ben.

But this past week was really about the correlation between the foreign exchange and equity markets. The best barometers of this are the yen and the Aussie dollar as they reflect the ebb and flow (panic) of de-leveraging and worries about the stability of the global financial system.

In a nutshell, equities take fright when the yen ralles as this is a sure sign of global risk aversion on the uptick, while the AUD is the ultimate carry trade currency. Its appreciation (rise) is usually a good indicator that the market is looking to embrace a more positive outlook for stocks.

Breaking News Stories and Market Movers Yesterday

• So Japan arrives late to the global co-ordination rate cutting ball with a meager 0.20% cut (bringing rates back down to just 0.3%). But it was a drama queen 5 to 4 split decision by the Bank of Japan board with the governor casting the deciding vote. One smells more than a whiff of outside political pressure i.e. that this had been agreed at G7 / G8 level. The markets' disappointment with the result is clear. The Nikkei lurched 5% in 15 minutes and the Hang Seng went off 4%. Risk aversion should hold sway ahead of a long weekend.
• The ECB’s resident uber-hawk Axel Weber has gone all weak at the knees and warmed us up for the expected ½% cut next Thursday by saying that “if the economy cools, then rates have to come down rapidly so one doesn’t risk falling behind the curve”.
• It seems Barclays (BCS) is in line for a very expensive GBP 7.3bn capital injection from the Middle East, according to the FT. They would have found it cheaper to take the strings attached Queens schilling!

It looks as if the insurance industry is the next in line to go cap in hand  to Capitol Hill looking for bailout judging by the performance of stocks in the sector of late. Check out the performance of Hartford Financial (HIG) and other US insurers. The penny has finally dropped for investors that banks / hedge funds and pension funds weren’t the only ones with dodgy, over valued assets on their balance sheets. Due to the more opaque nature of insurance company accounts though, these firms had slipped under the market's raider until recently.

• San Francisco Fed board President Yellen said that the FoMC could “go a little bit lower” than 1% as it is “concerned about weakness in the economy”
• UK GfKconsumer confidence survey is in the basement again. It has fallen 4 points to it’s lowest level since 1974, while John Lewis department stores' sales fell a worrisome 9.8% y/y in the week to Oct. 25% and British Petroleum (BT) put out a profits warning.
• The much respected and widely followed Martin Wolf in the FT is pleading for the BoE [MPC] to slash rates to 2.5% ASAP. The leader in the same paper suggests doing it in one bold leap of faith.

The big picture remains one of de-leveraging. Note Thursday’s “better than expected” abacus accounting results from German giant Deutsche Bank (DB) couldn’t disguise the fact that they are still 30 times leveraged.

Markets will remain vulnerable and volatile until this process is completed. I’d guess we are maybe 60-75% of the way through this torturous process.

The second phase of this cleansing process is now upon us with a global recession. This sadly has only just begun. Decoupling was a myth.

The phase will be marked by aggressive rate cuts, further bailout programs financed by bond issuance and possible currency intervention to prevent the yen appreciating. Only in late 2009 , early 2010, will the air clear as economic data will have reached their lows and financial dislocations will have abated.

Comments

[Frogman:]

Art Cashin has been looking for the Woossh which we never got in October...somehow "this is different"...ha right! There is more pain to come.

Take for example, In California many areas are experiencing 40% drop in home values from last year to this year. (See data from National Association of Realtors by zipcode) .>>YES 40%

People can't sell (to upside down), nobody will buy (because it isn't the bottom) and who the hell will be left (even after it bottoms) to pick up the great deals? Anyone who bought in the past 5 years has bought! So with tighter lending standards to boot the problem is that very few will qualify.

Next Quarters GDP will make history and this slide will continue in a bad bad cycle that will build on itself. (Roubini is right BTW) JPMC just came out with a 'mortgage plan' and so did the FDIC after taking over WAMU and how do you save some? That is like having two children drowning but you only have time to save one who are you going to save...?>! Either way you won't be able to live with yourself after the fact. In many cases (read the article) the FDIC couldn't negotiate until a homeowner is behind on their payments so there is a total incentive to not pay! Truly troubling!

Those who stepped into the market this past week will feel some real pain because this is by no means is over. Those of us who patiently wait will be rewarded for nothing has changed relative to transparency and information flow from these banks and mortgage market. In summary, THE CONSUMER IS AGAINST THE ROPES AND THERE IS NOBODY TO CALL THE FIGHT! Already we have heard of politicians allowing people access to their 401k's...which they do have the ability to draw from now but there are no more home equities to draw from, no credit cards to max out (see AMX call -highest delinquencies, and charge off's expected to get worse) so where will the consumer go to get cash? (The only place is the market if they have anything left)

So what catalysts do the bulls see on the horizon? "its cheap" I hear...yea relative to what ?!? An over leveraged consumer!!! If the market is forward looking (6months+) do you really think that we will be outta this in 6 months? Or even 9? Most economist (even the conservative ones) have said that we are in for a SERIOUS recession and yet we ignore the flashing red lights...take for instance our currecny?!? RECORD appreciation after the FED swelling its balance sheet in 30 days by 1 TRILLION dollars?!?! Is this stable? Hardly... perhaps the parallel can be drawn from an interview with an fellow Navy SEAL when he was asked, "How are the SEAL's so good?" He responds intuitively, " its not that the SEAL's are that good its just everyone else sucks!" Perhaps his wisdom applies here to the dollar.....either way keep your powder dry and don't be a hero. Live to fight another day...

2008 Nov 02 01:17 PM