Stocks Collapse/10-Year Rises

Good Afternoon Folks!

Take a bow Mr. Paulson. The market just loved your bailout: For 1 Day! Stocks are plunging today as retail sales fell off a cliff, and long term treasury yields continue to rise. The Fed's beige book should be out before I finish this so I will update it if its out before I finish this post.

Ok, lets start with retail sales:

"Oct. 15 (Bloomberg) -- The eroding U.S. economy drove retail sales into their longest slump in at least 16 years, even before this month's market collapse signaled a deepening recession.

Consumer purchases fell 1.2 percent in September, extending the decline to three straight months, the first time that's happened since comparable records began in 1992, Commerce Department figures showed today. In another sign of weakening demand, prices paid to U.S.
producers fell last month on lower fuel costs.

The median forecast of 75 economists surveyed projected purchases would drop 0.7 percent following a previously reported 0.3 percent decline the prior month.

``I don't think things can get much worse,'' said Brian Bethune, chief financial economist at Global Insight Inc. in Lexington, Massachusetts. ``September was a terrible month in terms of the overall situation, in both sales and production. The fourth quarter is guaranteed to be a terrible quarter.''

Quick Take:

Welcome to the 2008 recession ladies and gentleman. These numbers are terrible. It looks like there will be a lot of Scrooges this Christmas as the consumer goes down the toilet. Expect the 4th quarter to be even worse as the consumer folds like a tent. All indications so far in October show that things are continuing to slow.

Shipping

The shipping industry reported that world trade is slowing as the credit market remains locked. The shipping industry reports traders are seeing letters of credit dry up and are afraid to let ships leave port according to Bloomberg:

"Oct. 15 (Bloomberg) -- Pacific Basin Shipping Ltd., Hong Kong's biggest dry-bulk carrier, and Precious Shipping Pcl. said demand for moving coal, iron ore and other commodities will fall because banks are guaranteeing fewer loads.

``Letters of credit and the credit lines for trade currently are frozen,'' Khalid Hashim, managing director of Precious Shipping, Thailand's second-largest shipping company, said in Singapore yesterday. ``Nothing is moving because the trader doesn't want to take the risk of putting cargo on the boat and finding that nobody can pay.''

The lack of letters of credit, in which banks guarantee payment for merchandise, could become a ``big issue'' for world trade, according to Klaus Nyborg, Deputy Chief Executive Officer at Pacific Basin. Tighter credit has contributed to this year's 80 percent drop in the Baltic Dry Index, a measure of commodity-shipping costs. About 90 percent of world trade moves by sea."

Quick Take:

I thought banks were going to start lending again after getting hundreds of billions in bailouts from the worlds central bankers? Word is the banks are hoarding this money and stuffing it in treasuries and fixing their balance sheets instead of using it for lending.

This is bad news folks. If world trade slows considerably, all hell is going to break loose. The repercussions would be devastating to countries all over the world. Trading is imperitave to keeping the world economies going. 90% of trade moves by sea folks!

10-year Note

I may make this a permanent part of my blog. The 10-year is basically flat today which is bad considering we are down almost 6% in equities today. Money should be flying into these bonds as a flight to safety trade. Not today! Demand continues to be weak here despite the selloff because of the The Treasury's out of control spending via bailouts.

This is bad folks! If the credit markets don't loosen up, ships filled with worldwide goods are going to end up stuck in ports around the world. The Libor rate continues to stay elevated despite the massive stimulus injected by the worlds central bankers. Credit remains harder to find than a guy in LA that hasn't slept with Brittany Spears!

Bottom Line:

It looks like we may retest the lows set last week in the near future. We are halfway there so far in the last two trading sessions. I sold my TWM(no sense in trying to be a pig) that I picked up yesterday.

I am going to buy some Puts on TLT(long term treasuries) as soon as the VIX drops back down. I think treasuries eventually will turn into toilet paper down the road. We have spent way beyond our means as a government, and its going to take trillions more in spending to get us out of this mess. This is very bearish for treasuries. This is a long term trade that will take months to play out.

I plan on staying in cash for awhile at these levels. I still have my bearish long term hedges on. The next question we need to ask ourselves is how much of the recession is priced in here? For now I will be a spectator. Expect the volatility to continue.

BTW, there was nothing earth shattering in the beige book. The Fed basically said the economy sucks. Tell me something I don't know!

If treasuries continue to fight the Fed and take rates higher, the shorts will go back on. More confirmation is needed before taking any additional positions.

Stay tuned!