Global Market Comments for March 6, 2009
Featured Trades: (GE), (C), (FXI),(BIDU), (SOHU), (NTES)

1) February nonfarm payroll came in at -651,000, taking the unemployment rate up to 8.1%, a 25 year high. The unemployment rate in California is now well over 10%. There were huge revisions up in the December and January figures. Remember when the market used to have a heart attack over a job loss of 100,000? Those were the days! More than 4.4 million workers have lost their jobs since December, 2007, taking the total unemployed to a record 12.5 million. It may be only a matter of months before we surpass the 1981 peak unemployment rate of 10.8%. These figures suggest that the current quarter GDP could be as low as -8%, the worst since the thirties.

2) Spreads on commercial real estate backed mortgage securities have absolutely blown out to the upside, with the lowest grade BBB- paper now yielding a staggering 45% over Treasuries. This is more than double the peak seen in the wake of the Lehman bankruptcy in September. It reflects just a few throw away bids by opportunistic hedge and vulture funds outside of a closed market, and equates to about 20 cents on the dollar. These are levels anticipating nothing less than a Great Depression II and the utter collapse of the commercial real estate market. The reasons, which you well know, have already been eloquently detailed in these pages: failing tenants, emptying malls, too much leverage, and no refinancing.?? This is one of the reasons why General Electric (GE), which has heavy exposure in the sector, is trading at the $5 handle, down from $38. This is all happening when some of the most expensive and luxurious commercial space ever built, which broke ground three years ago, is about to swamp the market.

3) It now takes only four shares of Citigroup (C) to buy a cup of coffee at Starbucks. The stock market has hit twelve year lows only three times in the last 109 years. Remember, bottoms are made when things look terrible and are getting worse. I am not a big market timer, but this certainly qualifies as one of those times. If you assume that we are seeing the worst economic conditions this quarter since the Depression, then we are setting up for improving conditions in Q2, and the market will start to discount that. The short interest out there is enormous, and the trade is getting too easy. Even my cleaning lady is running a leveraged short on the S&P 500. Could the short bubble be the next one to pop? Watch for another furious 10%-20% bear market rally ensue in the next few days or weeks.

4) There is more speculation that China may lead any upturn in the global capital markets. China's holdings of US government bonds leapt by $250 billion last year, through capital appreciation alone, taking their current market value to roughly $1.25 trillion. To finance a domestic reflationary program, China need only sell some Treasuries, not print money, as the US must. This would involve converting a sizeable chunk of the Middle Kingdom's productive capacity away from US oriented exports to domestic consumption, particularly accelerated much needed infrastructure spending. This would be painful in the short term, to say the least, but is necessary for the long term. This would enable the Chinese stock market to lead the world out of the current morass. Buy the iShares FTSE/Xinhua China 25 ETF (FXI).

5) Clever traders are keeping a sharp eye out for things to buy for the next recovery, whenever that is. Look at the industry of the future in the country of the future, Chinese Internet shares, which are growing 15%-30% a year with strong cash flows. Baidu (BIDU), which is often referred to as the Google of China, saw its shares sell off 75% last year, but have rallied 75% from the December lows. Internet use in China is expected to increase from 250 million to 900 million over the next 5-10 years. The majority will access the net via cell phones, where gaming is the dominant application. Expect huge growth at the four horsemen of the Chinese internet sector, which also includes Netease (NTES), Sina (SINA), and Sohu.com (SOHU).

6) A year ago GMAC financed 1,500 cars for Autonation, the country's biggest auto retailer.?? Last month they financed only nine, despite much higher demand. This tells you where the real problem is.

QUOTE OF THE DAY

?Pessimism is your friend, euphoria the enemy,? said Warren Buffett in his 2009 letter to shareholders.

Global Market Comments for March 4, 2009
Featured Trades: (SILVER), (GOLD)

1) The February ADP employment report showed a loss of 697,000 jobs. Since we are probably in a minus 6% GDP quarter, expect these numbers to remain grisly for months to come. Watch for the Labor Department's nonfarm payroll on Friday, which will be a blockbuster. Rumors of another China stimulus package caused stocks to pop, and took crude back up to $45. The bears have gotten complacent.

