Suitably Flip

Breathe, Barney

Dude, seriously?

Yes, we want to lose you.

Well, Duh

Turns out there are unintended consequences when the federal government begins nullifying contracts and sticking its grubby little fingers into capital markets.

Hedge fund manager George Schultze says he may avoid lending to any more unionized companies after being burned by President Barack Obama in Chrysler LLC’s bankruptcy.

Obama put Chrysler under court protection on April 30 after lenders balked at a proposal giving them about 29 cents on the dollar for their $6.9 billion in debt. The investors said the president’s plan favored a union retiree medical fund whose claims ranked behind them for repayment. It was offered a 55 percent equity stake in the automaker.

Pacific Investment Management Co., Barclays Capital and Fridson Investment Advisors have joined Schultze Asset Management LLC in saying lenders may be unwilling to back unionized companies with underfunded pension and medical obligations, such as airlines and auto-industry suppliers, because Chrysler’s creditors failed to block Obama’s move. The reluctance may put additional pressure on borrowers seeking capital in the worst financial crisis since the Great Depression.
...
“It’s terrible precedent,” said Schultze. “The sad thing is it impacts the manufacturing sector and the companies that have legacy liabilities directly. It will be nearly impossible, or much more expensive, to get secured financing for these type of companies.”

(HT: Hot Air headlines)

Partying Like It's February 2009

Look kids, an 8-handle on the Dow.

Halfway through the trading day, the index is poised for its best close since February 9 (and more than 22% above the March 9 low).

Thanks, FASB!

Saving the Markets From Free Marketeers

Regrettably, Bush opened the door to this Alice In Wonderlandish reasoning when he said, "I've abandoned free-market principles to save the free-market system," leaving Joe Biden free to burrow a little further down the rabbit hole.

Vice President Biden, echoing President Franklin Roosevelt's famous admonition about saving capitalism from capitalists, urged world leaders on Saturday help "save the markets from free marketeers."

Biden made the remarks while speaking Saturday at the Progressive Governance Conference in Vina del Mar, Chile.

The assembled leaders "have to, in a sense, save the markets from free marketeers right now," Biden said in remarks released by the White House.

If we slide much further into the abyss of central planning and wealth confiscation, we may need to save democracy from the Democratic party.

Mere Hint Of Reduced Uncertainty Enough To Extend Huge Wall Street Rally

If the market abhors uncertainty, then in the current political climate, the market pretty much abhors life itself.  As we've cruised through countless versions of TARP, TALF, and trillion dollar guesses about both how to stabilize the economy and how to push through unprecedented social programs under the guise of economic stabilization, the markets have responded predictably, with multi-thousand point slides in the Dow and stock valuations rooted not in economic fundamentals, but an ugly mix of fear of guessing at what the federal government's next guess might entail.

Yesterday, with the (seemingly unremarkable) one-two punch of a surprise profit from Citi during the first two months of the year and an indication that the uptick rule would return, we saw a gargantuan broad-based rally.  Many predicted this "bear market rally" would prove fleeting, possibly giving up a significant portion of those gains in the following session.  (And just 90 minutes into the trading day, that could still come to pass.)

But so far, the major indices have all managed to push higher today, following comments by Treasury Secretary Tim Geithner last night that:

...he wanted to make it "compelling" for banks to cleanse balance sheets of toxic assets and in coming weeks would set up details for financing bad asset sales.

If that's considered incremental certainty about the bank stabilization plan, then it illustrates just how opaque things had become, thanks to the barrage of hastily devised and jettisoned plans, not only to address the crisis itself, but to rewrite the rules of how the American economy is permitted to function.

Don't get me wrong - I'll take it.  Thanks to the 1.5-day rally, the Dow is off a mere 16% since the new administration took office, a significant improvement from the 21% decline we'd incurred 36 hours ago.

Increasingly Unreliable Private Employment Report Worse Than Expected By Those Who Still Lend It Credibility

I still take note when ADP releases its payroll report, but given its modest month-to-month predictive powers vis a vis the Labor Department's employment figures, it's become little more than a numerical diversion.

So, let's get to it.

The market expected to see a reduction of 630,000 jobs in February (versus a revised loss of 614,000 in January), but ADP pegs it at a considerably worse 697,000.  That makes the 13th consecutive month of job losses and the worst decline of the decade.

Despite the sour number, the market's in positive territory (I know, get the kids, they'll want to remember this), but after 5 days of murderous selling, who can blame it?

It oughtn't be long before we're served another spoonful of recovery sugar (like this, perhaps) to help the market go down.

40 Days Of Hopenchange

After 40 full days on the job, the Obama administration has achieved a singular feat - namely presiding over a 17.1% slide in the S&P 500.

Ford came close, as the combination of a Presidential resignation and the latter stages of a severe oil crisis and market crash dogged the early days of his administration with a 16.99% decline.

But with today's intraday market slide, Obama is now poised to take top honors.

Presidential Address Pick'em

The Dow Industrials have shed 10% over Obama's first 5 weeks in office and more than 25% since Election Day.  It seems that each time he or a member of his economic team takes to the podium, the markets descend into deeper despair.

Tonight at 9 pm ET, the President will deliver a daunting 50 minutes worth of malaise-infused oration, replete with promises of sweeping tax hikes.

Your predictive challenge is simple:  When the U.S. markets open Wednesday morning, how exuberant or suicidal will the reaction be?

Update:  If you said "Down 0-1%" (which just 6% of you did), congratulations.  With the only mild declines in early trading, the post-speech action outperformed the expectations of 85% of respondents.

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Stimulus Bill Sedates Market To Lowest Levels Since November

With the exception of November 21st, most major indices are now lower than they've been in six years. The Senate having voted in favor of the stimulus bill's conference report late Friday night, this is the first opportunity U.S. markets have had to display their resulting glee.

In the six weeks following the November bottom, stocks actually mounted an impressive recovery.  By January 6th, the Dow Industrials, S&P 500, and Nasdaq had shot up 19%, 24%, and 26%, respectively.

