Roseman's Eruptions

LIBOR’s Plunge Sets the Stage for Corporate Bonds

Since trading north of 4.81% last Friday, three-month LIBOR has plunged 98 basis points over the last few days to 3.83% this morning in London. Credit markets continue to ease as interbank lending continues to grow following weeks of a virtual shutdown.

The Ultimate Short: Treasury Investors and the Boom in New Issuance

The United States is now setting a course to “boldly go where no man has gone before” as it pertains to the expansion of credit and the upcoming bull market in Treasury debt issuance. Basic economics 101 supports the view that a truckload of new Treasury debt issuance lies ahead to finance the enormous cost of the bank bailout and stem the tide of unrelenting home foreclosures. More supply means lower prices.

LIBOR Rates Finally Easing, but Riskier Credits still Stressed

For the first time since July, LIBOR rates have started to ease. That’s good news for global investors as recent government guarantees to protect banking systems and inject hundreds of billions of dollars into interbank lending rates begins to show signs of improvement.

The Hedge Fund Threat

The big global financial unwinding has been exacerbated if not spearheaded by hedge funds this year. And as we approach December 31, more hedge funds will have to dump stocks to meet investor redemptions.

Hedge funds have failed miserably to protect their investors in 2008, an extraordinarily challenging year for even the most seasoned traders. Some managers, including SAC Capital and Paul Tudor Jones, among the best in the industry, have recently liquidated their entire portfolios and are sitting in cash since September.

Solvency Attained but at a Huge Price

No bread lines for now…and that’s a good thing.

The United States and other major economies have rescued the financial sector. The threat of imminent bank failures across the industrialized countries coupled by questionable counter-party risk has all but ended at this juncture. That’s good news for global investors, depositors, businesses and individuals alike following weeks of financial market turmoil that culminated into a global stock market crash last week.

Thriving on Chaos

Bet on chaos…and thrive.

As the global financial landscape dramatically changes over the next several months ahead of new government regulation and partial or full nationalization of the banking industry, investors will have to look to alternative investment strategies to produce absolute returns. It is highly likely that some of the most important changes to existing securities laws and regulations since the Great Depression are forthcoming.

Why Gold Stocks Failed

Since the start of the credit crisis in August 2007, the XAU Gold & Silver Index of mostly large-cap mining stocks has tumbled 27%. In October alone – the worst month for investors in global stocks since August 1998 – the XAU Index has tanked 20%.

Gold bullion, however, has gained a cumulative 26% since the outbreak of credit panic in August 2007 while in a crash month in October gold has declined only 2%.

Don’t Sell Stocks Now

This is NOT the time to sell stocks. In fact, if you’re clamoring to dump stocks because you’re in a state of absolute discontent, then you’ll have your moment very soon.

The VIX or Chicago Board Options Exchange Volatility Index is now in record territory ahead of this morning’s opening on Wall Street. This fear gauge is now completely off the charts (see chart below).

Running out of Bullets

Despite a concerted global central bank rate cut this morning, world markets are still declining. Overnight, stocks in Asia crashed another 5% and the Dow futures look pretty grim.

The Fed and other major central banks, including the Chinese, cut benchmark rates by 0.50% today. Though U.S. stock market futures were higher at 8am this morning, they’ve since turned negative. The Dow has now plunged more than 15% in six days.

Massive Rebound Ahead as Fear Gauge Skyrockets

I’m certainly not predicting a new bull market any time soon. The United States and the majority of foreign economies will continue to come to grips with a protracted slowdown that will curtail consumption, inhibit expansion and result in a long economic recession. The damage done to the financial system has been monumental these last few months. There is nothing central banks can do to reverse that – we’re too deep in the cesspool.

But stocks and weaker credits are going to muster a spectacular short-term rally – and soon.