After yesterday’s market disaster, it’s hard to keep the news neutral or positive. It seems like there are 30 pieces of bad news for the global economy and markets, and very few bright spots. Often when the markets are in despair, and blood is running in the streets, it is a signal to get bullish. I don’t know if blood is running in the streets yet, but the markets are certainly in despair. As bad as things feel, the S&P is finding some support at the same level it has hit four times in the past six weeks, 1120.
The sell-off this week has been eerily like the sell-off in the fall of 2008. The dollar and treasuries rallied, and correlations of everything else converged dramatically. Supposed non-correlated assets began to swoon as investors reached for liquidity. The hallmark of the 2008 sell-off was that no asset was spared in the decline, and correlations drove rapidly towards 1.0 and stayed there.
Libor in the EU has spiked to levels last seen in September 2008. Part of the Fed’s logic in ensuring liquidity to Europe via swap lines was to avoid a “Lehman like” liquidity crisis. Let’s hope that works.
Evidently I underestimated the market’s expectations of the Fed meeting that concluded Wednesday, because within a few minutes of their statement being released, the market started falling. The market was sitting at 1196 when the release came out, and now sits at 1126, a decline of almost 6%. In addition to Mr. Bernanke’s downbeat assessment of the economy, I think the real shock to the market was the apparent end to the Bernanke Put. The Bernanke Put, which was preceded by the Greenspan Put, has been the Fed’s propensity to loosen monetary policy well beyond what is needed by the economy whenever the markets swooned. The Fed’s prescription from this meeting, Operation Twist, was in line with expectations when apparently many believed the Fed would toss out a bigger lifeline.
Who has a worst board of directors, Hewlett Packard or Yahoo? It’s really close, but I’m leaning towards Hewlett. The former tech icon announced yesterday they will have their seventh CEO in the past decade. The only one that was successful leading the company, Mark Hurd, was fired in a scandal. The others were controversial choices when they were hired and none of them worked out, each one leaving the company in a worse position than when they took over. Now the company has announced they will have Meg Whitman take the role. Ms. Whitman is fresh off her loss to Jerry Brown in the California Governor’s race, and prior to that successfully led E-Bay.
FDX lowered guidance earlier in the week, citing weakness in Asia. The PMI in China was also weak on Wednesday. Combined with the comments of lower coal consumption coming from Asia on Wednesday, and a picture is emerging of slowing growth in the strongest economies.
A disturbing comment I heard this morning was that the world is in financial turmoil, and everyone is looking to the US for leadership. I really hope we have other options for getting out of this mess.
On their second try, the US House approved a bill to let government continue spending after next week. Senate Democrats are expected to block the bill, which includes $3.5 billion in FEMA funding to help with relief from the recent hurricane on the east coast. The offset included a $1.5 billion cut to a green-technology auto-loan program that has been under scrutiny after the Solyndra default last week. This gamesmanship is why I’m concerned when the globe is looking to Washington for leadership.
Moody’s cut the credit rating of Bank of America, Wells Fargo and Citigroup. Moody’s feels the government is more likely to let one of the big banks fail since the “risk of contagion are less acute.” After jumping on the announcement of Warren Buffet investing in the company, BofA’s (BAC) stock has continued its plummet and almost broke the $6 mark yesterday.
Speaking of banks, I heard Josh Rosner speaking yesterday about the impossible task of analyzing big banks today. He quipped that “if they are too big to analyze, they are too big to manage.”
This could finally be the weekend we have been expecting for the past two years, the weekend Greece defaults on its loans. I actually think the Greek default will help the markets when it finally happens.
It’s Friday, which means its football time, both high school and college. The best time of the year. But we can’t forget about the MLB regular season, which wraps up next week. The Wild Card race in the American League is really heating up, and with 6 games left the Red Sox are on the bubble, with the Rays and Angels are two and three games back respectively.
Have a great weekend
Ned
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