Alas, that was the day the stimulus bill was introduced in the Senate and there ended the rally.  In the weeks since, we've given up the bulk of those gains.

Update:  Michelle notices a similar phenomenon.

With Stimulus Like This, Who Needs Malaise?

In case you hadn't heard, 2009 has thus far been a bad one for stocks.  Piling onto the sharp declines of the second half of 2008, the S&P 500 has shed another 8.5% year-to-date.

All the while, the President-elect-cum-President and Congressional leaders have been touting the idea that a massive pork package (now tipping the scales at a true cost of more than $3 trillion) would cure our economic ills.

As the bill larded through the legislative process, ultimately passing the House despite having only single-party support and bi-partisan opposition, and scraping through the Senate with nary a vote to spare, the market gradually came to accept the inevitability of its enactment.

It's perhaps no surprise then to see how well the market downdrift has correlated with the likelihood of stimulus passage.  Using Intrade's "Stimulus passes by March 31" contract as a proxy for the consensus likelihood, we see the S&P dwindle more than 100 points as stimulus inevitability set in over the last six weeks.

Related:
Stimulus, Illustrated
Stimulus, Illustrated - Part II
Stimulus, Illustrated - Part III

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Another Reason For Today's Blood On the Street

The major stock indices shed between 4-5% today, dragged down by financials, after a tremendous failure by Treasury Secretary Tim Geithner to restore market confidence as he introduced his new "Financial Stability Plan".

But TurboTax Tim wasn't solely to blame.

It turns out wholesale inventories fell by 1.4% in December, according to a Commerce Department report released this morning, twice the decline the market expected.

Why's that bad?

It also means the preliminary 3.8% annualized drop in fourth-quarter GDP will likely be revised downward. The preliminary number would have been worse, if not for a 1.6 percentage-point boost to the figure from inventory levels that now appears to be less substantial (the government estimates many of the December data points and revises the GDP figure as the actual numbers are tallied).
...
Revisions to fourth-quarter GDP following today’s report put the decline at something like a 4.6% annualized drop, according to Action Economics. Ouch.

As consolation...

Ironically, while that report was already the weakest in a quarter-century, a deeper negative at the end of last year could translate into less pain hitting growth in early 2009, economists say.

Even so, brace yourself for February 27th, when we have to look at the first revision to the 4th quarter growth estimate.

GDP Growth Considerably Less Awful Than Feared

The advance fourth quarter GDP report was expected to show annualized output growth dropping from -0.5% to a dreadful -5.5% in the most recent quarter.  Instead, it came in at a less dreadful -3.8%.

But...

[E]quity futures turned around from earlier declines, until, of course, it was revealed that the headline figure was basically a mirage.
...
The very thing that helped GDP in the fourth quarter — an increase in business inventories, by a $6 billion annual rate — will hurt in the first quarter, as reduced demand forces businesses to pull back and cut back on inventories. That realization caused a turnaround in stock futures, and caused bond yields to fall as investors moved back into fixed income.

Dr. Kenneth and Mr. Ken

Is The Wall Street Journal pixeltorializing?

Columbia Journalism Review notes a stunning evolution in Bank of America CEO Ken Lewis' stipple portrait.

Overnight, he went from neatly coiffed, even-tempered gent...

... to deranged, bloated, usurious baby-eater.

What happened between those two consecutive issues going to print?

Bank of America Corp. reported a fourth-quarter loss of $1.79 billion Friday and went on the offensive to answer critics and shore up support for the giant Charlotte, N.C., lender during a time of crisis.

(HT: Portfolio.com)

Double Dose of Good Economic News Overshadows Job Cuts

Twin rays of unexpected sunshine today, as existing home sales for December swelled from 4.45 million to 4.74 million (versus an expected decline to 4.40 million) and an index of leading indicators jumped 0.3% (versus an expected decline of 0.3%).

Major indices leapt out of the gate with every sector trading higher, shrugging off announcements of tens of thousands of layoffs and expectations of more to come.

Investment Strategies For 2009

I got to meet the portfolio manager of the Congressional Effect Fund tonight.

I think he might be on to something...

Congressional Effect Fund		S&P 500
Through December 31, 2008	-     2.19%	-   34.20%
From Inception through January 12, 2009	+    0.32%	-   35.09%
YTD through January 12, 2009:	+    2.57%	-     3.57%
Change from Previous Day:	0.00%	-     2.26%

A Lovely 9-Handle On the Dow

The blue chips are poised for their best close in two months, if they can hang on to this rally through the final hour of trading.

Update:  Done.  With a bit of settling left, the DJIA looks to close around 9,035 (a gain of nearly 3%).

As noted by CNBC, the rest of the millennial milestones on the road back to Dow 14,000 (and the last time we saw each respective handle) serve as an ugly reminder of how swiftly we fell through each of those levels.

• 10,000: October 3, 2008
• 11,000: September 26, 2008
• 12,000: June 19, 2008
• 13,000: May 19, 2008
• 14,000: October 12, 2007

2008 Market Year In Review, 2009 Morning In Review

WSJ's MarketBeat blog has put together a list of statistics about the market action from the year that was.

Yes, the year was notable for its crumminess (and many of the stats illustrate the unusually steep and broad losses), but more dramatic - historically speaking - was 2008's volatility.

This one in particular hammers the point home.

18: The number of daily 5%+ moves on the S&P 500 in 2008.
17: The number of 5%+ moves on the S&P 500 between 1956 and 2007.

And much of that volatility was crammed into the last quarter of the year.

280.80: The daily average point range on the Dow Jones Industrial Average.
421.01: The daily average point range on the Dow Jones Industrial Average between Sept. 1 and Dec. 31.

One half day into 2009, we're looking at another triple-digit move on the Dow, but at least it's in the right direction.  The rally puts the index 18% above its November 20 low (up 1,400 points in six weeks).  The Nasdaq Composite and S&P 500 are each up 22% from their November lows, including their new year's pops.