2) Simon Rubenstein, chief economist at the Royal Institute of Chartered Surveyors in London, sees global capital values and rents falling everywhere. The biggest hits are in formerly hot areas in China, Russia, and the Persian Gulf. Latin America has held up best so far, but now even it has started to crack. Falling exports and commodity prices are the villain, which is causing a reversal of a decades long globalization trend. The shortage of financing means only a few deals are getting done now, and we have some ways to go before we see a turn. Yields/cap rates have to rise 100 basis points before we draw in substantial investors.

3) I met my paperboy at 5:00 a.m. this morning, who is actually a Vietnamese girl driving a minivan. She delivered all five at once, which means the newspapers have outsourced local delivery to save money, who then aggregate customers to improve efficiency. Phuong took the rubber bands off of the papers when she saw that I was about to pick them up. Now that is cost cutting!

4) Now that we are at the 6,000 handle in the Dow and investors are jumping out of windows, it's time to put things in perspective. My old friend and global economist David Hale dug up some historical data for me. The maximum drawdown in real GDP from the 1929 high to the 1933 low was 26%. The decline nominal GDP was a steeper 46%. David's forecast for this recession is for a mere 3% drawdown. OK, what if?? this is optimistic, and it goes to 4%, or even 5%? We are not even in the ballpark of the numbers seen in the darkest days of the thirties. I know it makes for great, sensationalist headlines, but enough of this talk about another Great Depression already! Get a grip!

5) Howard Ruff is the irascible Mormon publisher of Ruff?? Times (http://www.cyrusfirst.com/guests/rufftimes3/index.php), which after 32 years is one of the oldest investment letters in the business, and one of the original worshipers of hard assets. He says that any investment denominated in dollars is a mistake, which is in a long term down trend. Silver is his first choice, which will outperform gold, and eventually top $50 from the current $12.50. Equities may never come back from their current slide. Don't buy ETF's because they may not actually buy the gold or silver they claim. The government is laying the foundation for a massive inflation which will begin in 6-12 months. You can't say this guy isn't entertaining.

QUOTE OF THE DAY

?Wall Street is the only place that people ride to in a Rolls Royce to get advice from those who take the subway,? said Warren Buffett, the Sage of Omaha.

Global Market Comments

March 2, 2009

Featured Trades: (BAC), (GOLD), (POLAND), (CEE), (MSFT), (INTC), (ORCL), (CSCO), (BRK/A), (COP), (JNJ), (GS), (GE)

1) The US is turning into Europe. Think high taxes, high unemployment, more government involvement in everything, and much lower growth. That is the message the markets are telling us by retreating to the 6,000 handle, levels not seen since 1996, and down 54% from the peak only 17 months ago. Equity prices are shrinking to multiples, in line with a permanently lower long term growth rate of maybe 2%, a shadow of the 5% rate seen for much of this decade. Maybe this is what mature economies are supposed to look like. If you do buy American stocks, only buy the ones that are really foreign stocks with American sounding names. Microsoft (MSFT), Intel (INTC), Oracle, (ORCL), Cisco (CSCO) all get 60%-70% of their profits from overseas where high growth rates have migrated. I think I'll move to Tahiti and live off of coconuts and freshly speared fish, wearing only a loin cloth.

2) Bank of America's (BAC) Ken Lewis says that he won't resign until he pays back the $45 billion in TARP money he owes the government. So paying $50 billion for something that is really worth a negative $170 billion is a bad career move? That's a revelation! I can see that secrecy is a concept that is forever banished from the investment community. CEO's won't be able to make an acquisition, nor fund managers raise a single nickel from here on, without a complete undressing, and a full proctologic exam!

3) Warren Buffet and his managers feel like 'hungry mosquitoes in a nudist camp.' So he revealed in his annual letter to investors in Berkshire Hathaway (BRK/A). I love it! This gem is an absolute must read for anyone in the markets. Although Buffet massively outperformed the indices, book value fell 9.6%, the worst performance since he took the helm in 1965. He admitted he did some 'dumb things', like adding to his holding in Conoco Phillips (COP) at the absolute top in the oil market, at the expense of safer stocks like Johnson & Johnson (JNJ). If you analyze his balance sheet and income statement, you can see the method to his madness. He only increased his net equity exposure by $1.3 billion. Much of his new investment went into high guaranteed return instruments, like 10% preferred in Goldman Sachs (GS) and General Electric (GE). He has greatly improved the long term cash flow of BRK/A at the expense of a short term hit to book value. Moves like this justify his 'Sage' appellation.

