Thursday Market Preview: The Bears Are Firmly in Control

Ouch, the Dow closes at its lowest level since 2003. There were several reasons including:

1. Fears that a bailout of the key auto sector will fail to pass through Congress. Shares of the big three are trading at levels not seen since 1942. The difference being that they were a buy then! With the kind of crassness not seen since AIG(reeds)'s (AIG) spa trips, we learn that the big three automaker CEOs flew private jets to plead for public funds.
2. The U.S Semiconductor Industry Association expects 2009 chips sales to fall 5.6%. This news clobbered the NASDAQ.
3. The now non-TARP for banks has let them again be saddled with all those toxic loans. Financials were down 11.5%. I feel Hank really dropped the ball on this one.
4. The housing market is showing signs of RENEWED weakness.
5. Credit markets are weaker for corporates but government bonds are rampant as risk aversion rules.

Today’s Market Moving Stories

• The FoMC (Federal Open Market Committee) minutes are usually a dull enough read coming as they do well after the event. But last night's was quite the exception, showing that deflation is once again a significant concern. In the most dovish and grimmest set of minutes I can recall they signalled that the Fed stands ready to cut rates again from 1% as they have slashed their outlook for growth in 2009. Separately Fed Vice Chairman Kohn said that the economy is very weak and though the risk of deflation remains small it was important to be aggressive in getting ahead of any such risk. Zero Interest Rate Policy (ZIRP) beckons.
• In other central banker news, BoE deputy governor Gieve chimed in with more glum tidings saying that “advanced economies are only at the early stages of recession” and hence policymakers must “be ready to take further action if required”. Looks like the various central banks are continuing to warm us up for a hefty dose of seasonal rates cuts in December then.
• ECB council member Nowotny, in the FT, is urging the Federal German government to adopt a far more ambitious (2% of GDP) economic stimulus package. In keeping with the dovish theme he further opines that tumbling inflation “obviously gives room for further measures”.
• Staying in the Fatherland, the country’s biggest state-owned bank LBBW (Landesbank Baden-Wuerttemberg) is said to be seeking as much as €6bn in capital and €30bn of guarantees from the government. Meanwhile the Italian banking association is in favour of their government's plan to use convertible bonds to help shore up dwindling capital ratios.
• It’s worth noting the dire performance of Citibank’s (C) share price in recent days. Just 4 days ago it traded above 10 bucks; it’s now around $6.60. The market has lost confidence in the blundering CEO. The death spiral drop in its stock seems to be indicative that the artist formerly known as the largest bank in the world is about to go the way of Wachovia (WB) or AIG(reed). Citi is now only the 5th largest bank in the US, oh how the mighty have fallen. They’re not dancing now.
• Note for financial historians. The dividend yield on the S&P 500 closed above 10 Year Treasury bonds for the first time since 1958. There are rumours of large S&P put positions out there and you know how the market loves to have its fun. For now the bears are firmly in control.
• Anecdotal evidence is beginning to filter through on troubles with trade finance. Now this is the very nuts and bolts of world commerce. Sure, trade finance is dull and it’s where you send the recruits who couldn’t dream up sexy time bomb products to fleece customers with. But trade finance is the very lubricant that makes that ship land with those toys for Xmas you see in Hamleys. It’s not just pesky pirates on the high seas that are the problem (where is Steven Seagal when you need him?). It’s more worries about escalating credit and counterparty risk, evaporating trust about ability to pay, and trade finance drying up that is really showing signs of hurting some of the bigger Asian export orientated economies.
• And it's amazing what you can get for $10 these days.

Data Today
In the European morning we get a look at German PPI (more good news for the ECB?) and UK retails sales at 09.30 GMT (which though an erratic series should show a sizable drop).

The afternoon sees the usual Thursday weekly jobless claims (recall the huge jump to 506k in this number last week) and continuing claims at 13.30 GMT. Later at 15.00 GMT the Philadelphia Fed area index and the leading economic indicators are released.

Disclosures: None

Comments

[Jimmy Lathrop:]

Isn't it interesting that the congressional mandate to provide affordable homes to anyone without six months of credit delinquencies through securitization of MBS resulted in a collapse of trade credit? We got the redistribution of wealth that we wanted! So why is everyone so unhappy? Oh that's right. Instead of some people being broke, now we're all broke. Misery loves company I guess. Bill Rogers is right. When you hear about Cabinet members secreting their cash into overseas markets, we have officially become a third world nation. Someone should set up some prop bets on which administration member is going to be caught hiding cash to avoid taxation You have until February to make your picks, so start research.

2008 Nov 20 07:37 AM

[investor88:]

Agree currently bears in firm control. At some point maybe Dow 7k there will be a reflex rally as always, in which case we go for a trade up. Traders will be kept busy down first then up. Does not appear to be a time to dig in with big long positions never mind this guru this and that investing legend saying "cash is trash" - it is survival first.

2008 Nov 20 09:06 AM

[Louisa:]

In light of all this awful news about the markets, I am wondering if anyone has opinions/advice about alternative investments? I just started working with this group of IPs out of Germany, the MORE Fund, which is an affiliate of Innoveas AG (innoveas.com) and they seem to offer some great alternatives to the continuously failing US markets. I am trying to learn more about alternative investments in general, any thoughts would be appreciated!

2008 Nov 20 10:48 AM

[mycousinearl:]

The sky is falling! The sky is falling! Quick, everybody go short!

2008 Nov 20 03:45 PM

[Smarty_Pants:]

On Nov 20 10:48 AM Louisa wrote:

> In light of all this awful news about the markets, I am wondering
> if anyone has opinions/advice about alternative investments?
> I am trying to learn more about alternative investments
> in general, any thoughts would be appreciated!

Tangible and productive assets with good returns will be the things to find.

One alternative you may find interesting:

www.tropicalhardwoods..../

2008 Nov 20 03:53 PM

[ATHELSTAN:]

I fear more than just a melt down of markets and banks. Now we are facing the strong prospect of a societal paralysis, plunging prices,a rapid increase in business failures, and anarchy manifesting itself in food riots and rebellion. On a scale which will make the 1960s city burnings and lootings appear as a Sunday picnic.

2008 Nov 20 05:49 PM

[bluehorses:]

Time for a taxpayer revolt. Enough of this sh**! Community organize businesses to not forward withholding to the government, that places the shoe on the other foot a gives citizens a commanding voice. More power to the people in a government that has been administered by grafters.

2008 Nov 20 11:19 PM