The buoyancy is underway despite the year's first economic data coming in softer than expected, as the ISM Manufacturing Index fell to a 28-year low.  Nonetheless, not only is every sector trading higher, but basic materials and capital goods are leading the way.

Try Your Hand At Financial Punditry, Win Lunch On Barron's

Barron's has posted the questions for its 8th annual forecasting challenge, a 16-question multiple choice survey about the performance of financial markets in 2009.

A few rules: Only one answer per question is allowed, though for several questions, more than one answer may prove correct in 2009. No one from News Corp., our parent, is eligible to participate. The winner gets a one-year subscription to Barron's, and either lunch in Manhattan with me [Andrew Bary] or $100.

The questions (and my haphazard guesses) are available after the jump.

Email your answers to editors@barrons.com by December 31st.

My answers are in blue.  Bary's own answers are underlined.

1.) What total return will the Dow industrials generate in 2009?
A.) Negative
B.) Zero to 10%
C.) 10.1% to 24.9%
D.) 25% or more

2.) Which battered emerging market's equities will perform best in 2009?
A.) Russia
B.) China (Shenzhen)
C.) Brazil
D.) India

3.) Which S&P 500 sector will do best next year?
A.) Health care
B.) Consumer staples
C.) Energy
D.) Technology
E.) Financials
F.) Basic materials

4.) The biggest financial surprise of 2009 will be:
A.) The S&P 500 drops more than 10%
B.) Emerging stock markets soar more than 30%
C.) Gold closes above $1,200 an ounce
D.) The dollar falls more than 15% versus the euro
E.) Treasury 10-year note yields less than 2% at year end
F.) None of the above

5.) Which battered industry group will perform best in 2009?
A.) Casinos Tickers: (MGM, LVS, WYNN)
B.) Newspapers (GCI, NYT, WPO)
C.) Oil drillers (RIG, DO, NBR)
D.) Retailers (M, JCP, SHLD)
E.) Auto parts (JCI, MGA, BWA)

6.) Which CEO will no longer be at the helm at the end of 2009?
A.) AmEx's Ken Chenault
B.) Apple's Steve Jobs
C.) Citigroup's Vikram Pandit
E.) Bank of America's Ken Lewis
F.) Ford's Alan Mulally
G.) All will still be on the job

7.) Which winning stock from 2008 will do worst in 2009?
A.) Wal-Mart
B.) Amgen
C.) Family Dollar
D.) McDonald's
E.) General Mills

8.) Which of these companies will agree to be taken over in 2009?
A.) EchoStar
B.) Yahoo!
C.) Elect. Arts
D.) Alcoa
E.) Morgan Stanley
F.) Bristol-Myers
G.) None of the above

9.) Which depressed financial stock will fare best in 2009?
A.) Citigroup
B.) Morgan Stanley
C.) Legg Mason
D.) American Express
E.) Blackstone Group

10.) Name the top-performing stock in the Dow industrials in 2008 (including dividends).
Worth 2 points.

Citigroup
Alcoa

11.) Name the worst-performing Dow stock for 2009 (including dividends).
Worth 2 points.

General Motors
Home Depot

12.) Which asset class will do best in 2009?
A.) U.S. stocks (S&P 500)
B.) Junk bonds
C.) U.S. Treasuries
D.) Commodities (AIG/DJ index)
E.) Municipal bonds

13.) What will happen to the U.S. auto industry?
A.) GM is forced to file for bankruptcy.
B.) Ford files for bankruptcy.
C.) Chrysler merges with GM or goes bankrupt.
D.) All three auto companies file for bankruptcy.
E.) None of the above

14.) What will happen in Washington?
A.) Obama pushes through a tax increase on wealthiest Americans.
B.) Obama's honeymoon ends as his popularity plunges by year end.
C.) The estate-tax situation is resolved as Congress, Obama OK new law.
D.) Obama brings down U.S. troop levels in Iraq by 50%.
E.) Hillary Clinton no longer is secretary of state at year end.
F.) None of the above

15.) What will be the top-performing commodity in 2009?
A.) Gold
B.) Oil
C.) Corn
D.) Natural gas
E.) Soybeans

16.) Where will the 30-year T-bond end 2009? (It now yields 2.55%.)
A.) Under 2%
B.) 2% to 2.5%
C.) 2.5% to 3%
D.) 3% to 4%
E.) Above 4%

17.) Tie-breaker: At what level will the Dow industrials end 2009?

11,4xx
12,001

SEC Probing Several Other Potential Madoff-Style Scams

That's according to the obligatory person familiar with the situation.

The Securities and Exchange Commission is casting a wide net as it investigates the apparent $50 billion fraud allegedly committed by Bernard Madoff, and it continues to look into whether Mr. Madoff's family had any connection to wrongdoing, according to a person familiar with the probe.
...
The publicity surrounding the Madoff scandal has sparked a half-dozen SEC investigations into other alleged Ponzi schemes, the person familiar with the probe said. Investors are taking closer note of red flags such as promised returns that seem too good to be true, and some are bringing their concerns to the SEC, this person said.

Madoff Investor Commits Suicide

Apparently.

Authorities found Rene-Thierry Magon de la Villehuchet at 7:50 a.m. with no pulse at his office of Access International Advisors, located on Madison Avenue a couple of blocks from Rockefeller Center.

A French newspaper is reporting that the 65-year-old de la Villehuchet committed suicide. The New York medical examiner spokeswoman says it has not determined the cause of death yet.

Madoff is accused of running a $50 billion Ponzi scheme that wiped out investors around the world, with big funds like de la Villehuchet's being especially hard hit.

His $1.4 billion fund specializes in managing hedged and structured investment portfolios.

Seeing a significant portion of your $1.4 billion fund evaporate and contemplating the repercussions from your own investors would be sufficient to inspire a certain amount of dismay, but (without knowing anything about de la Villehuchet's fund vis a vis Madoff's), it's also possible that authorities had come knocking on the doors of Madoff's large institutional investors to suss out whether any outside parties were in any way complicit in (rather than sloppily blind to) the fraud.  If so, a whole different level of dismay may have befallen de la Villehuchet in recent days.

