Global Recession?

I normally do not execute any new buy orders on Fridays as it allows me to sleep well over the weekends. Right now, it’s even more imperative to not execute any new buy orders because there has been so much volatility over the last so many weekends. Right now, the Dow is down by almost 300 points, or 3% (it was down by over 400 points earlier). Before trading started today, the US futures markets halted trading as they dropped by 5%.

A reason for the massive sell off is because Asia is falling off a cliff. Corporate earnings (Toyota endured its first sales decline in seven years and Sony gave disastrous guidance) sent the Nikkei down almost 10%, and the Kospi tumbled 10.6%. The dollar is at a 13-year low versus the Yen but at a two-year high versus the Euro.

With regards to Europe, the UK just released a negative GDP rate indicating that it may be heading towards a recession. Also, Iceland seems to have reached a deal for a $2 billion loan from the International Monetary Fund and says it hoped to secure additional support from other countries to prevent a total economic collapse. Apparently, Maine lobsters have nosedived in price because Canada (largest customer of Maine lobsters) is unable to receive credit from the Icelandic banks. Talk about different industries all being interconnected! In mainland Europe, Denmark’s central bank raised its key lending rate to 5.5%, which is crazy considering that everyone else is cutting rates and Denmark’s housing market is crashing and its unemployment rate is skyrocketing. For the global economy to get on track, I would think that we all need a united front with all nations singing to the same tune. However, as we are seeing with Denmark, there may be some cracks in this plan. This global meltdown is going to test many things such as the Eurozone because as the environment gets grimmer, each country will naturally fend for itself.

On a news wire today, a hedge fund manager with a US fund in an overseas office said, “We’re just doing whatever it takes to survive at this point.” To me, that means continued unwinding of existing positions, additional redemptions, and panicked selling. There will definitely be additional problems overseas because many of the developing nations lack the resources to save their banking systems in the manner that the US and Europe are able to. S&P cut its currency rating on Ukraine because it feels that the global financial crisis will increase the costs to recapitalize its banks and continue to slow economic growth.

Not sure if you read but PNC will acquire National City for $2.23 a share, a 7.1% discount to yesterday’s closing price. Another bank is gone but how many more? Now, we will see continued consolidation of the smaller, regional banks. They will have to due to the burden of mortgage debt and lack of interbank lending.

Also, Chrysler has told its employees that it will cut 25% of white-collar jobs next month due to the downturn in the economy and tightening credit. The job reduction is expected to affect about 5,000 of employees. It’s about time. There is talk of GM buying Chrysler. Does this make sense as you are simply taking two nonperforming businesses to form a larger nonperforming business?

Here are some articles for you to read:

• Russia’s default risk has escalated to beyond that of Iceland since foreignors are pulling capital out of Russia at an escalating rate and its credit default swaps (cost to insure Russian bonds against possible bankruptcy) have skyrocketed. Here is the article.
• This article discusses how France’s president has promised “massive” state intervention to support the local economy. Germany isn’t too pleased. Is this a lead-in to the eventual breakdown of the Eurozone?

The bluechips are dirt cheap by historical standards; but, with the ongoing global economic and financial problems, I think they will go lower. It’s tempting not to buy back in at these levels, but I am holding steady and being patient. I have increased my cash position in my investment accounts to circa 35%. At least gold and silver are holding steady today.

Have a good weekend! If you have any questions, don’t hesitate to either post a comment or e-mail me at moolahtimeletter@gmail.com.

ciao,
Moolah