Wednesday, October 29, 2008

Hooray, more debt!

Maybe I can't tell good news from bad.

Honda Motor Co. reported a 41% drop in quarterly profit; quite naturally and rationally investors drove the price of their stock up 16%.

On Monday companies sold $232 billion in new debt. This is ten times the normal volume of commercial paper, (a fancy schmancy name for 'corporate debt') issued per day. $67 billion of the debt was longer term issues -- due to be paid back after mid-January.

If you were a thinking person, you might be asking yourself who in their right mind would be interested in buying long term corporate debt given the current state of the economy. You would think long and hard about the odds of getting paid back given that it is really, really hard to tell who is solvent and who isn't these days.

Well, that's what a thinking person would do. As it turns out, YOU bought about $60 billion of that $67 billion in longer-term debt! How is that for irony?

"Wait just a minute here!" you say. You're not a moron, there's no way you would do anything so obviously foolish. Sorry. You see, the Federal Reserve just got their Commercial Paper Funding Facility going, and took on a bunch of debt. Congratulations, now doing your part.

Economists and market strategists are doing all they can to make sure we know that companies going deeper in debt is a good and positive thing -- key to helping the market and economy turn around. I think my favorite quote is from Adolfo Laurenti, a senior economist at Mesirow Financial Inc.:
"That's the very first really good news in quite some time. It's probably something the government can do and the normal investor would not otherwise do."
Do ya think?! At no point could I find anybody asking why this might be the case. Why would a normal investor be uninterested in loaning money to struggling businesses that refuse to fully disclose the condition of their assets and are dependent on loans to survive? I'm sure the reason will come to me.

That wasn't the only good news though. All day long investors were looking forward to the Federal Reserves much anticipated rate cut. Expectations are for the rate to be cut to 1%. This will make credit cheaper. Which, considering we are in the midst of a rather serious credit deleveraging process, is sort of like discounting salt water sales in the Sahara.

I predict that the Fed will announce a rate cut to .75%. I think they'll do this for the psychological impact.

The problem in the market is that somehow or other we have started to go through a period where reason is breaking out in all sectors. Maybe if the Federal Reserve can jolt us enough, we'll be able to get back on the credit-expansion bubble and things will be jolly all-round again.

It wasn't all bad news though. The run-up of markets around the world presents great opportunities for short sellers (through short sales, call options, short ETFs, or bear mutual funds) to pick up even more gains.

The pickings will be even better if this rally can last through the end of the week. I don't think it can, but there's hope. If nothing else, there are literally millions of people who are determined to have a "V" shaped bottom to the market. They're wrong, and they'll pay for their ignorance... Maybe they can pay you.

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