French business paper La Tribune obtained some relevant quotes, but it's unclear (to me, anyway) whether these are characterizations made by the police to the paper or excerpts from a note or statements made by de la Villehuchet himself, as recounted to the paper by police.

Mr. de La Villehuchet, 65, the founding partner and chief executive at Access International Advisors LLC of New York, was "unable to resist the pressures that followed the eruption of the scandal," according to the report.

He had tried "night and day" to recover funds that Access International raised in Europe through its $1.4 billion Luxalpha fund and had begun legal action in the United States against U.S. authorities, according to the report.

Oil Down $100/Barrel Since Summer

It's official.  Today's trading low of $47.36 represents a plummet of more than $100 per barrel for crude oil from its intraday high of $147.50 in mid-July.

Citi Field Redesign

In light of the federal government's decision to inject $20 billion into Citigroup and to backstop up to $300 billion of the bank's losses, the Treasury, FDIC, and the Federal Reserve are pleased to unveil a redesign of the new home of the New York Mets.

Previously christened "Citi Field", the new stadium's naming rights were purchased by the bank for $400 million in late 2006.  In the two years since, Citi shares (NYSE: C) have shed more than 90% of their value.

Market analysts are cautiously optimistic that this more representative re-branding of the stadium will help restore investor confidence in the financial giant and the banking sector generally.

Update:  Hey - the New York City Council stole my bit. (HT: JWF)

Reliable Investments

Okay, one real post today.

This is a vintage SNL clip that takes on renewed relevance today.

(HT: My Dad)

Market Stat Of the Day

Change in Dow from Bush's inauguration through election day 2008: -9.1% (10,587.59 - 9,625.28).

Change in Dow in two days following Obama's election (as of 1:15 pm): -9.3% (9,625.28 - 8,730.6).

Update:  Worst two-day plunge in history.

The Economy Was In the Pool. IT WAS IN THE POOL!

Even so, the shrinkage was less than expected.

Wall Street was feeling more upbeat Thursday after a government report showed the economy contracted in the third quarter by less than expected and after the Federal Reserve's second interest rate cut in a month. The major stock indexes jumped more than 1.5 percent, including the Dow Jones industrials, which rose 150 points.

The Commerce Department reported that the nation's economic output was the weakest since the third quarter of 2001, but it wasn't as bad a showing as Wall Street had feared. The department said the gross domestic product, the measure of all goods and services produced within the U.S., fell at a 0.3 percent annual rate in the July-September quarter, rather than 0.5 percent as expected.

Dow's 2nd Biggest Jump In History

With a gain of 889 points (10.9%), today's rally was second only to the 936-point jump two weeks ago.

Increasingly Feckless OPEC Tries In Vain To Prop Up Oil Prices

The cartel held an "emergency" meeting in Vienna today, at which they agreed to lower their collective production quota by 1.5 million barrels/day.

Even so, crude futures are off another $3 and change, leaving the price per barrel below $65 for the first time in 16 months.  Since the mid-summer peak, oil prices have now plunged some 56%.  That's certainly unwelcome news for petroleum exporting countries, but their latest attempt to manipulate prices by artificially constraining supply is only showcasing their inability to do so.

The problem of course is that there's no honor among thieves, when it comes to OPEC.  Try as they might to collude against net oil importers to their collective advantage, immutable free-market pressure to maximize profits leads to the member countries regularly cheating on quotas.

This is all very good news for those of us on the net consumption end of oil (and food, and retail goods, and services).  It may seem like a thousand years ago in terms of economic concerns, but you may recall that just a couple months ago, the stratospheric rise in oil prices was an enormous problem.  It was stoking inflation, choking off consumer spending, reducing corporate earnings, and threatening to kneecap the airline industry and perhaps the transportation sector generally.  Prices had doubled in less than a year and quadrupled in less than four years.

In stark contrast, prices today are just 18% higher than they were four years ago.  Adjusting for inflation, that's virtually flat.

Our condolences, OPEC.  Try not to let this ruin the rest of your Vienna boondoggle.

Dow's Biggest Jump In History

More than 936 points, better than 11%.

That makes it the largest one-day jump on both a point basis and the 5th largest on a percentage basis.  It was also the largest point change in either direction, though not nearly the largest percentage change (Black Monday saw a 22% drop).

Following today's record-settiing rally, the Dow Industrials closed at 9,387.61, a level not seen since October 9, 2008.

Dow Turns Positive [Update: But Closes Down]

With 30 minutes of trading remaining in what looked like it would be the Dow Industrials' worst week in history, the average extended a massive intraday turnaround and actually moved into positive territory.

Having been down nearly 700 points early in the day, a close above 8,623 (a gain of 34 points) would mark the Dow's biggest intraday gain ever.

Currently showing a gain of 140 points, we could see a moderate sell-off from these levels and still book a record setting low-to-close upside move.

Update:   Cripes. Minutes later, the Dow shot up as high as 8,900 (representing a 12.9% intraday swing to the upside).  If the rally were to extend a bit further, we could see a Dow with a 7, 8, and 9 handle in a single day.

Update:   Didn't quite pierce 9,000.  By the close, the triple-digit gain had petered out and the Dow settled moderately lower.  Still, a heroic recovery from this morning's lows.  The 1,018.49 intraday range was the biggest in history (surpassing yesterday's record of 999.50).

Crude Oil Now Literally Free

Well, basically.

It happened late Thursday night, with crude futures falling through their mid-80s support level and driving down to just over $82 per barrel.  Oil hasn't seen such lows since last October and has now plunged nearly 45% from its mid-summer high of $147.50.

See, there's a sunny side to the global economy grinding to a halt and all humanity facing permanent destitution.

Update:  Another new low today, with oil dipping below $79 per barrel, getting very close to a full 50% decline from July's all-time high.

