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Thursday 11/20/08
11/20/2008-BANKS CRUSHING INDEXES at 04:28 PM EST
Banks, particularly Citigroup, after today's selloff now represent just 11% of the SP500 value where they used to comfortably sit at 30%. Citigroup now is below the level ($5.00) where many mutual funds will have to divest them from their portfolios by law if they don't get their act together in the next 30 days. JPM sold off by 18% today, BAC 14%, so it wasn't only limited to Citigroup.
Volume over the last two weeks has been on the light side but today we actually saw it kick up heavily as the we settled on an 11 1/2 year low on the SP500. (Capitulation?...I won't believe it till I see it.)
We could keep right on going to 5995 DOW but even the biggest bears on the street aren't talking those levels right now.
It is still all about confidence and right now there is none. The LIBOR still is above any reasonable rate that would allow banks to begin to lend money and until they do we still remain in gridlock.
Paulson's speech today was a nice history lesson but did nothing to assuage investors..quite the opposite. He re-iterated the fact that he is essentially going to be hands off on any large deals, deferring to the incoming administration to tackle the problems in their own time and style.
The congress could not come to a resolution on the auto companies and it was obvious that while they want to do something the votes just weren't there, and Pelosi and company do not want to have another fiasco like the original TARP vote, particularly now that they have a majority in both houses. They can't afford to look ineffectual. Now, will there be some meeting of the minds during the congressional break and an emergency session brought together?...Probably, but without the certainty panic continues to spread.
As I have said this will be the best buying opportunity in a generation, but we still don't know where the bottom is, and there will be plenty of time to get in when the risk levels have moderated. Speaking of risk, the VIX today settled on its closing high of 80.06.
SP500 traders have staked out their positions for the expirations tomorrow morning and given the late day selloff the bias is to another weak open. The end of the day will be determined by the rollover buying in the options markets so we won't get the real picture again till late in the delay.
Oil cracked $50 today and looking at the charts doesn't show any signs of stopping there. I thought that would provide a psychological support level that would energize futures traders, but they are treating the commodities like they are even more toxic than the stock market right now.
Wednesday 11/19/08
11/19/08 Market Swoon to 5 1/2 year Low at 06:28 PM EST
A positive report for continued low oil prices and a lowered CPI...usually a fodder for a rally wasn't enough to keep markets from plunging throughout the day. Inflation is back under control. The commodity-produced inflation scare of this summer is long gone. The idea that higher energy prices will necessarily lead to broad inflation pressures is dead. The concern has actually shifted to deflation, with the idea that businesses will have a hard time mantaining profit margins. Lower energy prices and weak demand are leading to some large monthly declines in CPI for the fall months. CPI will remain in check well into 2009. The year-over-year increase in CPI stood at 4.9% through September, but plunged to 3.7% after the October data, and is headed even lower.
There are all sorts of reasons that can be given for todays breakdown, but who knows which ones are reality and which ones are simply excuses for a lack of understanding of the true underlying problems.
We got a support saving recovery at the end of the day yesterday but there was a 45 billion dollare redistribution of assets as BUD was removed from the Sp500 basket of stocks and all that money was portioned out to the rest of the stocks in the index.
Paulson's testimony before Congress regarding the decision NOT to buy the toxic assets of banks was probably in retrospect the right one, but to those investors who thought this was going to give Citigroup credibility and creditworthiness it meant that they were left with a sour awakening that Citi's bottom line would continue to be in doubt. As a result, a selling wave hit Citigroup driving the stock into mid single digits...A price that hasn't been seen since 1995 and no relief in sight.
Additionally Paulson essentially washed his hands of the mess and said that there would be no more major distributions until the new administration takes power in January. At the same time, of course he said and emphatic "NO" to using the TARP, now certainly going to be renamed with a new anacronym, as the bailout vehicle for the Big 3 auto manufacturers.
I really do believe that Congress will come up with something creative in the next couple of days to get them what they want whether it is the right thing to do or not. What makes sense would be some sort of restructuring such as the airlines have used for decades to stay in business, but I don't think it will be be that direct. This is the party of the Unions and they have already said that bankruptcy is not an option.
Anyway, that will play out in some manner which we have little input to and a resolution that will be less than satisfactory but will probably give the markets at least a temporary boost. If it wasn't expirations week, with today's break I would be calling for a continued drop down to 6000 DOW, but because of expirations there are a lot of shorts out there that are going to take their profits and that means buying back the stock giving a short covering rally. Whether that will last is up in the air and we will have to play this market on a day by day basis once we get through this week.
In terms of historical expirations, this week was typical with daily reversals. Tomorrow afternoon will be the setup for expirations on Friday and most of the trading during the day will be of little consequence.
Congress starts their vacations this Friday so it got me to thinking about the relationship between Markets and Congress....
A few years ago I found a fascinating bit of trivia that seems to be supported by a paper that you can download HERE..."Congress and the Stock Market"
I'll give you the short version....
As Will Rogers said:
"This country has come to feel the same when Congress is in session as we do when a baby gets hold of a hammer.
It's just a question of how much damage he can do with it before we take it away from him."
In the paper it notes that if $1.00 were invested in the DOW, in January of 1897, and withdrawn when Congress was "in" session ... (If you invest in the DOW when Congress is OUT of session, and in cash when it's IN session)....(noting Will Rogers' comment), then by the year 2000 you'd have a portfolio worth $216.10 and ...
If you only invested when Congress was in session and went to cash when they went boondoggling on the other hand...
You'd end up with $2.00
Markets love it when Congress cannot enact new laws, pass new taxes, or spend your money as evidenced by this phenom, so with Congress away we dispense with any risks that would offend voters.
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