Global Market Comments
May 1, 2009

Featured Trades: (COAL), (TBT), (SPX), (CRUDE), ($USB), (BAC)

1) OK guys, it's May. Go Away. I mean vamoose, andele, raus, ike nasai! You've just had the best two month run in 30 years. It's time to sit down and smell the roses. Go climb that Alpine peak you've always wanted to attempt, finish off that basement, or take the misses down to Cabo. Maybe your nine iron needs some work. Whatever. There are no decent risk/reward trades in the market right now. All of my long recommendations, like emerging markets, commodities, crude, and junk bonds, are through the roof. My shorts have cratered, with the 30 year Treasury bond futures down a whopping 20 points, from 142 to 122. All of my longs are way overbought, and my shorts are oversold. I can't in good conscience ask traders to just sit on big unrealized profits. Never slap a double in the face, especially in this environment. Nobody ever got fired for taking a profit. Always leave the last ten percent for the next guy. There is no law that says you have to trade every day of the year. Better to reestablish at better prices, like in August. If you strapped on any of these trades, the first four months of 2009 gave you a great year. If you didn't, don't break your back playing catch up. It's not worth it. As for me? I'm going down to Vegas to shop for condos at ten cents on the dollar and do some actual gambling.

2) I wanted to get the low down on clean coal, a political hot potato in the energy sector, so I visited some friends at Lawrence Livermore National Laboratory. The modern day descendent of the Atomic Energy Commission, where I had a student job in the seventies, the leading researcher on laser induced nuclear fission, and the administrator of our atomic weapons stockpile, I figured they'd know. Dirty coal currently supplies us with 50% of our electricity, and total electricity demand is expected to go up by 30% by 2030. The industry is spewing out 32 billion tons of carbon dioxide (CO2) a year and the global warming it is causing will lead us to an environmental disaster within decades. Carbon Capture and Storage technology (CCS) locks up these emissions deep underground forever. The problem is that there is only one of these plants in operation in North Dakota, a legacy of the Carter administration, and they cost $4 billion each. The low estimate to replace the 250 existing coal plants in the US is $1 trillion, and this will produce electricity that costs 50% more than we now pay. And while we can build a wall to keep out immigrants, it won't keep out CO2. This is a big problem as China is currently completing one new coal fire plant a week. In fact, the Middle Kingdom is rushing to perfect cheaper CCS technologies, not only for their own use, but also to sell to us. Since it appears that Obama is not willing to wait on anything, expect to hear a lot of sturm und drang about CCS this year. For proof of this, look at the chart of coal prices below. While competing crude has had a good year so far, coal has been dead as a doorknob.

3) With luxury spending in free fall, it is no surprise that the wine market has crashed. The Liv-ex 100 Fine Wine Index, which tracks the performance of 100 mostly premium Bordeaux wines less than 25 years old, has plunged by 22% since its 2007 high, and there is no support in sight. The market is coming off a spectacular run up which saw prices nearly triple in the previous five years. Gone missing from the market have been newly wealthy Chinese social climbers, hedge fund managers, and former corporate titans. Typical is Chesapeake Energy (CHK) CEO Aubrey McClendon, who resorted to a distress sale of his multimillion dollar wine cellar after a highly leveraged bet in his own company's shares went wrong. With the recession driving many wine wholesalers out of business, more inventory is being dumped on the market, driving prices lower. For the brave at heart there is the Cayman Islands based Vintage Wine Fund which invests in a portfolio of fine wines and charges hedge fund type 2%-20% fees with quarterly redemption. The fund has posted a 26.8% annualized return since its launch in 2003. As for me, I am happier as a wine consumer than a wine investor. See you at Costco.

4) So many hedge funds are happy to bet against Bank of America (BAC) that prime brokers are reporting shortages of stock available for borrowers who want to short it. Those willing to bet that the financial crisis is anything but over will have to pay a premium to do so.?? BAC quadrupled off its February low to $11.25, and even some of the most loyal shareholders don't mind taking some money off the table here.

QUOTE OF THE DAY

'The markets are in LALA Land at the moment, but soon John Wayne will kiss his costar and the lights will come on,' said John Brown, senior market strategist of Europacific Capital.