(I'm starting to feel a little like Lou Loomis in the final scene of Caddyshack, willing that ball into the hole as the golf course explodes around me.)

Meanwhile, the Dow dipped as low as 7,883 (2002 levels) before recovering to a mere 350 point loss by mid-session.

An Econo-Political Positive Feedback Loop?

In the last 19 days, the S&P 500 stock index has declined nearly 22%.  Over that same period, the odds of John McCain winning the election (based on the price of the corresponding Intrade contract) has plummeted from 48% to 24%.

There's clearly a correlation, but what's the causal connection?  Are we seeing McCain's chances dwindle in response to worsening economic news?  Or are we seeing stock values decline in response to a greater likelihood of an Obama Presidency?

Since polling has shown a general voter preference for Obama on economic matters, it stands to reason that his prospects would improve as turmoil increases and the market declines.  On the other hand, Obama's stated intent to increase investment income tax rates threatens to dramatically (and immediately) reduce the value of capital assets, so as his polling advantage widens, you might expect to see stocks slide.

Worse still is the prospect that both of these effects are at work, since they would combine to form a woefully self-reinforcing trend.

The noise in the financial markets is a bit too seismic at the moment to reliably tease out any political cause-and-effect.  But until we see a McCain-friendly polling shift (and a corresponding turnaround in the Intrade price trend) without seeing a convincing and concurrent upside move in stocks (or vice versa), this is a potentially worrisome trend both for McCain supporters and anyone whose portfolio isn't stuffed in the mattress.

Half-Point Inter-Meeting Fed Rate Cut Now Fully Priced In

The Federal Open Market Committee's next policy meeting is scheduled for October 29, but trading in options on Fed Funds futures suggests the market expects more immediate action.

Rather than wait until Oct. 29, many economists believe the Fed will take action — perhaps in concert with a group of central banks — prior to that day, and perhaps as early as later in the week. Currently, the October federal-funds futures traded on the Chicago Board of Trade have an implied yield of 1.41%, which fully prices in an interest-rate cut of a half-percentage point at some point prior to the Oct. 29 scheduled Fed meeting.

Whether this alleviates the logjam that has bedeviled various short-term indicators of stress is another matter. The spread between LIBOR and the anticipated funds rate sits at record levels, and short-term bond yields also suggest massive stress. Lowering the funds rate may make it easier for banks to hoard cash — as it will cost less.

What's more, the options trading implies a 40% chance of a full-point cut (lowering the Fed Funds rate from 2.00% to 1.00%), by the adjournment of the October meeting.

Dow On Pace For 2nd Largest Point Drop In History [Update: 500-Point Rebound]

The 1st largest absolute decline took place way back in September of 2008, when the Dow sank 777 points.  With 90 minutes of trading remaining, the index is off 700 points, slightly worse than the pre-2008 record decline of 684 points on September 17, 2001.

Last week's record-setting drop represented a 7.0% decline, slightly less than the post-9/11 sell-off, which totaled 7.1%.

Now that we're starting from a lower base than last week, it's easier to set new percentage records.

If the Dow closes with a decline of more than 736 points today, it will be the largest percentage drop since 1997.  If it loses more than 742, it will be the largest percentage drop since 1987.  (To beat 1987, we'd need to see a one-day drop of more than 2,300 points.)

Had your eye on a stock, but were waiting for a more attractive entry point?  Might be time to pull the trigger.

Update:  Zowie.  That was a heckuva 90 minutes.  After tumbling as much as 800 points to an intraday low of 9,525, the Dow roared back to close at 9,955 (after poking above 10,000 just before the closing bell), losing "only" 370 on the day.

Intrade's "Who Will the VP Debate Benefit" Contract Swings 28.5 Points Toward McCain

If you want to cut through the clutter of faulty polling and biased outlets, consider the market price action.

The contract's price represents the cost of a contract that pays out $100 if Obama's Intrade price improves versus McCain's one day after the VP debate.  It closed yesterday at $61.00 and plummeted to $32.50 shortly after the debate.

Le Head Fake

In early afternoon trading, U.S. equity markets had shaken off a steep morning decline and were enjoying a modest rally, largely in response to this news.

France plans to propose at a meeting of big European Union countries this weekend that the bloc pursue a 300 billion euro ($424.4 billion) rescue package for its financial sector, a European government source said on Wednesday.    

"France will propose at the Saturday meeting a European rescue plan with a volume of 300 billion euros," the source, requesting anonymity, told Reuters.

And then this happened.

French Economy Minister Christine Lagarde denied on Wednesday that France was planning a 300 billion euro ($424.4 billion) EU bank rescue package.    

Earlier on Wednesday, an EU government source told Reuters that France was planning to propose an EU rescue package for banks worth 300 billion euros.

    Asked about the report, Lagarde told reporters: "There is no such thing. There is nothing of the sort."

Stocks are now back en rouge.

Biggest Dow Drop In History

Thanks to some extra selling just before the closing bell, the Dow managed to post its worst loss in history today - 777.68 points.

The previous record of 684.81 took place on September 17, 2001, during the post-tech bubble recession.  That decline was steeper than today's on a relative basis (7.1% compared to today's loss of 7.0%).

That's $1.1 trillion in market value gone in a flash.

Here's a bold prediction: after a Rosh Hashanah recess filled with calls from livid constituents who've had time to glance at their brokerage accounts and 401Ks and have suddenly gotten religion about the bailout, a very similar bill passes the following morning with broad bi-partisan support.

Nancy Pelosi on Bailout: "We sent a message to Wall Street: The party is over." (?!)

Remind me never to party with Pelosi.

Oil's Biggest Jump In History

Yikes.

Front-month crude oil futures experienced their largest one-day increase today, closing above $120 per barrel (having briefly touched $130).  The $16 jump easily trounced the previous record of $10.75/barrel.  Most of the spike occurred during the final 90 minutes of trading and things got so frenzied that the Nymex briefly halted trading in the contract.

