Wednesday, October 8, 2008

Forensic Examination of the Market


A view of the overall market might convince one that the end of the world is nigh. However, a closer examination of the market that composes this index tells a different story.


We can see that the oil services have gotten killed in the same pattern as the market (which is an AVERAGE of other stock prices, including oil service stocks)


Rio Tinto, one of the worlds largest mining firms, has lost 60% of its value. Arcelor-Mittal (MT) has lost 70%. US Steel is down 75%. This is all since the end of June.

What we are experiencing is a huge popping of a liquidity fueled commodity bubble. Remember the Chinese Liquidity Mechanism? Thats been happening in every asian country in to some degree. So since 2003 there has been a mechanism for creating a ton of money and reinvesting it both in the US and emerging markets. Since commodities are priced in dollars, they have represented an easy way to reinvest accumulated dollar reserves held in foreign banking systems. Now that the largest mechanism for financing this huge ponzi scheme -- the investment banks -- are rotting six feet under, the whole money flow system is under pressure. That has meant less money creation in emerging markets and falling demand for raw materials as Americans buy less shit.

All this has combined with our banking crisis and election cycle to make everyone jittery as fuck. Take a look at some banks. They have gone NO WHERE in the same time frame:



The MASSIVE (combined market cap of greater than $400 billion) domestic banks haven't done anything in the last 5 months except rattle about. Granted they have made huge moves, they just represent the uncertainty that has gripped the market in 2008.

Of course, if you were long some foreign bank ADR's, all bets are off:

Japan:

Brazil:

Russia:

Long story short: our banks our fine. They have huge net interest margin from rate cuts and tons of high yielding commercial paper to buy. They have a 700 billion dollar buyer for their toxic mortgage products.

A commodity bust led to a bust in emerging markets. In a country like China or India, natural resources make up a much larger portion of their economy. Their banks lend to raw material firms. Prices just collapsed. Loans will go bad. Banks will go bust.

The S&P's look bad because its made up of raw materials firms and banks. Don't panic, make money when the world returns to normal. Just don't lose it all now.

2 comments:

Charlie said...

what a freakin' recap. This is solid forensics. how do you see the global reaction to this playing out through the next few weeks? do you see any signs of stability?

moneytrack said...
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