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Mark's Market Blog

11-21-08: Earthquakes and Bear Market Rallys

By Mark Lawrence

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In '78, there was a Caltech professor who predicted a major earthquake - 6.5+ - for the Northridge area. About 5 months later, late at night, I was sitting in my office and felt an earthquake, so I went over to the Geology building to have a look at the seismometers. It was apparent that this was a small quake, perhaps a 4.5. As I was looking, five guys come running in still zipping up their pants. I grab one, "Is that the professor who predicted the quake?" "Yes!" "Is this his quake?" "We don't know yet, but if nothing better comes along it might have to do."

About a month ago I was calling for a bear market rally. Well, it turns out we actually had one, at least by the standards of the story above. See the cute little lump running from about October 26 to November 20? That's going to have to do.

S&P 500, Last 90 days, 11/21/08

The markets are now down 50%, an historically unprecedented drop. I blame the Republicans. You have to go back to the Great Depression to find anything like this. I suppose that means we should all get ready for soup lines, and prepare to make our living selling apples. If only Wall Street brokers would start jumping out of windows. . .

S&P 500, Last five years, 11/21/08

Late today, Obama picked Timothy Geithner as his Sec. Treasury. Geithner is currently the President of the NY Federal Reserve Bank. This background makes it intensely likely that Geithner will prove to be an inflation hawk and against budget deficits, and respect the autonomy of the Fed. My kind of guy. He will also likely be more focused on banking and finance than on the economy as a whole; I don't know what to make of this. Stocks leapt in the last hour of trading today due substantially to the appointment of Geithner.

S&P 500, week ending 11/21/08

Hillary has reportedly accepted as Secretary of State; I take this as a positive as she'll be out of the country a lot. Our last female Sec of State was Madeleine Albright under Clinton. She was a loose cannon, threatening people with the Army on a routine basis. Albright once said of the Army, "Why are we paying for it if we're not going to use it?" I expect Hillary will continue this fine tradition. Bill Richardson will become commerce secretary. I'm not clear on who or what he is, but then I'm not clear on what Commerce does either, so that's appropriate.

Yesterday Waxman unseated Dingell as chairman of the House Committee on Energy and Commerce. Dingell is from Michigan and a big proponent of the auto companies, always finding a way to help them avoid fuel standards and such. Waxman is a wild-eyed California green who will want a windmill in every back yard and everyone driving a 1200 pound car that gets 45 mpg and gives its driver a 70-30 survival chance in a head-on collision with a bicycle. Obama vowed in his campaign to shut down the coal industry and raise energy prices, and Waxman is a great first step in that direction. The US gets about 50% of our electricity from coal, so you can expect your electricity rates to go up real soon now. Coal is pretty much free, which greens hate as it makes "alternative energy" look bad. Their solution is to put huge taxes grant carbon offsets on coal and oil to make alternatives look good competitive.

GM briefly touched $1.70 on Thursday, as it appeared there would be no bailout for the remainder of this year. At this point, the basic fact about GM is that without a government loan of some sort by about March 1st at the latest, they will be bankrupt and the stock will be worthless. Just after lunch there was news that a deal was on, four key senators had agreed. Stock price duly shot up to $4. A bit later it turned out to be a false alarm, stock dropped to $2.90. Congressional leaders blamed the breakdown on the auto companies and told them to go home and prepare a business plan within two weeks. Congress is adjourned now for a well-earned rest (it's hard work trying to destroy the US market). It appears there will be some kind of compromise loan put out in early December, but it will not be nearly enough money.

GM, week ending 11/21/08

GM is currently losing over $2B per month, and no one is forecasting that 2009 will be a good year for car sales. So it's not hard to imagine that GM needs $15B - $25B to make it to 2010, when the new UAW contract with two-tiered wages kicks in, when the Volt is released, when the recession is over and people get back to buying cars and trucks. Chrysler will need about $10B - $20B, and Ford about $8B - $15B, total about $50B for the three companies. In December the compromise will almost certainly to be to convert about half of the $25B earmarked for design and production of new fuel-effecient cars to go straight in as loans. GM's share will be about $5B. The Democrats will have to add in another $25B roughly next February or March, and the way I see it yet another $15B or so roughly next September. The whole fight is about the UAW - the Democrats want to bale them out and save union jobs, the Republicans want to push Detroit into bankruptcy and bust the UAW.

Interestingly, this auto drama is currently driving the stock market. Every time people think there will be a bailout, all stocks shoot upwards, as it's perceived that we have the worst of the financial crises behind us. Every time it looks like a bailout won't happen, people hunker down for 2m-3m in layoffs and a recession that lasts well over a year and sees unemployment hit 12% - 14%. The markets basically dropped 15% this week because the Republicans want to crush the UAW.

Facing the likelihood of "significant weakness" in the economy, some Fed officials suggested "additional policy easing could well be appropriate at future meetings," but worried that the effectiveness of previous rate cuts "may have been diminished by the financial dislocations, suggesting that further policy action might have limited efficacy in promoting a recovery in economic growth." Virginia Federal Reserve Bank President Jeffrey Lacker said Wednesday "My reading of current conditions is that bank lending is constrained more now by the supply of credit worthy borrowers than by the supply of bank capital." This is FedSpeak for "We're in a liquidity crunch and all we've got left is our golden voices. Please listen."

Quote from a fund manager: This is worse than a divorce. . . I've lost half of my net worth and I still have my wife. . .

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