Fishing for fundamentals that may have triggered the increase, some market watchers have pointed to a weaker dollar and the perception that the Fed's financial bailout will result in the printing of so much new money that commodities had nowhere to go but up.

Indeed, commodity prices saw an across-the-board rally today, but nothing like what happened to oil.  The primary problem was the expiration calendar of crude futures.  Contracts for October delivery expire today, meaning anyone with a short position (i.e. anyone betting prices would go lower before the October contracts expired) was left holding the bag.  Unless they wanted to arrange for physical delivery of the corresponding barrels of oil to their counterparties, they had to find a way to exit those positions by 2:30 pm.

To some extent, this always happens as we approach monthly expiration dates, but today, it appears that one or more very large players found itself in a huge short position.  Sufficiently huge that they were held - ahem - over the barrel by comparatively unmotivated sellers.  That trading asymmetry served to drive prices higher and higher as the session wore on and the shorts became increasingly desperate to cover their positions.

This effect is pretty clear if you look at the November contracts, which rose just $7/barrel today.  The November contracts become the front-month futures tomorrow morning (and closed the session at the relative bargain of $108.80).

Even so, commodity guru Eric Bolling opined on Fox Business Network that the fallout from today's spike could be ugly.  He opted not to speculate about the likely players that got caught in the short squeeze (and likely lost a big pile of money today), but he did express concern about what it might mean if Morgan Stanley and/or Goldman Sachs were among them.

Great Political Moments In the Oil Bubble's Burst Cycle

Today's Paulson-driven rally on Wall Street is taking place despite another surge in crude oil prices.

The price per barrel has soared more than $12 from the early week lows - the most severe rebound since the oil bubble was pierced in mid-July.  Guess what else happened early this week.

The ruse began late Monday night, when Speaker Nancy Pelosi released a 290-page bill and then waved it through less than 24 hours later, 236-189. "Closed" rules prohibited the GOP from offering alternatives. The real game was to give vulnerable Democrats political cover by letting them vote for more offshore drilling -- while also making more drilling all but impossible, thus appeasing the party's green wing.
...
he bill would allow exploration on the Outer Continental Shelf, but only in waters 100 or more miles out in the Atlantic and Pacific. The farthest reaches of the OCS contain resources, but undersea geography and deep water make development very -- if not prohibitively -- expensive. Areas closer to land are far richer and easier to access. Conveniently, Mrs. Pelosi's bill imposes a 50-mile "buffer zone" around the country.

A quick look at the course of crude oil over the last few months offers further evidence that futures prices are reacting rationally to political events.  Oil began its swift declines when the President lifted the executive ban on offshore drilling on July 14th.  When Congress left for vacation two weeks later without taking up the issue, the Republican "Guerrilla Congress" stayed behind to debate in the dark and make the people's case for defettering domestic energy production.  Both of those events appear to have catalyzed major reductions in oil prices.

The disappointing reversal observed this week offers further confirmation that "Pelosi's drilling ruse" was just that.

Holy $#!& The Market's Going To Close Up For the Week [Update: Sort Of]

As long as they hold onto their mid-session gains, all three major indices will have booked an up-week.

Not too shabby for a market that had plummeted 8% by mid-Thursday.

Credit the game-changer.

1,000 points on the Dow in less than 24 hours.

Update: Well, the Dow slipped a bit in afternoon trading, ending the week down 0.3%.  The Nasdaq finished the week up 0.6% and the S&P gained 0.3%.

Oil Basically Free Now

As we wait on the Fed to announce its interest rate decision (at about 2:15 pm ET), let's have a look at the still-plummeting price of oil.

Currently at $91.50 per barrel, front month crude futures have regained their esrtwhile downward mojo, after having moved mostly sideways during August.  At today's trading low, prices had shed more than $10/barrel in just two days.

Since their peak two months ago, oil prices have now plunged $56/barrel (or 38%).  Year-to-date, oil is actually down 5%.  Versus year-ago prices, it's up just 15%.  Two months ago, that one-year increase was 99%.

If Wall Street weren't so chock full o' news this week (well... and if the mainstream media were capable of noticing oil price swings when the movement is downward), this would be quite a little story.

The counter-inflationary impact of oil's protracted tumble is likely giving Fed governors additional comfort, as they ponder shifting back to a rate-cutting stance.  Following yesterday's turmoil, the market has gone from strongly expecting no change to expecting a 25- or even a 50-basis point cut in the Fed Funds rate.

For posterity, I'll plunk my chips down on a 25-point cut, moving the Fed Funds target to 1.75%.  Stay tuned for the exciting conclusion...

Update:  No change in rates.

Strains in financial markets have increased significantly and labor markets have weakened further. Economic growth appears to have slowed recently, partly reflecting a softening of household spending. Tight credit conditions, the ongoing housing contraction, and some slowing in export growth are likely to weigh on economic growth over the next few quarters. Over time, the substantial easing of monetary policy, combined with ongoing measures to foster market liquidity, should help to promote moderate economic growth.

Inflation has been high, spurred by the earlier increases in the prices of energy and some other commodities. The Committee expects inflation to moderate later this year and next year, but the inflation outlook remains highly uncertain.

On CNBC, Bob Pisani reported loud boos and cries of, "Worried about inflation - are you crazy?!" on the floor of the NYSE.

 

"How Come I Would Make the Economy Better" by Barry Obama

In response to a wild day on Wall Street that saw a fairly major restructuring of the financial services sector, Barack Obama sat himself down and wrote an essay about what it all means.

Since Obama's background in financial writing has recently been exposed as something less auspicious than we were originally led to believe, the Presidential hopeful actually faxed off a draft of his statement to his 6th grade social studies teacher, to solicit her feedback.

In a worldwide exclusive, this blog is pleased to present the marked-up version of the document returned to Obama's campaign headquarters late Monday night.

(Yes, this is the real text of Barry's essay.)

Click for pages 2-4...

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If you made it all the way down the page, you might enjoy some of our wearable snark, including our fashionable new t-shirts and the original Obama-edition 57-star lapel pin.

