Daily Investment Interpretations
October 6, 2008
(10:30 p. m.):
The Asian markets are down again tonight but so far, by 1%-to-3% rather than
last night's 5%-to-6%. Market expert Jim Cramer today, speaking to serious stock
traders, warned them to take out of the stock markets any money they might need
for the next five years: Cramer: Dow Could Drop Another 14%, Oil's Going to $50.
I interpret that to suggest the possibility of a long, severe recession or even,
conceivably, a depression. Here's another call for an intermediate-term rally: Time To Go Long, For A Short
The author recommends the Profunds ultra-S&P 500 ETF, SSO.
Gold is still available, although at prices that tend to run a bit on the high side (for popular items).
2008-10-6: Oil ended the day at $87.81 a barrel, down $6.07 for the day. The Nasdaq Composite closed at 1,862.96, down 84.43. The Dow at one point had 806 points, but the markets rallied toward the end of the day, and the Dow closed down 363.35. The S&P 500, off 80 points at its low for the day, ended at 1,056.89, down 42.34 from its opening value. The VIX reached 58.24 before closing at 51.7. Beginning an hour before their close, the markets rallied smartly, regaining about half their maximum daily losses. So far, there's been no explanation of what turned stocks around... in order, I'm sure, to allow the big-money investors to load up on stocks before the rest of us were told why we might want to participate.
It has just come out that talk of global intervention boosted the market in the last hour of trading U.S. stocks end off lows on talk of global intervention. In dealing with this crisis, the U. S. is said to have advantages over the European Union in that the Treasury Department, the Federal Reserve (central bank), and the White House are better able to coordinate their efforts to combat financial problems, whereas in Europe, the machinery isn't yet quite as closely knit to support such an integrated approach.
Apparently, the Fed and the Treasury made a mistake in not rescuing Lehman Brothers. The problem is that many other institutions owned shares in Lehman Brothers. When the Primary Fund announced that it couldn't quite return $1.00 per $1.00 invested, it sent a chill up the spines of investors all over the world, and started a wholesale flight from stocks, corporate bonds, and money market funds into gold and Treasury-bill funds. But money market funds invest in commercial paper. With the flight of capital from conventional money market funds, the market for commercial paper dried up. And commercial paper is the grease that lubricates the gears of commerce. Also, like banks, conventional money market funds are partially backed by mortgage-based securities (collateralized debt obligations) in an effort to "juice" yields. And banks are afraid to lend to each other because banks are in shaky shape and are going bankrupt.
The grief is worldwide, with banks failing all over Europe. It looks as though deflation is coming rather than inflation: Warning of 'deflationary bust'. This will mean that asset prices, including the price of gold, may fall. (Gold might be a special case because of its value as a security blanket.) One might ask: how can we have deflation when the world's central banks are printing up all that money? The answer lies, I assume, in the "velocity" of money. If the Fed were to create $100 trillion (only the U. S. Fed can create the world's reserve currency: $) but were to keep that money out of circulation, it would have no inflationary effect because it would be unavailable. Money is a medium of exchange, and how inflationary it is depends not only upon how much money is available but also upon how rapidly it changes hands... thus, the "velocity" of money. Right now, the Fed is making beaucoups out-of-thin-air dollars available to banks, but the banks aren't lending this money out but are hanging on to it in order to beef up their reserves. Consequently, for practical purposes, it might as well be sitting in Treasury vaults. If there is a thaw in this credit freeze and the money begins to flow again from bank to bank and from bank to business entity, then the Fed will have to move quickly to reduce the money supply to control inflation.
This is a crash in slow motion.
What should you do now? Here's an interesting article by Todd Harrison: Random Thoughts: Capitulation Now? and another that suggests the possibility of a coordinated rate cut on "Turnaround Tuesday": Random Thoughts: There's a Sale at (for) Pennies!.Things got so bad today that you knew the world's governments are going to step in soon and take some steps. And when they unpredictably do, then at least temporarily, markets will go up. And that's a time when you'll want to cover your bets that the markets will fall further.
Mr. Harrison seems to be entertaining the idea of a tradable 10% to 15% rally before the markets swoon again. What I did today was, first thing this morning, buy enough QID (the ultra-inverse exchange-traded fund for the Nasdaq 100) to at least partially offset the mutual fund losses that I expected to take at the end of the day. Then this afternoon, when the market was near its bottom, I bought 50 shares of Vestas Wind Systems. Vestas has been running $132 a share recently, having doubled from the $65 a share I paid for shares in June, 2007. This afternoon, I was able to pick up my 50 shares for $71 a share. In the meantime, Vestas has been performing like an Olympic gold medalist, with various wind turbine contracts coming its way. In addition, last Friday, U. S. wind turbine subsidies were renewed and expanded. I also bought 200 shares of Chinese photovoltaic company, Suntech, for $28 a share--their lowest price in almost two years. Thirty-percent solar tax subsidies were extended for eight years, and their $2,000 cap was removed. Morningstar has given them a four-star rating, and has recently lowered their fair market value from $80 a share to $70 a share. In the afternoon, as the markets turned up, I sold my QID for a small profit and bought QLD instead. I didn't make much money on these transactions, but at least they were slightly profitable, and hedged me against further losses. I bought these alternative energy stocks because I'm convinced that they have a bright future. I'm willing to hold them for a while until the alternative energy market turns up again.
