Global Panic/Credit Freeze

Good evening everyone!

Quite a day today wasn't it? The stock market plummeted over 3% today as credit continues to tighten globally. I saw fear and panic in the eyes of the traders today as they practically got on their hands and knees and begged Congress to pass the rescue plan.

I think you saw the market sell off big for three main reasons today:

#1 The credit markets are virtually shut down.
#2 Many believe the rescue plan is too little and too late.
#3 The continued financial meltdown in Europe.

I also think the markets sold off because they wanted to send a strong signal to Congress that they seriously need help.

Credit Markets

The credit markets are flat out ugly folks. You practically need a crowbar to pry money away from a bank right now. Corporate lending has almost come to a complete halt. How bad is it?

Well lets put it this way: Last month was the worst month ever for corporate credit despite the world's central banks pumping an unprecedented $1 trillion dollars into the financial system:

"Oct. 2 (Bloomberg) -- Interest rates on three-month dollar loans rose to a nine-month high, short-term corporate borrowing fell by the most ever and leveraged loans tumbled, exacerbating the credit freeze that's paralyzing businesses around the world.

The crisis deepened after the worst month for corporate credit on record. Leveraged loan prices plunged to all-time lows, short-term debt markets seized up and even the safest company bonds suffered the worst losses in at least two decades as investors flocked to Treasuries. Credit markets have frozen and money-market rates keep rising even after central banks pumped an unprecedented $1 trillion into the financial system.

``It's going to get much, much worse,'' Gregory Peters, head of credit strategy at Morgan Stanley in New York. ``The credit markets are effectively shut, the CP market, which there's not enough focus on, is under complete duress. That can't be sustained, as that's the lifeblood of corporations funding themselves.''

The market for commercial paper plummeted $94.9 billion to $1.6 trillion for the week ended Oct. 1 as banks and insurers were unable to find buyers for the short-term debt amid the worst U.S. financial crisis since the Great Depression. Financial paper accounted for most of the decline, plunging $64.9 billion, or 8.7 percent, to a two-year low."

Quick Take:

What can I say folks. This is terrifying. The credit markets are how many companies fund themselves for things like payroll and buying inventory for things like the holiday season. If they have no availability to credit, they can no longer operate.

There is practically no money out there folks. Zero. Zilch. Squadoosh. The central banks pumped $1 trillion dollars into the banks and it did nothing to free up lending. This leads me to a little question here: If a $1 trillion liquidity injection did nothing to cure this problem, how in the hell is our measly $700 billion rescue plan gonna help?

Take a Look at this additional piece of data on Fed loans to the banks:

"Oct. 2 (Bloomberg) -- Commercial banks and bond dealers borrowed $348.2 billion from the Federal Reserve as of yesterday, an increase of 60 percent from the prior week amid a worsening credit freeze.

Loans to commercial banks through the traditional discount window rose about $10 billion to $49.5 billion as of yesterday, the Fed said in a weekly report today. The total surpassed the previous record after the 2001 terrorist attacks."

One week borrowing from the banks was nearly half the amount of the bailout bill! This "rescue plan" is like giving a guy a twenty when he is short $1000.

The problem in the credit markets is two fold. One, the banks have no money to fund the credit markets because they are sitting on too much debt. Two, they don't trust each other. Every bank is afraid they are lending to another bank because they are worried they are insolvent. As a result, they refuse to lend and hoard the cash to take care of their own funding issues.

The problem with the Paulson plan is its not enough money to rid the world's banks of their mortgage debts, and it does nothing to restore trust. Regardless, I fully expect Congress to pass this bill after watching what happened in the credit markets this week. Its not going to work, and this little blogger can't wait to write about it when it fails!

European Slowdown

Just a couple stories here from Europe. Take a look at the ECB's Trichet's comments today. He was much more dovish on interest rates. Inflation worries look to be off the table. Expect rate cute across the pond folks. Currencies will be interesting to watch over the next few weeks. The dollar soared today today based on Trichet's comments and further signs of European weakness.

How bad is it in Europe? Take a look at the bank runs that are occurring in Greece:

""The Greek government has issued a blanket guarantee of all bank deposits after panic withdrawals by customers in Athens and Thessaloniki, creating an unstoppable stampede across Europe for an EU-wide bail of the financial system."

Yikes!

Bottom Line:

Be prepared for a Japan like classic deflationary death spiral folks. I hate to say it but the signs are everywhere. Gold and commodities were pummeled again today. This is a classic deflationary signal. Houses, cars, and all other assets continue to drop in price and value. Students are unable to get school loans. Expect education long term to also drop in price as a result. These are all signs of deleveraging and deflation. Its going to be painful process, but it is inevitable.

We simply don't make enough money to afford the level at which it costs to live. Something has to give and its going to be prices via deflation.

My advice is to get out of debt as fast as you can. If you have wealth, deflation actually will make you richer because everything drops in price and the world will be on sale when we come out of this. Make sure you protect your wealth in safe investments like treasuries and bank CD's. When we come out of this economic reset, you will then have money, and you will be sitting pretty.

Let me close by warning everyone that the deflation thesis can always be taken off the table if the government decides to print. All bets are off then folks. However, I highly doubt our government is that stupid, but if it gets bad enough they may consider some form of it.

Watch the vote tomorrow from a short term trading perspective. I think the market could move violently up or down tomorrow if the plan is approved. Confidence in the plan seems to be lacking so we could see a "sell the news" drop in the markets. However, never underestimate the "bubble boys" and how they love to take the market higher on bailout news!

I plan on entering some more short positions on any bounce from our FANTASTIC, WONDERFUL "RESCUE PLAN"! What a joke.

Always remember folks, when the government knocks on your door and says "hi we're from the government and we're here to help you" , lock the door and run as fast as you can!