NY futures continues to drop this week

17 Oct '08

5 min read

NY futures continued to drop this week, with December falling 250 points to close at 49.94 cents, while March was down 312 points to close at 53.75 cents.

Nearly all markets, with some notable exceptions like the government bond market, continued to collapse this week, driven primarily by the relentless liquidation of hedge, index and mutual fund positions.

Fear and panic is causing unprecedented redemptions out of these portfolios, many of which include emerging market stocks and commodities and this downward spiral seems to have taken on a life of its own, as a growing number of sellers is finding fewer and fewer willing or able buyers. Sellers are getting a rough deal in this process, because it is not them but the market that is determining when these highly leveraged assets have to be sold.

Instead of focusing on supply/demand issues or earnings in the case of shares, traders all over the globe are trying to figure out when this deleveraging process will finally run its course. What the market needs is buyers, but the ongoing credit crunch and the looming recession are causing potential buyers to hoard their cash in anticipation of worse things to come and we need to see a change in this attitude before we can talk about any potential bottom.

The level of fear as measured by the S&P 500 Volatility Index (VIX) reached its highest reading ever today at over 80 percent, before retreating somewhat during the late day rally in stocks.

Meanwhile, the government continues to throw money at the banking system in an effort to shore up the balance sheets of defunct financial institutions, but in doing so it is merely moving bad assets from one account to another. Also, when compared to the size of the problem, the 700 billion dollar bailout package is a drop in the bucket.

The size of the US credit market is nearly 60 trillion dollars, while Credit Default Swaps amount to around 62 trillion dollars and the face value of global derivatives adds up to over 1300 trillion dollars!!

As we have pointed out before, the problem with the current approach is that the money that is being pumped into the banking system is not finding its way into the real economy. But who can blame banks for not extending credit to 'Main Street', because most consumers are not worthy of credit, since they have no savings and are already up to their eyeballs in debt.

Therefore, the current rescue plan is doomed to fail in our opinion and the government will eventually be forced to intervene directly in the real economy by buying assets, such as real estate, in order to reflate values. Until that happens, we are likely to see further pressure on asset prices.

The steep drop in commodity prices has been across the board, as prices of crude oil, corn, soybeans and cotton have all been slashed by over 50% from their record highs of just a few months ago.

This should give at least some of these commodities hope that things may improve once this liquidation phase is over and fundamentals take over again. This seems particularly true for food and energy, while we are not sure that cotton will find better fundamentals anytime soon.

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