1) Q1 GDP came in at minus 6.1%, much worse than expected, hitting the economy's green shoots with a fatal dose of herbicide. There will no doubt be some at the Fed who are green around the gills over this one. There was a surprise fall in government spending, while consumer spending did better. With a good chunk of US industry either shut down or running on shortened hours, inventories are shrinking at a tremendous rate.?? Still, the market decided to look at the glass that is half full, and leapt 168 points.

2) I attended the FinovateStartup09 conference in San Francisco yesterday to get a sense of what technologies are headed our way in the financial sector. The techfest, which drew 350 attendees, was sponsored by the leading financial blog aggregator Seeking Alpha. The one liner is that I was awed, and a little frightened. It is safe to say that there is no corner of the financial industry that is not about to come under attack by disruptive, minimal overhead encumbered, Internet based business models. Peer to peer online banks, like LendingKarma, LendingClub, Pertuity, and People Capital, were in abundance, where borrowers and lending are brought together in a totally transparent fashion in amounts as small as $50. KaChing is a virtual investing environment that tracks 375,000 portfolios. Investors can hook any of these up to a real brokerage account, which then replicates the trades by any star managers. For $125, LowerMyAssessment.com will appraise your house and then file an appeal with state authorities to get your property taxes lowered. Secondmarket matches buyers and sellers of illiquid securities like CDO's, auction rate securities, bankruptcy claims, limited partnership interests, mortgage backed securities, and restricted stock. Valuecruncher allows researchers to go into the spreadsheets of analysts' company reports and change their underlying assumptions. I have to confess that I felt like a dummy after listening to eight hours of jargon like 'logic abuse', 'bolt on software', and 'man in the browser' worms. It is amazing how many entrepreneurs and their backers are taking the plunge with times so dire.

3) High yield bonds, less politely known as 'junk', have seen a dramatic improvement in the past month, making it the best performing fixed income asset class this year. With junk default rates expected to skyrocket this year, and a huge backlog of new supply overhanging the market, investors have been staying away in droves. Last year yields shot up as high as 25%, implying improbable future default rates of over 75%. The actual Q1 default rate came in at only 7.0%, up from 1.5% a year earlier, and rating agency Moody's sees a worst case scenario of 14.6% this year. But a strong stock market and the opportunity cost of zero short term interest rates was enough to entice players off of the sidelines, who snapped up $7 billion in securities in April. The improvement in conditions is a welcome blast of fresh air to companies in debt heavy industries like REIT's, hotels, and property developers. At the end of 2008, I recommended the SPDR Lehman High Yield ETF (JNK) which has since jumped by 27%. Take a look. There are more gains to come.

4) Another sign of the times. The New York Yankees announced that it is drastically slashing prices for its premium seats behind home plate at its new $1.5 billion stadium. The $2,500 seats were chopped down to $1,250 and the $1,000 seats were pared to $650.?? Season ticket holders are being showered with new free seats. The team's legendary retired manager, Yogi Berra, who threw the season opening pitch in April, once said, 'When you come to a fork in the road, take it.'

5) You would think that dentistry is a nice recession proof profession to hide out in, but you would be wrong. My dentist is a crotchety old 70 year old who delights in telling you an 'X' rated joke while giving you a root canal. It turns out that many people view dental care as the first luxury to cut when times are tough. Many patients have lost jobs and health care insurance and will only come in when something is broken or hurts, and then ask for big cash discounts. His new visits are off 70%. He's tried to make ends meet by cutting staff salaries by 20%, but it is not enough. So he will try to negotiate down his office rent when his lease comes due. It seems there is no corner of the economy that hasn't been affected by the recession.

QUOTE OF THE DAY

'Congratulations, you're going to Detroit', is not something you hear very often these days. That is what number one NFL draft pick and University of Georgia drop out Matthew Stafford was told when handed a six year, $41 million contract by the Detroit Lions.

