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This is where I make personal comments and observations about the markets and my crazy life.  These are my personal comments and should not be construed or perceived as an investment recommendation or investment advice. By accessing my personal blog you are agreeing to my terms and conditions located here:  TERMS OF SERVICE

September Madness - Who will be the bracket winners?

September Madness - Who will be the bracket winners?

So when did this mess really begin? I would say the cartoon below really hit the nail on the head.


I noted in my last blog entry that the market might enter a base building process and that I was not expecting a blast off from this level. I also noted that if this is in fact the worst financial crisis of our generation as many pundits are calling it then additional potential weakness was probably in order at some point. It appears that we may be on the verge of the second scenario as the market could not hold onto the gains generated from anticipation of the "Bail Out/Rescue Plan" and sold off into the close. Quite  bit of technical damage has been done to the market and while we may see some intermittent rallies the chance of sustainability seems to be waning.

I thought today I would list some of the positive and negative aspects of the current market to begin to ponder what will be the key items to watch.

Credit Conditions:


The chart above shows how much liquidity is being pumped into the system through various channels. The negative is that these levels show the stress that is currently in the system. The positive is that this amount of liquidity could be a large catalyst once confidence is restored.

The chart below shows how much debt and leverage has grown. This is a serious problem and will take some time to work our way through but the markets have discounted quite a bit of this leverage as reflected by current equity valuations.


The ECB is showing signs of stress as well as the ranks are becoming restless and beginning to crack with the latest Germany backing deposits as well as a means to try and regain confidence. 

What else is on the radar... It appears investors are beginning to scrutinize ETN's and other structured products. See the link below. 

http://biz.yahoo.com/etfguide/080925/38_id.html?.v=1

The Muni market is also feeling the affects of tight credit and is starting to get the headline risk that I have been anticipating. As municipalities face rising costs there will be more news that will accentuate the current spread over US Treasuries offering investors what I believe will be a great opportunity to but good quality muni's at extraordinary cheap prices relative to Treasuries. Unlike our Federal government Muni's cant keep printing money and therefore tend to get their fiscal houses in order. Essential service and GO's will in my opinion be one of the best plays for 2009. It wont be fun and games at first but I believe patient investors will be amply rewarded in the high quality muni market.

Anecdotal Evidence:

One of the most positive signs that the market is close to finding some resemblance of a bottom/base building process is the cartoons that show up and when they show up. 

Here is the bracket winners so far (Click Link): www.dukejones.com

Anther sign is when an actress decides not to be the closing bell ringer for the NYSE due to the current conditions of the market (story here: http://tinyurl.com/53jd3e ), we are reaching levels of anxiety that usually come close to turning points even if they are intermediate turning points. 

So what does the future hold? Here is one potential review: A good tongue and cheek of what may lie ahead.  http://tiny.cc/jLzUm

The First of the Capitulation

Nothing like walking into a meeting with a market down 350 points and walking out and seeing down 700 points. Instantly you knew that folks in DC had to have screwed up. This entry is not to debate wether we should or should not have a "bail out" wait thats not it...I mean "rescue package" nope thats not it... I mean liquidity injection. This post is an attempt to begin to try and put some of this into perspective.  What did yesterday mean....

In a much too simple theory... 

The bad news, package or not we are probably in at least a mild recession within a bear market. The length of the recession will be determined by the ability of funds to generate enough liquidity to entice folks to risk assets again. The Ted spread has certainly been indicating that banks are not willing to loan to each other much less to the public. 

The good news, congress and main street are now beginning to realize we are all in the same life boat.  Something will get done and it might even be a better package then the revamped original (OK I am an optimist.)  However, the fact that sentiment is so negative has to begin to excite even the mild contrarian. Expectations are now so bearish that even a dead cat bounce might turn into a little excitement.  Yesterday's breadth was the worst since 1987 by my calculations with almost -20 to 1 decliners versus advancers. Yesterday was a Lowry's 90% down day as well. With a 6 standard deviation move in the VIX we got enough capitulation to create at least a decent backdrop to begin to build a base which is more of what I am expecting versus a blast off from here but again the role is not predict but to summarize possible situations and build a plan for how to profit from the eventual outcomes.  

For the sobering news...if this is fact the worst financial crisis since the great depression as many pundits have called it,  then based on history we could see more weakness at some point. If the Tech correction was almost 50% of the S&P then a "crisis" such as this could be potentially  as bad. Again, not predicting but trying to judge the risk to reward to evaluate the signs the markets offer in forming a game plan.


Prediction Hit and other observations

For those who have seen my market updates will remember that my one prediction for this year was that we would see another 500 point day in the market which was something we had not seen since 1987. I almost had the prediction met in January of this year as the futures were down over 500 but the Dow in regular trading never met that level. The reason for the prediction was that the level volatility in the markets had come off historical lows and was now progressing to higher levels which is a normal cycle as expressed by the old adage "High volatility begets low volatility and vice versa."  Of course the level in 1987 represented over 20% where as today it is under 5% however the psychological implications are interesting in their timing.

Unfortunately, I am only half right in my prediction as I said we would also have a 500 point up day as well.  Still have some time and the historically strongest season is still in front of us... but I am not holding my breath.


MER & BOA Observations:

The spread between the announced deal with ML and BOA is very interesting. The spread currently as I write this is around $3.50 with a high of around $5.00. Usually that size spread is quickly Arbed away so it makes me wonder if liquidity is that scare and tight or does the market think that deal may not go through as currently priced?

Click the link below for Goldman's take on the merger. While its nice that they took ML off their sell list they did at least acknowledge ML as the preeminent wealth management franchise.

Goldman Sachs Research Piece

Financials in general:

I think we are getting close to the lows in financials but I don't think we are just there yet. While we have seen some selling I would not call it capitulation as the levels of activity and volume did not seem to evoke enough fear or turnover. 


Municipal Observations:

With the consolidation of one major player and the liquidation of another major player in the muni market spreads and bids will more than likely widen to customers. If you thought bonds were hard to come by before I am guessing it will only get worse with less liquidity. Muni's do appear very attractive and still seem to offer some of the best risk/reward ratios but the near term may still be volatile. The market has begun to price in a move down in rates by the Fed and add that to potentially higher tax rates makes muni's pretty compelling.


 

 (copyright 2008, duke dot jones at gmail dot com)