Tiny Bubbles, Make Me Happy, Make Me Feel Fine

Sorry for the long delay in posting, but things have been a tad bit hectic here lately. Anyhow, last week was just as incredible in the up direction as the week before was in the opposite. Extreme volatility persists. With the election tomorrow, expect more of the same. It seemed today that most folks were sitting on the sidelines. I have been reading that a lot of traders are choosing to do just that as the market is too difficult to call. Add to that the volatility and people are holding pat, especially with the election. We will see if that holds true tomorrow as there was a fair amount of bad news today that is not yet impacting the market, it seems. You can just look at some Bloomberg headlines for a quick summary:

U.S. Manufacturing Contracts at Fastest Pace Since 1982 (worse than predicted)

Blue Mountain Freezes Withdrawals From its $3.1 Billion Hedge Fund (some hedge fund terms allow them to do this for more orderly deleveraging)

Viacom Drops 37% on Ad Drop (and that during record election spending - what happens next week?)

U.S. Car Sales Fall 32% to Lowest Total in 17 Years (GM sales down 45% and they are calling it the worst month in the post-WWII era. So much for employee pricing. It seems that we will all be auto company stockowners soon.) This is ugly -

http://globaleconomicanalysis.blogspot.com/2008/11/grim-auto-news-on-every-front.html

Circuit City to Close 155 Stores, Cut U.S. Workforce

Okay, it was not all bad news, but the news is more bearish than bullish, on the heels of our best week for stocks in many years. I was a bit surprised the market was so flat. I think people are pausing a bit for the election. Depending on how the election goes, we could see a temporary bounce or a downdraft. It depends on who wins. Right or wrong, Americans think that Obama is better for the economy and, no doubt, a win by him is somewhat built into the market right now. If McCain wins, the immediate market reaction may not be too favorable.

BRIC-A- Brac Under Attack

There has been a fair amount lately about the BRIC (Brazil, Russia, India and China) economies hitting headwinds (and who isn't). Obviously, if you are invested in their respective stock markets, this is an understatement. For Russia and Brazil it is more commodity oriented and for China and India it is more export (goods and services) oriented. Some are down more than the 79% the U.S. dropped during the Great Depression, but for the most part that is after some pretty astronomical climbs in the past few years, so all is relative. Nonetheless, those counting on the fast growing economies to support our export growth and provide the global economy with a soft landing are possibly in for a rough awakening. China, for example, has seen its growth slow to 9%, which sounds great but it is not when you consider the number of people there for which the country is trying to create jobs. And now the country may be facing its own liquidity/credit issues. Yet another bubble bursting. So many bubbles popping right now it sounds like Chinatown on Chinese New Year. Good thing China has $1.9 trillion in reserves:

http://www.nakedcapitalism.com/2008/11/china-faces-liquidity-crunch.html

For more on the BRICs generally:

http://www.bloomberg.com/apps/news?pid=20601110&sid=aZwI8vU6TNwo

Those with BOS (Balls of Steel) might be temped to go into these markets given the big drop, but some might be wary of more drastic declines if things turn nasty and some of these countries destabilize, which would be truly ugly.

Street Cred Report

The credit markets continued their eternally slow thaw for the most part, but all is not good in credit land. Banks continue to tighten lending standards on pretty much everthing and loan demand is weakening. After all, why borrow when you cannot make the payments and you know you will not get the loan. Oh, I miss the good old days when no one expected to be able to pay and the lenders didn't care if you could. Life is good in a bubble. They make me feel fine.

http://calculatedrisk.blogspot.com/2008/11/fed-lending-standards-tighten-loan.html

The Deficit Bubble

Seems like just the other day the federal deficit passed $10 trillion and they had to add another digit to the national debt clock. Oh, so far we have come so fast. That was last month's news - literally just a month ago. Now we are almost to $10.6 trillion. In case your calculator is lacking enough digits for the math, we have increased the national debt by just about 6% in A SINGLE MONTH!! It took us over over 230 years to get to $10 trillion and just one month to add 6%. That is how bad this crisis is and it is not showing any signs of ending soon. Yes, I think we will get through this in a few years but at great cost to our kids and grandkids. We have room to grow debt but the deficit is quickly approaching high levels as a percentage of GDP. Not where we want to go, but right now we have no choice.

http://www.treasurydirect.gov/NP/BPDLogin?application=np

The Bubble That Bursts in Vegas Stays in Vegas - Not

I went to Vegas a few months after 9/11 and it was good in terms of no lines, getting a lot of attention and good deals. Well, Vegas can be added again to your cheap vacation spots (your experience may vary depending on betting). No surprise given that the city with, formerly, the highest growth in the country has also now shown some of the highest foreclosure rates. If you vacation there, don't expect a lot of happy faces, though this time the sad ones will be those dealing you the cards.

http://suddendebt.blogspot.com/2008/11/busted-in-vegas.html

Housing Bubble, Chapter 3,413

The housing bubble seems to be the slowest popping bubble ever, and believe me it has a lot of wind to go, so why so much talk about artificially trying to put a bottom under it. While we can hope and pray a bottom is near, we will get there when we get there. Trying to support a false bottom, is just like asking for - well - a fake ass. Looks nice but doesn't feel so good.

There is a lot of political support for some housing price support, but we need to get to the bottom folks. Any false bottom is not a real bottom and we will only delay the final day or reckoning. Let it drop and drop fast. The faster the better. We only get a bottom when in fact we get to the bottom. Yes, support mortgage relief for those who can afford their homes at realistic pricing and realistic rates, push for logical modifications where it makes sense (though securitized mortgages for the most part cannot be modified much due to contractual restrictions), and put in place some government programs for helping people with negotiating modifications and making payments (where appropriate). Any program has to be designed to not support moral hazard, i.e. not get people to blatantly take loans they cannot afford and avoid helping those who were speculating. But the realm of help is limited. No pain no gain.

http://bigpicture.typepad.com/comments/real_estate_/index.html

VW Bubble

Was anyone else surprised last week when VW (yes the car company started in Germany during the Hitler days as the people's car) surpassed Exxon as the largest company in terms of capital. In case you have been in a coma for two years and have not noticed, all car companies are sucking wind. So why-oh-why would VW rise in such a meteoric fashion? Well, officials are apparently asking the same question.

I noted last week that Porsche is buying enough shares of VW to increase its share to 75%. This left a very small float (freely trading shares) in the company that the short (and curlies) could not cover. And so the stock climbed high and hard. Can you say Short Squeeze! (in full disclosure I made a host of money this year on put options, but that does not make me a big short fan. I have no put options presently and most of my retirement is in Treasuries. I too am on the sidelines it seems.)

And for the elections, may the best men and women win.