Oil jumped 10% yesterday but overall stock markets declined by as much as 3% in late trading amidst various ‘rumors’ that a large hedge fund was going to “fall” and that there would no bailout for the auto industry.

This morning stocks continued to tumble around the world after the Senate officially rejected a bailout for the “Detroit Big 3” automakers which will only threaten to deepen the global recession. U.S. Treasuries rallied and yields fell to record lows. The MSCI World Index lost 1.7%, GM shares plunged 32% in Germany while Honda and Daimler dropped more than 8% (metals and crude oil prices also slumped).

In short, stock markets are in a very dire situation and are in a very risk adverse situation. Standard & Poor’s 500 Index futures sank 4%, Europe’s Dow Jones Stoxx 600 Index lost 4.1%, while the MSCI Asia Pacific Index fell 3.7%. “It’s over with,” Senate Majority Leader Harry Reid said on the Senate floor in Washington last night. “I dread looking at Wall Street tomorrow. It’s not going to be a pleasant sight.” A collapse of GM and Chrysler is worrisome for the U.S. in particular. We are in a synchronized or integrated world so it will have an impact elsewhere and it will challenge the assumption that there will be the expected U.S. economic recovery mid-2009 onwards. Supposedly the only difference between the supporters and the blocking republicans came down to when pay cuts should happen. Unions wanted concessions to start in 2011 but the blocking Senators wanted 2009 (wonder what the Union will be saying now? – at some point we need to ‘play together for the benefit of all’).

Investors have been betrayed again by politicians, even with the knowledge that we are in the midst of a recession they were unable to come to an agreement. Investors have decided to sell now and ask questions later. A potential failure of U.S. automakers will have immediate “ripple” throughout the U.S. economy which will affect demand for Asian products (since employees for the company consume things made in Asia) and add to recessionary pressures as mentioned.

Denso is the world’s biggest listed auto parts maker and they dropped 12%. Aisin Seiki, Japan’s largest maker of car transmissions dropped 13%. In short, the auto industry is not going bankrupt but just contracting – big time! There will be survivors.

The S&P 500 earlier this week had marked a “technical” end to a 14 month bear market, extending its rebound from an 11 year low last month to as much as 21%. President elect Barack Obama has stepped up efforts to pull the economy out of a recession. Yields on 10 year U.S. Treasury notes declined to 2.48%, the lowest level since 1954. We also saw the number of Americans filing first time claims for unemployment benefits jump to the highest level since November 1982, a report showed yesterday. As mentioned, if you lose your job, you don’t spend. If you see others lose their jobs, you don’t spend either.

With today’s drop the MSCI World Index is trading at 11.4 times the earnings compared with this decade’s average ratio of 26.5. The worst global financial crisis since the Great Depression pushed the index value down to 10.5 times earnings on October 27th, the cheapest in at least 13 years as data compiled by Bloomberg shows.

Regards,

Wilfred Vos Bcs, CFP, FMA, FCSI, CIM, CFA, MBA, DMS, CBV

SVP & Partner