Alright on to business:
A lot of traders were a bit skeptical about being short going in to this weekend because of the G20 meeting. The G20 is a group of the 20 biggest economies in the world that represent approximately 90% of world GDP. Fears were from traders who worried the G20 would create a $200 billion fund to buy bad debt/assets from nations around the world - a global bailout.
The Wall St. Journal is reporting the G20 nations have agreed on:
* Reached a common understanding of the root causes of the global crisis;
* Reviewed actions countries have taken and will take to address the immediate crisis and strengthen growth;
* Agreed on common principles for reforming our financial markets;
* Launched an action plan to implement those principles and asked ministers to develop further specific recommendations that will be reviewed by leaders at a subsequent summit; and
* Reaffirmed their commitment to free market principles.
They are expected to come out with a comprehensive plan of action by March of 2009. I really hope the food was good this weekend because that might have been the only highlight. This doesn't help markets at all in the near term and might have a negative affect on Monday morning.
Bloomberg is reporting Honda Motor and Home Depot are lobbying the Federal Reserve to include second tier commercial paper in their commercial paper buy back program. Commercial paper is a short term loan that companies use to cover daily operating expenses (payroll, rent, etc.), so it's their life line. By buying only first tier commercial paper the Fed is raising the borrowing cost of second tier paper. First tier commercial paper rates have dropped to 1.16% from an October high of 4.28%, second tier commercial paper rates have dropped to 5.18% from an October high of 6.30%, the cost of borrowing for companies reliant upon second tier paper is extremely high.
Interest rates represent market sentiment and of course default risk. We cannot turn in to a nation that bails out every one while putting our tax payers at risk. Even with short term funding some of these companies might fail and that would affect the taxpayer. If the Fed agrees to buy second tier commercial paper, it will be time to look in to Gold trades (something I'm generally against!) as Gold prices will rise with inflation.
On to a the fate of General Motors. On Monday Democrats will bring to Senate a bill that will allow GM access to the TARP program (the $700 billion bailout). Republicans are going to use a special power which will delay the vote until Wednesday. President Bush and other Republicans strongly oppose bailing out the giant auto maker. If the bill fails to pass, GM's days are numbered and it will go down as one of the biggest embarrassments in American history. It will also cause the nation to loose a staggering amount of jobs and will discontinue benefits for some retirees. The markets will sell off if the GM bailout doesn't pass.
If it does pass, we will reach a scary place. The bailout of GM should come with clauses that mandate a change in management. Even with new management GM will not sell cars until the consumer is doing better and their image is brought back from the dead - the former will happen way before the latter. This will put the Fed in a situation where they will have to give the auto maker more and more money, way past what we're looking at this week, similar to AIG (which originally wanted $85 billion but has take more than $160 billion from the Fed). We will rally off a bailout of GM but it won't last. This is a lose lose situation.
I'm going into Monday with 50% of my cash in NOV 17.5 AXP puts and NOV 7.5 DRYS puts. I feel comfortable with the positions but I'll be watching what the government does very closely this upcoming week.
Buckle up, it's going to be one hell of a ride starting tomorrow.
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