Market Follow-up Dated Dec 19 2008

Chrysler is Shut but not Closed.

Madoff is out on bail???? Did the judge give any thought to where the bail money would come from?

Blame the Arabs again, Its interesting that all the bad things are most of the time out side of the border. Like El Nino and the other Spanish name that I do not remember, and West Nile virus etc. but its always California sunshine and Kansa blue sky. We blamed Arabs for not producing enough oil when they were producing at capacity and selling to whoever wanted. However It wasn’t the actual crude but the oil futures that was in demand and has now put us in the past. The price mechanism for crude that is denominated in U.S$ is our creation not OPEC’s, and so are the hedge funds. Yesterday, in all eagerness we blamed OPEC again for being opportunist and divisive for curtailing 2 million barrels a day. Well what do you do when the bath tub is full? With oil inventories high to the extent that oil tankers instead of transporting oil have become floating storage tanks for crude, one held by pirates that markets couldn’t care about, what do we want OPEC to pump extra oil for? To pump it back in the ground? My call on Oil last week was premature as oil has come down since last week. There is currently $7 spread between January oil @ 35 and February Oil @ 42.

Fed did the right thing by aggressively reducing interest rates down close to zero, with the idea of easing credit and taking away any incentive for hoarding cash that fed would like to see it go back into the system. With treasuries bills giving close to zero and occasionally negative, the Fed can no longer purchase short term treasuries as there is no room for the yields to go lower. Purchasing Long term treasuries is not much of an option as it would flatten the yield curve taking away any incentive for the financial industry to lend. The Policies seem to be working as the LIBOR spreads have been narrowing and also we can’t be in a constant state of panic. With no choice of buying treasuries, the Fed will resort to buying other papers like Mortgage, Commercial paper and other kinds of instruments related to Consumer loans that will by-pass the banking system and come directly to the main street. Despite low Treasury yields, the Fed will not be issuing bonds as it would counter productive to suck money from the system. The Fed will have to resort to printing dollars to manage any lag between demand for currency coming from the stimulus and economy and the restricted supply from the financial institutions and funds parked in savings and cash. Many doubt the Fed's ability to manage the current crisis given the loss of wealth of 7.4 Trillion dollars and getting bigger. Much of the wealth destruction is of wealth that was created by financial engineering levrage that over-inflated values. What matters is Income generation and savings going forward. Its always better to have secured income and savings than to have wealth with no income. Even though that is the ultimate goal but then why do we keep working for more? I think the Fed will be able to achieve it here in U.S, but in a global recession many of the emerging markets do not have the luxury of dropping interest rates as they face inflation caused by fall in currency values. They will have to wait for the U.S to turn around to see their money supply increase from exports. Until then keep you investments in U.S as it will take the lead in recovery.

People looking for an opportunity to get into the market or tempted by the markets low value should consider that even though market is normally 6 months ahead, certain inevitables of a recession are yet to be seen i.e lay-offs particularly in Tech and corporate bankruptcies. Tech is mainly a gizmo for corporations as much as for individuals and kids. Companies are not looking at up-grading their technology while they are trying to save their capital. Nobody gets a security system installed while the house is on fire. Corporate Bankruptcies will occur as always with individual bankruptcies also the export earnings component of S&P 500 which at one point was 37% will shrink considerably due to deepening recessions in other parts of the world and strengthening dollar. My advice: Don’t be a hero unless you want to be.