It was scary buying stocks when the VIX has reached the highest level in the last 15 years (10 points above any other high), but I gambled on what Todd Harrison observes in his articles above. You need to buy when you're afraid to buy--when it seems as though anyone in his right mind would eschew the stock market. (Of course, if we're heading into a Great Depression, then anyone in his right mind should eschew the stock market. These stocks could go a lot lower before they go higher.)
So what should you do? Well, one ploy might be to watch the market indices with an eye toward a sudden upwelling in stock prices, signaling a coordinated global rate cut or other major financial surgery, and then know what you want to buy. Todd Harrison suggests, among others, QLD).
A few good articles are linked below.
Will the Bailout Work?, Part 1
Will the Bailout Work?, Part 2
Op-Ed: The Second Great Depression-
Random Thoughts: The Unfreezing Process
2008-10-6 (6 a. m.): The cat is among the pigeons. The spot price of gold for delivery has been rising all (Sunday) night long, and at this moment (6:00 a. m. CDT), is up $26.80 from its closing price last Friday (10/3/2008). Oil has fallen below $90 a barrel on an expectation of slowing global economies. Asian markets are down 1.95% for the ^KLSE to 10% for the Jakarta Composite, ^JKSE., with an average loss of, perhaps, 5%. European markets are underwater 5%-6%. U. S. stock futures have been rising during the past hour (possibly because of U. S. Treasury intervention?)
These numbers are sizable, but they don't reflect an all-out panic.
Last Friday, we had an unexpectedly large loss in jobs: 159,000 Jobs Lost in September, the Worst Month in Five Years. The chart just below, taken from this New York Times article, shows the recent fall in jobs along with the job changes during the 2001-2002 recession.
On Saturday, I channeled a couple of leading economists: Princeton's Paul Krugman, writing for the New York Times, Paul Krugman: Edge of the Abyss, and Dr. Paul Krugman's Blog, and Harvard's Dr. Martin Feldstein, described as one of the top ten economists in the world, and the man who would now be the head of the Fed if it weren't for his age (83). Both of these economists are calling for a severe recession, if not Depression 2.0. Dr. Krugman notes that, "Normally sober people are sounding apocalyptic, with Joel Prakken of Macroeconomic Advisors saying that the world seems to be on 'the edge of the abyss'", (a phrase echoed on Friday by the Prime Minister of France, Francois Fillon, who says "the world is on the edge of the abyss".) Dr. Feldstein writes, The Problem Is Still Falling House Prices - Feldstein - WSJ.com. Both of these men are signaling worse outlooks than what's appearing on the nightly news--understandably, in view of the need to avoid panic in the streets.
What form would an economic meltdown take? Of course, I can only fantasize, but I'm thinking that there would be a massive sell-off on Wall Street of stocks and corporate bonds, a run for gold, and a run on banks... all of which has already occurred to a limited degree. On Thursday afternoon, I was preparing to buy a one-ounce U. S. golden eagle, but I didn't buy it right away. (I figure we probably won't ever sell it, but will keep it for Amber.) When I came back an hour later, they were no longer available. The U. S. mint will sell them to you, but you'll pay through the nose for them.
The problem with owning actual gold is (it would seem to me) that of getting your money back out. It costs you a premium over the melt value of your purchase, and in addition, you have to pay a rather steep shipping and handling charge (e. g., $19.50). Then to sell it, the buyer has to somehow authenticate your gold, and then is at liberty to dicker with you on how much he/she will offer you for your gold. You also have the problem of storage, and, maybe, insurance. A billionaire who can buy in bulk and store his/her gold in a bank vault can take advantage of economies of scale (not to mention hiring a precious-metals expert to handle the details), but we can't do that. One possibility might be a set of sterling silver, or a deal with a dental lab.
Here are a few more articles:
Fed Watch: Rate Cuts Increasingly Likely
Economist's View: "We are Going over the Edge"
"The Fires are Becoming More Frequent and More Serious"
Judith Warner: Waiting for Schadenfreude
Dr. Paul Krugman's Blog
Some of the readers' comments are as valuable as the articles themselves
What should you do? Several market watchers are calling for an intermediate bottom here, but the waters are treacherous. But if the markets rise at all, I would recommend either selling remaining stocks/mutual funds, or buying sufficient inverse funds to hedge against further market drops. For example, I own 50 shares of QLD, and I bought 50 shares of QID to offset further QLD losses. (In this example, I would probably be money ahead to sell both and hold the cash in a U. S. Treasury money market fund.) I also own some mutual funds that if sold, would fetch today's closing prices. Buying additional QID shares for today to protect my mutual funds from further losses would probably be a good idea, since I can't sell them until the close of business today.
2008-10-6 (8 a. m.): Gold is now up $28.80. The Fed is moving aggressively to try to avoid a meltdown. Europe is hurting because European banks got together this weekend but couldn't agree on any actions. As of this moment, European losses range from 2.66% on the FYSE 100 to 7.65% on the (Vienna) ATX. S&P futures are down about 22 points.