Market Comes Down With a Case Of the Mondays

You know, the word "meltdown" gets thrown around a lot these days...

It's certainly not a panic, but it's not terribly pretty either.  WSJ's Deal Journal has a wrap-up of the weekend doings that preceded today's financial sector tsunami.

Unfortunately, given the potential for conflict, that's all I have to say about that.

On the plus side, oil's off another $5+ a barrel today (extending its 2-month decline to $52/barrel or 35%).  The tumult is also stirring chatter about the possibility that the Fed could cut rates at its September meeting on Tuesday (rather than leaving the Fed Funds rate at 2.0%, as has been widely expected).

Double-Digit Oil

It was fleeting, but we got there.  At about 1:49 ET, front month crude futures dipped to $99.99 on the NYMEX (despite Ike churning angrily in the Gulf of Mexico).

It was the first time we've seen oil below $100 per barrel since early April and the ongoing slide now amounts to a 32% decline from the all-time high set less than two months ago.

Oil Plummet Nears 30%

In less than two months, oil prices have tumbled very nearly 30%.  As of Tuesday midday trading low of $103.46 per barrel, front month futures were 29.9% lower than their mid-July high of $147.50.

So far, the collapse in oil prices has basically stuck to the bursting bubble script, so it's potentially worth noting that the -30% mark was roughly where the Nasdaq bubble burst took a breather.  After fluctuating around that level for a few months though, the hemorrhaging doubled to 60% and more.

But let's assume we don't see oil take a comparable secondary dive to $60 per barrel.  (With multiple named storms still stewing in the Atlantic, humility in cheap oil expectations is probably well-advised.)  Still, if prices were to level off where they are now, the difference in the inflation picture (compared with how it looked just 60 days ago), not to mention the outlook for corporate earnings, consumer spending, and economic vitality in general, is stark.

As of today, the one-year change in crude prices is +34%.  A steep twelve month increase, but nothing compared to mid-July, when it was +99%.  That's a fairly radical change in assumptions for anyone forecasting operating costs, purchasing power, or output growth.

Falling oil prices represent a welcome, all-boat-lifting swell tide (save oil company boats, of course).  Swifter growth + lower inflation = happy economy.

Update: The 30% mark has now been officially surpassed. Since putting up this post, oil prices have continued to tumble toward $100 (currently $102.50). Think this has anything to do with it? (HT: Ed Morrissey)

Drill baby drill.

Why Was the Market In Such a Foul Mood Today?

Especially on a day with relatively little news, not much of a move in oil, and kicking off of a week when just about everyone's on vacation?

Larry Kudlow thinks he knows why.

You Too Can Be a Rogue Trader

Here's an intriguing twist on the Nigerian 419 scam.

Jérôme Kerviel, the French trader whose unauthorized positions cost Société Générale more than $7 billion earlier this year, is looking for a way to recover some $32.5 million in insurance payments related to his ill-fated trades and he needs your help to facilitate the transaction.

Cha-ching!

From: Jerome Kerviel
17 Cours Valmy 92987
Paris-La Dйfense

My name is JEROME KERVIEL, a ROGUE TRADER in charge of VANILLA FUTURES HEDGING FOR EUROPEAN EQUITY MARKETS with Societe Generale Bank Paris France.  I got your contact through cross border business information centre situated here in Paris and picked interest on you after going through your profile for a mutual benefit.

I don’t know if you have been conversant with invents lately as regards to my case with my bank (Societe Generale), if you are unaware, please point your cursor on the following CNN associate we-blink to be better briefed.

http://www.telegraph.co.uk/money/main.jhtml?xml=/money/2008/01/24/bcnsocgen624.xml 

From the above, you will understand that I was accused of loosing 7.1 Billion Dollars while serving my bank.

The truth of the matter is that I was used as an escape goat to cover my superiors who happens to be the master minders over the deal, Our bank Societe Generale has an insurance premium worth three times the sum reported to be lost, with French National Insurance Commission and they sees no other way of claiming the sum to favour the bank financially other than using me to cover the plot. The deal was successful following a reward of USD 32,500,000:00 (Thirty Two Million, Five Hundred Thousand United States Dollars) to me.

The above sum was successfully secured into a security/finance company here in France according to my superior’s directives, but I do not have an international contact to assist me in accommodating the funds until I am able to file in my resignation and contact you back to take my share.

So I write to seek  your assistance to accommodate and invest the sum as stated above for me  temporarily while I prepare to take my resignation in the near future. I have been warned by my superiors not to lodge the said sum into an account that will bear my name as that will jeopardize the whole transaction and possibly expose all.

If you are interested please provide me with the following in return mail:

YOUR NAME IN FULL
YOUR OFFICE OR RESIDENTIAL ADDRESS
TEL AND FAX NUMBER

As soon as I hear from you, further details regarding the transaction will be unveiled to you.

I look forward for your urgent response.

You've got to give the scammers credit.  This is a bit more creative than the typical widow-of-the-embezzling-ambassador or heiress-to-the-O-Henry-candy-bar-fortune back stories that usually accompany advance fee fraud schemes.

The helpful "we-blink" takes you to a genuine Telegraph article that confirms most of the details.  And the fact that Kerviel is French explains away the amusingly broken English.

"Escape goat" is a particularly enjoyable mental image.

Oil Plummet Stretches to $30 (20%!)

Crude oil hit a low of $117-and-change per barrel Wednesday, more than $30 below their intraday high above $147 in mid-July.  That marks a 20% drop in just over three weeks, lending further support to the thesis that oil prices were exhibiting classic bubble behavior and were poised to crater in classic bubble fashion.

Measuring from oil's record high closing price to Wednesday's close, prices have fallen 18% (in 23 calendar days).  At the same point in the tech meltdown, the Nasdaq had also fallen 18%.  Less than two weeks later, it had extended that decline to more than 34%.

If oil prices were to continue to follow the template, they'd sink as low as $96 per barrel by mid-month before their next rebound.

