Thoughts on Friday's Market
You all know I have been an extreme economic skeptic since I started the blog. But today’s market felt something like the classic capitulation than only comes when the stupid players are selling everything. Stupid people come in two classes. First, those who are not paying any attention and wake up to a quarterly retirement account statement and realize they are down 40% for the quarter! Like this idiot from Hollywood who just started selling his banking stocks.
Michael Cerenzie, a film producer, told The Times he had been selling out of his million-dollar position in banking stocks and was looking to invest in companies specializing in natural gas and energy.
“This isn’t going to come back,” he said of the recent stock market losses. “This is going to be a long one. We are not going to see returns like we did in the past.”
And second group is the over-leveraged hedge funds who have $billions of redemption demands and $billions of margin calls. That’s why Chevron can be bought at a P/E of 6.3 and a yield of 3.6%. (It’s not like the oil business is going away next year). The mutual funds and hedge funds have sell stocks to raise cash. But at a certain point that oversold condition ends. I feel like we’re close to that end in that hedge fund investors had to inform the funds of redemption amounts by last week.
Finally at the end of the day they managed to close out all the Lehmann Bros. Credit Default Swaps. And they were successful in clearing $300 Billion of CDS and all the insurers put up the necessary collateral. So a defacto date certain clearing systems can happen. One last thing, my guess is that more than $200 billion are in offsetting pairs of CDS that can just cancel eachother out.
If the G-7 ( Wy is this not a G8 Meeting?) can come up with some coordinated promises under the Gordon Brown (What a comeback!) plan for government investment in Banks for preferred shares, then I think a healing can begin.
The market in the States has decided Obama will be president (look at David Brooks column today on how the Sarah PalinRepublicans have driven all the smart people out of the Republican Party). The market is going to be pleased with a Barack victory, because it will represent a chance for a total makeover of Brand America, which has so been trashed by the Bush Era. Warren Buffett, being so strongly for Obama helps Mr. Market follow the Sage of Omaha.
Barack has just got to continue the positive–”We can solve this together.” message. The market is just about ready to help him in the close.