Headline

So, I'm getting coffee today and I glance at the newspaper in the vending maching. It's the Claremont Daily Bulletin. The headline reads, "DOW Down 76 Points."

Psychologically, we are not ready for a rally. When nobody cares about the DOW anymore we will be at the bottom.

In other news, we just had the worst retail sales numbers for September in three years. Sales dropped 1.2%.

And the Great Unwind is not over. Bloomberg reports that $65 billion is still frozen in Lehman Brothers. It's $45 long and $20 billion short. But the market's dropped 20% since Lehman cratered and there are margin calls on these securities. That's just great. You get a margin call, you can't sell to salvage what you have left, and you may not even own the securities anymore! Steven Pearson at Pricewaterhouse Coopers is in charge of separating assets

held in trust on behalf of clients and those the bank held as collateral from clients that it could then loan to other investors, a practice known as rehypothecation.

``The biggest losers will be those who had the most assets rehypothecated because they're gone,'' said Pearson.

.....

``It's going to be many months and maybe beyond many months,'' he said. It could take years to unravel.''

.....

``Every second that they waste hurts,'' said Edward Chin, who runs Pride Revelation Fund, one of dozens of hedge funds in Hong Kong that used Lehman as their sole prime broker. ``We're looking at many hedge funds that will have to shut down, but they can't even shut down because they don't know what they have left. The thing is I cannot now even liquidate the fund.''

.....

``If you play the long game you can unlock value, and we can play the long game,'' said Pearson. ``If you hold a fire sale you get fire-sale prices. You don't want to be selling assets in a falling market.''

So, there you have it. Any rallies are going to be sold into for a long time.

And now comes some confirmation from Bloomberg of my idea that one of the unintended consequences of government action in the markets will be to institutionalize the credit crunch.

The discount cuts the cost of cash to 2.2 percent from 3.7 percent for General Electric Co. and from 4.7 percent for Citigroup Inc., data compiled by Bloomberg show. One possible unintended consequence: private buyers are shut out.

``The Fed can drive everybody else out of the market'' for buying commercial paper unless market yields drop, said Robert Eisenbeis, chief
monetary economist at hedge fund Cumberland Advisors Inc. in Vineland, New Jersey, who used to work at the Atlanta Fed. That could end up "`assuring that markets won't restart,'' he said.

The CPFF will be up and running by October 27th. One other thing that caught my eye is that they will only be accepting top-rated commercial paper. That might be very bad for GM. I'm getting nervous after XGM's huge runup over the past two days, and I am very tempted to sell half of my position, especially now that XGM has jumped from 15% to now about 25% of my portfolio.

And shipping rates dropped another 10%+ from yesterday. Even Bloomberg doesn't know how long it's been since rates were this low.

Commodity shipping rates plunged to the lowest in more than five years ... Traders are finding it harder to get letters of credit that guarantee payments for goods, shipping executives said.

Hmmmm... maybe some of this drop is overdone and will come back if and when credit starts moving again. DRYS has fallen 84% over the past year and its P/E is 1.04. However, shipping rates have also fallen over 80% and the question is not how much they make but can they cover their debts and survive.