Chartologists will probably tell you there are substantial resistance levels around $110 and $100.  And I guess if we're applying chart patterns, we may as well jump in with both feet and acknowledge these supports could temporarily put some brakes on the ongoing bubble deflation (to mix a metaphor).

But as to the raging debate over whether we're seeing a bubble burst before our eyes (or whether the swift and drastic declines are instead due to relatively minute changes in foreign exchange rates and/or comparatively mild (though genuine) net-bearish surprises about inventories and demand), I continue to opt for the former.

Certainly the good news on inventories and the strengthening dollar are helping to ease the upward price pressure, just as the President's lifting of the executive ban on offshore drilling and the drama playing out on Capitol Hill are helping to improve (i.e. lower) expectations of future supplies and therefore of future prices.

But none of these factors alone or in sum are likely to explain such a rapid 20% decline, except to the extent that they have served as catalysts for the burst, which is now of its own accord exhaling those long built up expectations of indefinite price increases.  To stretch the bubble metaphor a little further, one or all of these events has served as the pin prick, which plays a crucial role in the bubble lifecycle; but it's the subsequent explosive exhalation of all the hot air inside (in this metaphor,  the role of the hot air is played by the irrational expectations of endless price increases) that has yielded the cascading prices we've seen (and can hope to continue to see) over the last three weeks.

Stocks Up, Oil Down (Again) Ahead Of Fed Decision

Froth continues to seep out of the oil bubble as futures fell as low as $118 per barrel this morning.  That marks a decline of nearly 20% from crude's intraday high of $147 set less than a month ago.

I argued last week (when prices had rebounded to $127 per barrel) that we'd see another steep sell-off this week, based on the bursting bubble lifecycle that oil has been tracing so nicely.  If prices continue to follow that pattern, oil could be getting ready to plunge significantly lower - perhaps approaching double-digits and perhaps as early as the end of this week.

The oil sell-off, combined with a better-than-expected report on service sector activity, has sent stocks significantly higher, though the Dow continues to struggle to punch through that 11,500 threshold that seems to have become a strong psychological resistance level in recent weeks.

This afternoon at 2:15, the Federal Reserve will publish the outcome of its August policy meeting, which ought to give the market something new to flail over.  The Fed is overwhelmingly expected to leave the Fed Funds rate at 2.0%, but any language changes in the policy statement (i.e. whether they now perceive a greater risk from inflation or weak growth) should inspire some wild whipsawing in the equity markets this afternoon.

Based on trading activity among options on fed funds futures, the market seems to think any possible deviation from the status quo would more likely favor a rate increase (i.e. more hawkish on inflation, at the expense of economic growth) than a cut.

That's probably true, but the possibility of any adjustment seems very remote, given the significant deflation seen in commodities in recent weeks (particularly among oil prices) and last week's GDP revisions that showed an isolated quarter of slightly negative growth at the end of 2007.

If the bubble thesis regarding oil prices is accurate (i.e. if the scale of the run-up was an emotional and gross overreaction to the actual shift in supply and demand), then changes in market psychology should continue to be particularly swift and powerful levers against trading levels.  With that in mind, any changes to the Fed's language on inflation expectations could play out rather violently in the oil markets.

At the last meeting (on June 25), the Fed had this say on the topic of inflation:

The Committee expects inflation to moderate later this year and next year.  However, in light of the continued increases in the prices of energy and some other commodities and the elevated state of some indicators of inflation expectations, uncertainty about the inflation outlook remains high.
...
Although downside risks to growth remain, they appear to have diminished somewhat, and the upside risks to inflation and inflation expectations have increased.

Since that statement, oil prices have fallen 12%.  Oil's not the only commodity that drives inflation, but it's certainly the big one and its seemingly perpetual rise was a major contributor to inflationary expectations six weeks ago.

If the Fed tweaks its inflation language meaningfully today (and it's hard to imagine they won't), traders on the fence about the future direction of oil may rapidly develop new confidence about prices' continued downward journey.  If so, we may well see oil shed another couple bucks by day's end.  That in turn ought to further goose stocks, but one never knows which way the equity markets will ultimately choose to stampede when there are Fed tea leaves to be read.

Update:  The statement's out.  As expected, no change to target interest rates.  As for the inflation language, compare the excerpt above to this:

Inflation has been high, spurred by the earlier increases in the prices of energy and some other commodities, and some indicators of inflation expectations have been elevated. The Committee expects inflation to moderate later this year and next year, but the inflation outlook remains highly uncertain.

Although downside risks to growth remain, the upside risks to inflation are also of significant concern to the Committee.

The language is shuffled quite a bit, but not too much is different.  Only two significant qualifiers changed: continued price increases became earlier price increases, and upside risks to inflation got a mild demotion.  They're now "also of significant return" whereas in June, they were in the process of trumping growth risks as the chief concern.

Update:  I guess that qualifies as a further goose.  The Dow Industrials rallied another 100 points in the wake of the the Fed policy statement, to finish the session up a hearty 332 points (+2.9%), closing out its best day in more than four months.

2Q GDPick'em - Results

The magic number was 1.9%.

Economists were looking for second quarter growth to clock in at 2.3%, so it's a bit of a miss.  The reading likewise came in lower than 78% of you predicted (poll results below).  I thought it might reach as high as 2.8-3.0%

I guess not.

On the bright side, it does show marked acceleration from the first quarter's growth rate of 0.9%, thanks in part to the impact of the timing of the stimulus checks.

On the less bright side, the fourth quarter 2007 growth estimate was revised downward (as part of broad changes in both calculation and estimation methodology) to show a blip of negative growth.

The relatively small revisions to the annual estimates reflect partly offsetting revisions to the quarters within a year.  For example, for 2007, the annual rate of growth of real GDP for the second quarter was revised up 1.0 percentage point, from 3.8 percent to 4.8 percent, while the growth rate for the fourth quarter was revised down 0.8 percentage point, from a small increase (0.6 percent) to a small decrease (0.2 percent).