Wednesday, September 3, 2008

Oil Down, Market...Down?

First, oil went up, barely, on fears of a Cat 4 or 5 hurricane. Then, it dropped precipitously on a "non-event" Cat 2 hurricane that only left 1 million people without power and will cause a mere $4-$8 billion in damage to an economy already in the pooper. Not to mention the devastation of Louisiana's sugar cane crop. This was viewed as very good news and the market literally shot straight up 250 points. Then something happened.

Maybe oil didn't drop $8 on Gustav alleviation alone. As I've been saying for weeks, there is no demand because the global recession is here. But don't just ask me. Ask U.K. Chancellor of the Exchequer Darling. "[The times we're facing] are arguably the worst they've been in 60 years. And it's going to be more profound and long-lasting than people thought." 60 years. So while the media gets all giddy about the "strong dollar" (still incredibly weak by historic standards) and our export growth, let's just step back and think who's going to buy our goods as their economies erode and our stuff gets more expensive.

Ho hum. Another day, another hedge fund failure. "Ospraie Management LP is shutting its flagship commodity hedge fund after it lost almost 40% this year." Wow, good thing Lehman didn't own this loser. Oh wait, yes they did, 20%. Another solid investment from Fuld. They weren't alone. "U.S. activist hedge fund Atticus Capital has lost more than $5 billion this year, a source familiar with the matter told Reuters, after its funds were hit by heavy falls in financial stocks."

You know things are still rough when Wachovia is giving more downgrades. "Seasonal slow markets, reluctant investors, declining valuations in both fixed income and equity, and more marks will highlight a challenging third quarter for the industry," analyst Douglas Sipkin wrote in a note to clients." The fact that less capital has been raised will hurt companies further.

Morgan Stanley also piled on. The global economic downturn has only just begun, with the U.S. near a ``recession trajectory'' and the impact of the credit crunch still to be fully felt, said Stephen Roach, Morgan Stanley's Asia chairman." He went on to say that, ``Maybe two thirds of that is behind us, but the impacts on the real side of the U.S. economy and the global economy are at an early stage.'' Exactly. We're not just going to keep chugging along. People are broke and their houses are worth nothing or less than nothing. If consumer spending is 70% of GDP and only rose 0.2% in a quarter where a $100 billion free dollars were handed out, what's going to happen now?

The dreaded pullout has begun. No, not Iraq, but money from the U.S. and its treasuries. "European banks had cut dollar loans booked by their U.S. offices, resulting in a net outflow from those offices of $259 billion during the first quarter of year, following a net outflow of $238 billion during the second half of 2007." In a separate article from the Financial Times, they write that China has finally started to dump our debt. "Bank of China has cut its portfolio of securities issued or guaranteed by troubled US mortgage financiers Fannie Mae and Freddie Mac by a quarter since the end of June. The sale by China’s fourth largest commercial bank, which reduced its holdings of so-called agency debt by $4.6bn, is a sign of nervousness among foreign buyers of Fannie and Freddie’s bonds and guaranteed securities." Uh oh.,Authorised=false.html?


Tiger Coach said...

Ax.. Why do they keep pumping LEH when EVERYONE know they are a loser?

Who wants to buy them... why all the announcements about a purchase... then it all follows up with no action.. no purchase... No BODY, NO BODY WANTS THIS BAG OF GARBAGE?

If it runs like a Yugo, and sounds like a Yugo, and is cheap like a Yugo... then it is junk. Oh that's right, a Yugo runs... at least for a while.

AX said...

Hopes of a bigger, better offer to boost the price. If you notice, Mitsubishi won't negotiate until earnings are released and the price gets hammered. Without capital, loss is going to look real bad for Lehman.

Vikram P said...

Dear AX,

Thanks for the great coverage of the declines in oil prices and the market

I work for, an investing wiki with research about companies like those you blog about and concepts like oil prices and the credit crunch. I've been approaching top bloggers identified by our business development team about the Wikinvest Wire, a traffic-boosting, invitation-only blogwire for investing and finance blogs.
If you're interested, do e-mail me at vikram [at] wikinvest [dot] com and we can go through it in greater detail.

Have a great day ahead!