Right track or roller coaster

After surviving the nation’s first fatal train wreck, Cornelius Vanderbilt swore off railroads for 30 years. (John Quincy Adams was on the same train in the same car.) At the age of 69 Vanderbilt decided to invest in a railroad venture and earned close to $20B in today’s dollars over the next 15 years. Thanks to the loathed railroad industry, Vanderbilt died the richest man in America.

Despite today’s moment in history involving Cornelius Vanderbilt, railroads and the right track, the market looked mostly like a roller coaster yesterday and a solid downside today.

We find our government entertaining more and more murky waters with the restructuring of AIG and Fannie and Freddie. If they choose the automobile industry (like we did in the 70’s) and don’t offer them any incentives to actually be innovative we only prolonging the inevitable demise of the American auto industry. I digress, here is a tidbit from Bloomberg – Land of the Living Dead – Corporations.
Nov. 11 (Bloomberg) -- The revised bailout of American International Group Inc. marks a new phase in the government's effort to shore up financial markets: It's the first time cash from the rescue fund Congress created last month has been committed to a failing company.
The Federal Reserve, which saved the insurer from collapse two months ago with an $85 billion loan, yesterday reduced that loan and offered lower rates, while the Treasury chipped in $40 billion from its bank-rescue fund to buy preferred shares. The new terms represent a departure for Secretary Henry Paulson, who until now has said he only wants to invest Treasury funds in ``healthy'' firms.
Taxpayers are ``keeping the zombie alive,'' said Robert Eisenbeis, chief monetary economist at hedge fund Cumberland Advisors and former director of research at the Atlanta Fed. ``We keep getting deeper and deeper into these holes.''
The shift is likely to vastly expand political demands for saving dying companies in the name of financial or economic stability. The administration of President-elect Barack Obama may soon have to consider credit or capital injections for other insurers, automakers, even retailers as the U.S. slides deeper into what could be the worst recession in a quarter-century.
Harken back a moment to the Spring. .. yes, oh so long ago. Fears arose that the US was about to embark on the kind of programs that kept Japan mired in a decade of growth. The analogy was quickly snubbed by officials citing where the Japanese didn’t allow bad banks to fail. As Congress reconvenes for a lame duck session to consider funds for autos and the like, it’s beginning to look a lot the shoe’s on the other foot.
November 15th Hedge Fund Window: Mass amounts of chatter and buzz are filling the airwaves about the looming deadline for a year-end hedge fund withdrawals and its possible implications. Jim Brown in his Premier Investor Newsletter.
The Nov-15th hedge fund notice day is also going to be a major event. If investors want to withdraw funds on Dec-31st they need to give notice by Nov-15th. Otherwise their next withdrawal window will be March 31st. In recent weeks 21 top funds have closed the gate on withdrawals. Hedge funds have a provision in their agreements that allow them to halt redemptions if they get redemption requests of more than 20% of their capital. This is called gating and is intended to prevent a run on the fund. Another type of gate only allows 20% of the amount you have invested to be withdrawn in a given period. 21 top funds have announced they were gated. There are probably dozens if not hundreds more that did not make pubic announcements. If funds receive a wave of redemption requests by Nov-15th it does not mean selling next week will crush the markets. It means there could be persistent selling through the end of December as funds raise cash. However, funds have already raised a significant amount of cash with an average cash position today at 30% in anticipation of further withdrawals. This suggests a calm notice date without any upsurge in withdrawal requests could actually result in a positive market as that money is put back to work.
Looking ahead – The support yesterday of 884 was broken and we are skating awfully close to the next support of 865 in the S/P500. If it were to break 845 we’ll start flying the SW flag or in layman’s terms the hurricane flag. October bottoms tend to be more sustainable if history is a good predictor – the Trader’s Almanac indicates that when bottoms straggle into November they are painfully longer.

Since the low of 10/10 we’re stuck in a rectangle. Tomorrow and Friday seem to be days to watch.


Sources: Art Cashin-UBS, Bloomberg, Financial Times, Jim Brown. This material is not intended to be relied upon as a forecast, research or investment advice, and is not a recommendation, offer or solicitation to buy or sell any securities or to adopt any investment strategy. The opinions expressed are as of November 12, 2008, and may change as subsequent conditions vary. The information and opinions contained in this material are derived from proprietary and non-proprietary sources deemed by Merrill Lynch to be reliable, are not necessarily all-inclusive and are not guaranteed as to accuracy. Past performance is no guarantee of future results. There is no guarantee that any forecasts made will come to pass. Reliance upon information in this material is at the sole discretion of the reader. Investment involves risks. International investing involves additional risks, including risks related to foreign currency, limited liquidity, less government regulation and the possibility of substantial volatility due to adverse political, economic or other developments. The two main risks related to fixed income investing are interest rate risk and credit risk. Typically, when interest rates rise, there is a corresponding decline in the market value of bonds. Credit risk refers to the possibility that the issuer of the bond will not be able to make principal and interest payments. Index performance is shown for illustrative purposes only. There may be less information available on the financial condition of issuers of municipal securities than for public corporations. The market for municipal bonds may be less liquid than for taxable bonds. A portion of the income may be taxable. Some investors may be subject to the Alternative Minimum Tax (AMT). You cannot invest directly in an index. Discuss your investment needs with your financial professional before investing.