Credit markets sieze up ... who's the next casualty? ... when to buy Russia? ...Chavez expels US ambassador

Yesterday wasn't a very fun day as the credit markets appeared to completly sieze up. Reportedly, there were only cash sellers yesterday with no bids at all, one broker saying it was as dry as he'dever seen it, including in the run up to the Bear bankruptcy. Moreover, the iTraxx indices don't hint at the stress under the hood because almost no one is trading CDSs right now because of the huge up front payments now required for the index constituents. Everyone knows there is another casualty - Lehman today, who the hell know who tomorrow? - and feels it's only a matter of time before that casualt starts dumping its market making inventory on the market. It felt like something very bad was about to happen all day, although it didn't ... in fact it turned into a modest rally which has carried through into Asia this morning ... 

No doubt the fastest retail sales growth since 1999 in China this morning helped. Might the consumer now "decouple" from the the slowing export driven sector of the economy? Well, if "decouple" is the latest euphemism for "lag" then yes, it probably will. Property prices are now falling now in major cities (e.g. Shanghai down 25%) making a meltdown look increasingly in the cards according to Morgan Stanley. So maybe we should temper our relief. Anhu Conch Cement - China's biggest construction materials maker - fell 10% this morning on just such concern. 

In recent months the authorities raised downpayment requirement for potential purchasers, and reserve requirements at banks ... look for those to be reversed in coming months. Can you refinlate bubbles once they've burst though? No you can't. But maybe it wasn't a bubble - maybe it was a miracle? I guess we'll just have to wait ... also out this morning was industrial production growth which was reported as the softests it's been in six years ...

Dick Fuld has brought Lehman back from the brink on four seperate occassions in recent times. On Wednesday's conference call he said “We’ve been through adversity before, and we always come out a lot stronger.” So much stronger that they continue getting into these ridiculous near-death experiences every time there's a downturn ... looks like they've finally managed to kill themselves this time though. The stock was down about 40% yesterday and is now trading around its 1994 IPO price! One of the few guys who's done well out of LEH is Mr. Dick Fuld himself, who was paid $40m last year. I'd have blown LEH up for half that ... 

Things are looking very ugly now. Merrill looks like the next target, trading below $20 (from $80 last year and $100 eighteen months ago) as does AIG (also trading well below $20). When the tech bubble burst earlier in the decade most of its darlings either went bankrupt or fell by the wayside. The strong, the ones still standing prospered when the weak had been eliminated. I wonder who amongst AIG, Merrills and Goldman will be World Com, who will be Amazon and who will be Google?    

The Russian index was down another 4.1% after a late swoon yesterday. It had actually been trading in slightly positive territory most of the day ... so how bad can it get? Well let's see ... the banking system relies on the capital markets for 75% of its funding; capital is fleeing the country by around $1bn a day; the banking system has leant heavily to oligarchs who've levered up holdings in Russian stocks; those stocks are now cratering because the "industrialists" who levered into them are now forced sellers of them; power, not the rule of law, holds sway; and that power is concentrated in this man's hands:

However, there is still $1bn coming into the country every day from the oil and gas revenues, and despite having spent $20bn defending the rouble in the past two weeks, reserves stand at $570bn, the third largest in the world. This is the key chapter missing from the usual emerging market blow up story. The entire market cap of the Russian equity market is around $500bn, so they probably have enough ammo to weather the storm (although I don't know what foreign holdings of domestic bonds are ... trying to find that out). 

Meanwhile, the CB is also providing as much liquidity as it physically can to the banking system. This isn't having an obvious effect right now since interbank rates continue to spike. Moreover, transferring dodgy collateral from the banking system's balance sheet to the central bank's rarely ends in anything but tears. But that's a problem for tomorrow. Everything has a price and its beginning to feel like it's time to buy Russia. It has the potential to get uglier first, as these things always do, but if there's one thing I know about emerging market investing its that these sorts of collapses are as inevitable as their timing is completely unpredictable. The only way to make decent money as an investor is to hold your nose and buy when things look ugliest ... difficult to do as a short term trader so we have to wait for the trigger ... just not sure what that might be yet ... 

Maybe it will be a turn in commodities? The historical volatility of of the CRB hit a thirty year high this week according to Bloomberg, although its not clear to me why an indicator which works well for equities should work for commodities, which have very different statistical properties ... oil is stronger this morning though, as are the other commodities, as Ike heads towards Texas and Venezuela expels its US ambassador while threatening to stop supplying the US market ... Ken Livingston's mate Hugo Chavez, eh?