1)?? I have to confess that when my alma mater, Morgan Stanley (MS), announces earnings, it still tugs at the heart strings. We endlessly outperformed expectations, but laughed because we knew there were tons of latent profits sitting on the back books. The stock would rocket to trade at a luxurious five times book. We were the invincible Masters of the Universe. Things have changed a little bit since the eighties. Today the company said it lost $190 million in Q1, and that revenues plunged from $7.92 billion to $3.04 billion. The dividend was cut 82% to a paltry five cents a share, and the stock backed off?? 9%. Those coupon clipping retired Morgan MD's have got to be pissed. I have to confess that 'risk adjusted returns' is a term that is new to me when applied to corporate earnings. The venerable white shoe company disclosed so many special onetime only provisions it almost earned a place in the Guinness Book of Records. Bizarrely, it lost money on marks because its own debt is now trading higher than three months ago, wiping out unrealized gains on the theoretical short. Mark to market can be a bitch. Guess what? Lower risk taking means fewer profits. Thank goodness I'm not there anymore, now that the salad days are a distant memory. CEO John Mack should have stayed at hedge fund Pequot Capital, where he would no doubt now be reaping an astronomical bonus. But those of us who know John will tell you it was never about the money with him. He had to be the biggest, baddest boy on the block, the Master of the Masters of the Universe. If you had to name two firms that are going to survive this mess they are MS and Goldman Sachs (GS). They are, after all, still the smartest people in the room. Do I need to point out that the stock is up 430% from the October low?

2) CEO Mike Jackson of Autonation, the world's largest car seller, has the best read on this market of anyone. Annualized sales are now at 9.5 million, a 60 year low on a per capita basis, and down from a high of 20 million a few years ago. A six month shut down of the car loan securitization market is to blame. Today General Motors (GM) announced a nine week total shut down of its plants this summer to deal with backbreaking inventories, and also possibly to anticipate a chapter 11 filing. But ultimately, we are creating enormous pent up demand. Some 13 million cars are scrapped each year, and another million new households are established, creating a 'natural' market for 14 million cars a year. The bigger question is who will be left standing to capitalize on this. The US car market could be owned by foreign manufacturers by the time a recovery comes around.

3) Anyone who had doubts about where the future of equity investment lies, should check out international index moves since March 9. Although the US enjoyed a 26% leap, the best in 70 years, it ranked only 25th globally. The top performers list is dominated by emerging markets. The Ukrainian stock market was up 67%, followed by Puerto Rico, 53%, Romania, 49% and Peru, 49%. Next are Russia, Vietnam, Hong Kong, Pakistan, Egypt, Greece, India, the Czech Republic, Saudi Arabia, Spain, Singapore, Taiwan, Argentina, Mexico, Turkey, Israel, and Croatia. Granted, many of these markets moved so much because they are illiquid. But looking at the list, I get a strong whiff of commodities, energy, and international trade, themes I believe will dominate for the next decade. The new big trend has shown its hand. Do you want to own stock in a country that is growing 1%-2% a year, or 8%-10%? Smart investors will use this rally to lighten up on the US and increase holdings in higher growth emerging markets. Or you can buy the iShares MSCI Emerging Markets ETF (EEM). I wonder if Rosetta Stone (RST) offers a language program in Ukrainian?

4) The transportation market is in the process of getting fragmented beyond all recognition. There are at least a half dozen different technologies to power cars with electricity under construction.?? Better Place is building stations in San Francisco, Hawaii, Israel, and Denmark to swap out 1,000 pound batteries in a car wash type set up. The Renault-Nissan Alliance is building fleet charging stations in Portland and Phoenix. The Chevy Volt is going to count on an overnight charge from a standard wall outlet. There are choices for 110 volt versus 220 volt, slow versus quick charges, and solar options. Massive government subsidies are upending commercial considerations. It is reminiscent of the early 1900's, when steam, electric, diesel, biomass, and gasoline power options competed on a level playing field for consumers' attention. In the end, gasoline won out because it was the cheapest and delivered the most energy per unit, but it took 20 years to sort out. I wonder how the hapless car buyers without the PhD's in engineering are going to deal with all of this? This is a much bigger call than choosing VHS over Betamax, because owning a dead end technology could cost you $50,000. I bet a used Stanley Steamer didn't fetch much in 1925 when gas stations made it to every street corner. Are we all going to have to haul around a trunk load of power adapters like we already do for cell phones, Blackberries, and laptops? Are we even going to need cars, or will they end up as toys of the idle rich and hedge fund managers?

QUOTE OF THE DAY

'Consumers are not going to buy a $40,000 electric car when they can buy a comparable car for $15,000 to $20,000 with some oil consumption,' said Nissan CEO Carlos Ghosn, dismissing the competitive threat posed by the General Motors (GM) Volt.