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Commentary

Fund Liquidations Continue

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Ugly does not begin to describe the market and the damage to good stocks. Early in the week TrimTabs was saying we could see $50 billion in fund outflows for the month of September. Late Friday there were estimates it could be closer to $100 billion. Either number would be a withdrawal record. Investment advisors around the country are reporting their phones swamped with withdrawal requests.

Money market funds are imploding with investors going back to a mattress mentality. MM Funds are big buyers of corporate paper and this week they are net sellers of that paper as that market self destructs. It was reported on Friday that AT&T can no longer roll over its corporate debt and can only roll it over day to day. If AT&T can't get credit for more than one day at a time then what problems are lesser credits having? GE credit default swaps reached 750 basis points on Thursday. That is well over junk rates to guarantee their debt. After Warren Buffett bought $5 billion in super preferred stock that number fell to just over 500 basis points and still unheard of for a AAA credit. The corporate paper market is completely locked up and it is likely to get worse before it gets better.

Hundreds of lenders have cancelled their student loan programs leaving tens of thousands of students without funding for college. Universities are reporting waves of checks bouncing as loan commitments were withdrawn. Home equity lines of credit are nonexistent and have been withdrawn. Over $1.5 trillion in bank loan capacity has evaporated and that is causing severe dislocations in the credit market. These are dislocations the $700 billion bailout package will not address.

Good stocks with rising earnings are getting thrown out along with the bad ones as normally happens when the equity markets implode. We saw selling into every rally last week and despite the +457 point Tuesday and +300 points intraday on Friday the Dow still lost -817 for the week and the Nasdaq -235.

What aggressive investors should do in this environment is buy good companies at fire sale prices. Unfortunately we have tried to do that several times in recent weeks. If the market conditions I laid out above were not quite so dire I would be loading the watch list with a ton of entries. Instead I am only going to add a few. I would rather be late to a rally than continue to be early to a decline.

The price of crude settled just under $94 on Friday after a +$10 swing for the week. Unfortunately I think we could see it move lower. Nine major analysts lowered their estimates for crude prices with Merrill warning prices could drop to $50 in the "unlikely" event of a global recession. Nobody heard the "unlikely" and only heard $50 in 2009. There is strong support in the $85-$90 range but I believe that support may be tested. OPEC is already ramping up their sound bites but so far nobody is listening. They could easily announce another cutback in production next week but odds are "unlikely."

Drillers are getting hammered along with service companies and there is no reason for either to be losing ground other than the market. I believe that is where we need to be focusing our investments in energy. I am also going to add some banks to the watch list as well. I was going to add a couple as plays but they sold off sharply on Friday suggesting there was some profit taking ahead of the short sale ban expiring. The ban expires at 11:59 PM on Oct-8th. Banks have risen over the last two weeks and now that short selling may return we could see some more speculation on future failures and counter party concerns.

I also considered adding some puts but what? Crude may test $90 but the major damage is already done. I considered puts on the banking ETF XLF but there is a strong feeling the Fed could cut rates by 50 points next week in a surprise announcement. I believe it is best we continue to look at buying the dip rather than try to capitalize on further declines.

Jim Brownn


November Crude Futures Chart - Daily

November Natural Gas Futures Chart - Daily

 

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