Can the VIX top 37 for the first time since 2002?
This was a very painful day. Thank goodness for gold, that hedge was working today even as the trusty SKFs were up a relatively dull $15. As I expected in the morning post, oil took off as well, closing up near $97, up 5% for the day (less than gold) after a fairly large net draw of 9M+ barrels in the inventory report. They’ve been telling us high oil prices were good for the economy on CNBC but we’re not seeing it today.
Copper made relatively no move, indicating the jumps in both oil and gold had nothing at all to do with improvements in global demand, just a search for something that would retain some value as the market collapsed and not even money market funds were safe (Reserve Primary Fund is down to .97 on the dollar).
Cramer says "Don’t push the panic button" but it seems like someone already gave it at least a nudge with even GS dropping 19% on the day. The Dow is down 7.1% for the week and all 30 components were red today led by AIG (-45.3%), JPM (-12.2%) and C (-10.9%). The Nasdaq finished down at the 5% rule at 2,098, not a good thing at all and the S&P was down 4.7% at 1,156, down 7.6% for the week. Things were bad enough that the SEC issued rules to curb short selling but they did little to cheer investors up and we closed at the lows of the day.
Europe dropped about 2% today and Russia, who’s market is in massive decline (57% off highs), halted trading for the second day in a row, just 90 minutes after opening so the rise in gold is not a US-only issue, everybody in the World is scrambling to find something that isn’t failing. "Forget about retail investors, all the pros are scared," says one broker. "People have no idea where to put their money."
"It’s unclear who is going to be a credit provider going forward, and if having fewer credit providers means higher costs of borrowing going forward," says Basil Williams, chief executive of hedge-fund managers Concordia Advisors. Investors tried to reduce their exposures to two more big players in the market, Goldman Sachs and Morgan Stanley. That sent the cost of protection on both Wall Street firms soaring to new highs.
Since the AIG rescue did not protect the bondholders, some AIG debt was selling off for 40 cents on the dollar a great deal compared to LEH debt going at .17 today. Getting out of MS bonds will get you .60 and GS is the reigning champ with bonds fetching .70 on the dollar – a vote of confidence in this market! Junk bonds traded up to 10.6% today while treasury notes briefly went negative (you pay them to hold your money). Ford had to pay 7.5% on overnight lending vs. about 2.25% normally. Even GE had to pay 3.5% to borrow money, well above the Fed funds rate (now 2%) that they usually pay overnight. Very crazy stuff.
Looking at the above clock we’d have to say we’re righ at the bottom, with people running to long-term treasuries, not neccessarily the best idea if government policies keep inflation stoked. Here’s a couple of ideas for parking some cash rather than keeping it in one of our very questionable banking institutions:
- BAC (OK, so this on IS a banking institution) at $27.20 (9.6% dividend) – They just picked up MER and their $400Bn M&A business (so far this year) as well as close to $1Tn in cash and investments in exchange for a bit of stock (20%). The combined BAC/MER is now the 3rd largest underwriter in the world with $5.3Bn in IPOs this year, and it’s been slow. Additionally, these guys are now found in the dictionary under "WAY too big to fail." It may be a while before they recover from absorbing MER but they are a great candidate for just buying the stock and selling calls while the premium is up here. The Oct $27.50s are $3.15 so it puts you in the stock for net $24.05, called away at a nice profit in a month if need be.
- Options are in such shock that you can also buy BAC stock and buy the 2010 $42.50 puts for $17.60, which puts you in the stock for $44.80 with no chance of getting less than $42.50 and you can sell the 2010 $42.50 calls for $2.90 to reduce your basis to $41.90 and simply collect your premium for 15 months although it might be worth the risk to just buy the stock and the puts and wait for a nice bounce before covering the long side.
PFE at $17.17 (7.1% dividend) – Anyone selling anti-depressents in this market should clean up! In reality there is a worry that the company will have pipeline issues and difficulty borrowing to buy more companies, which is essential for growth but, on the other hand, a lot of acquistion targets will be bargains and what few lenders there are will probably be happier lending to Pfizer than many others. There is no "sure thing" play like BAC but the Oct $17.50s fetch .80 so 22 sales like that and you have a free stock that pays dividends for the rest of your life.- PGH at $15.16 (16.4% dividend) – There has been a sharp sell-off in energy trusts over the price of oil and a possible change in tax status but these are monthly dividends and the tax rules don’t change until 2010 unless there is a big upset in the Canadian elections and a rule change. There are no really good hedges on this one but the dividend is .21 per month and you can sell the Oct $12.50 calls for $3 (.30 premium), which lowers the basis to $12.16 and you get the same .21 a month ($2.52 a year) for a 20.7% dividend less the cost of rolling the caller forward each month.
So there are still things to buy and we’ll keep digging around for opportunities in what is a very, very tough market. Even cash isn’t safe with the dollar dropping again and gold flying up – and that’s with the Fed standing pat on rates! Here’s a really scary chart from the NYTimes showing the $4 Trillion of lost market cap in the market (21%) since Oct 9th, 2007.
