So it turns out BSC was worth just 1% of what it was trading for about a month ago – who is next?
Rather than casting you eyes about looking for the next institution to fail, let's think about the root cause of this problem as Congress seeks to fund Bush's latests budget by raising the US Debt Limit to $10.2 Trillion. When Bush took office, the US had $5.6T of debt and Clinton's final budget was off by just $18Bn with surpluses projected for the foreseeable future. I'm not going to get into the blame game as to who is responsible for nearly doubling our nation's debt in the past 7 years but let's just try and keep that in mind next time we pick a President as even the wealthy are now suffering from the extreme trickle-down economics of this administration. 40% of this nation's wealth is now held by the top 1% of it's people and this little downturn will move the bulk of that money to the top 1/10th of 1% as America holds a fire sale that only the most liquid will be able to take advantage of.
While we are but lowly minnows swimming in a very big pond, we've done our best to conserve our capital all year for just such an occasion so we're going to be in bargain hunting mode but think of this as the opening item of an auction, where we're just going to watch the action and see if there are any real bidders, continuing to conserve our cash for the items we really want.
In the weekend wrap-up's comment section, we discussed our Stop, Drop and Roll strategy and I urge people to read K1's section titled "Covering and Hedging I – Basics and Mattress Plays" as those mattress plays can really save your virtual portfolio on a day like today. Remember those plays are best if you are already covered with index puts, as I hope you were over the weekend and we want to play things very carefully overnight as we expect big Fed action tomorrow at the very latests so our goal should be looking for bargains and staying in cash until we see how the market reacts to yet another major rate cut.
The Hang Seng hit the 5% rule and closed there this morning while the Nikkei "bounced" back to being down "just" 3.7%. A 5% Dow drop would be 600 points and the Hang Seng is already down to 21,084, down from its high of just under 32,000 in October (down 34%) while our Dow is off "just" 18% (as of pre-market) from it's October highs. If we are going to play catch-up, we have a loooong way to go!
Europe is also off about 18% from the October highs and EU markets look off about 3% this morning so it looks like a retest of 20% is in the cards for the US/EU block while Asia is flirting with disaster as the next stop below 35% is very possibly a 50% retracement of the highs. When I predicted US equities would be the "least sucky" place to put our money in 2008, I simply didn't think it would give us the leeway to be down 18% and still be the winners…
Still, I stick with my premise that, from an international perspective, US equities continue to look like a safer haven than the markets in Asia or even Europe now as fears on the other side of the Atlantic are mounting that they are heading into a credit crisis of their own. As other markets feel the pain, their Central Banks are forced to bail out the markets, devaluing their currencies and improving their returns on dollar-denominated equities (but NOT commodities, which are more currency sensitive). This will set up some very interesting global dynamics in Q2.
October 29th, 1929 was a Tuesday and the Dow lost 12% that day, which followed a "Black Thursday" dip. Much like the Fed, bankers of the time delayed the invetable by having a big meeting but by Monday it was clear to investors that the big boys actually had no clue and there was a total lack of confidence in the market when it opened on Tuesday with virtually every order a sell and no buyers to be found. You don't "miss out" on a crash like that, the whole market gave up 90% of its value so just make sure you have cash as the opportunities to short will be endless if we are truly going to have a global melt-down.
This is not 1929 from a fundamental standpoint but a lack of buyers is a powerful thing and a crisis of confidence can knock 20% off this market very quickly. On the other hand, since $4Tn worth of global liquidity is being sucked up by oil each year ($3Tn more than in 2000) a simple downturn in commodity prices can reverse much of the damage that's been done to the global economy. As I wrote last week, there simply isn't enough money in the world to pay for $200 oil and it's these same financial firms that have hung themselves by investing as though commodity prices (including homes) had no upper limits.
Of course we can blame the declining dollar for part of oil's rise but the dollar is "only" down 40% since Bush took office, the rest of the 300% rise in the price of oil can be blamed partly on the 5% increase in global demand but, for the most part, it's been 7 years of a very loose money policy that has fueled rampant speculation in all forms of commodities since oil, gold and copper don't have quarterly reports to file and you can pretend those items are worth whatever you want them to be BUT, much like Bear Stearn's stock, you may quickly find out that they are only truly worth what someone is willing to pay for them.
We are already short on USO (the oil ETF) and will be pushing those bets and we already have puts on XOM but it's time to short the XLE as well because integrated oil is simply not going to do well in a collapsing economy and will do even worse if the oil bubble bursts so they make a great hedge if you need a put in your virtual portfolio. The June $72 puts are $4.15 and will probably open higher but we can sell current $70 puts against them if we bottom and get $1 back very quickly. This is an excellent put if you are under-hedged. My premise for this is that there will be a coordinated effort to shore up the dollar at this level, which can lead to a very quick 10% decline in oil prices.
DIA May puts follow the same logic, buy whatever is just out of the money on the way down and sell whatever put is at the money on the reversal and then we roll up. Keep in mind that we expect a sharp bounce back this week but there is NO WAY we are going into this weekend, which starts on Thursday, uncovered so let's start thinking about that now.
Deals are still getting done: The CME is moving forward with its purchase of the NYMEX for $9.3Bn, International Paper is buying WY's recycling business for $6Bn, DT is spending $4Bn to buy just 20% of a Greek telco, Air France is going through with the Alitalia deal and (LOL) JPM is buying BSC for $236M and getting $30Bn from the Fed as a bonus for being the first caller.
This is not what happens in a catastrophe folks! It is business as usual in much of the world and what we have here is panic, pure and simple but panic is a very powerful thing so let's run with the crowd, and not against it, for the duration.