4) Panic buying of gold coins continues to overwhelm coin dealers around the world. According to the Financial Times, the US Mint sold 193,500 American eagles in the first seven weeks of this year, more than it sold in all of 2007 at prices 40% lower. Retail investors fleeing paper assets, like plummeting stocks and bonds, are paying 5% premiums over face values. The same phenomena is appearing in other countries where gold coins are available to the public. Does this have a toppy feel to it?

5) I met my paperboy at 5:00 a.m. this morning, who is actually a Vietnamese girl driving a minivan. She delivered all five at once, which means the newspapers have outsourced local delivery to save money, who then aggregate customers to improve efficiency. Phuong took the rubber bands off of the papers when she saw that I was about to pick them up. Now that is cost cutting!

6) While American banks have their subprime crisis, European banks are being dragged under by their lending to emerging economies in Eastern Europe. Led by UniCredit in Italy, Austria's Erste Group Bank and Raiffeisen International, France's Societe Generale, Belgium's KBC, and Hungary's OTP, banks have lent $1.6 trillion to companies in these formerly communist countries at cheap rates, with minimal documentation, and few questions asked. The easily available credit caused local money supplies to explode, and sparked bull markets in both stocks and currencies. Emerging Europe grew at double and triple rates in the West, as local companies pumped up on steroids became the master of leverage. Now $400-$600 billion is due for rollovers this year from nonexistent credit markets, and the chickens'?.make that vultures, have come home to roost. Economic growth has fallen off a cliff, with Poland's seasonally adjusted industrial output down in December a precipitous 7.4% YOY. The Polish stock market fell 48% last year and the zloty is off 40% against the dollar from its June peak. The Central European Equity Fund (CEE) has crashed 80% in eight months. The crisis is so severe, it may postpone Poland's entry into the Euro block, which had been scheduled for 2011. Home mortgage borrowers are in especially bad shape. Up to 50% of their loans were denominated in Swiss francs, so the collapsing Polish currency has caused a near doubling of borrowers' monthly payments and principals since last year. Austria really has its knickers in a twist, as these heavily syndicated loans account for 80% of GDP. A 10% default rate could wipe out the entire banking system there. Germany has the smallest loan exposure, but has the most to lose, with 25% of its exports headed east. It is now in negotiation with its partners in the EC to cobble together a bailout with the help of the IMF to provide bridge financing for these loans, and hopefully ward off a further economic collapse. It looks like the headlines in Europe are about to get uncharacteristically sensational.

QUOTE OF THE DAY

'If you have been playing poker for a half an hour, and you don't know who the patsy is, it's you,' said Warren Buffet.

Global Market Comments for February 26, 2009
Featured Trades: (GM), (YEN),(YCS)

1) Weekly first time jobless claims soared from 631,000 to 677,000, taking total claims to 5.1 million, a new all time high. General Motors (GM) announced a Q4 loss, and a 6.2 billion cash burn, leaving them with a scant $14 billion left. The company will have to file for bankruptcy when this figure drops below $10 billion, or in about two months. Last year GM lost $84.7 million a day! How does a $2 stock lose $15.71/share? Apparently when people are afraid of losing their jobs, their house, and are maxed out on their credit cards, they don't run out and buy a new car. At least some fiscal responsibility is returning. Unsurprisingly, CEO rick Wagoner was back on Capitol Hill today panhandling for more money. The death watch has started.

2) Here is a novel plan put forth by a hedge fund in Florida, Derivatives Bridge, LLC. Securities backing performing mortgages worth 100% are being sold for 20% because there is no market for these securities. Have the government buy these securities for 60%, rescuing the banks, and then sell them back to the original homeowner. The homeowner then is able to refinance his home, see his mortgage principal drop by 40%, restoring his net worth and purchasing power. The cost to the taxpayer is zero. This is already possible in some countries like Denmark. If someone offered me a deal like this I'd take it in a heartbeat, even if I had to clean out the sofa cushions and raid my kids' piggy banks. They say necessity is the mother of invention.

3) There is a lot of talk today about the recent weakness of the yen, which along with gold, became the focus of the 'short America' trade. The Japanese currency has backed off from its ??88 peak a month ago to ??98, breaking several key technical levels, and seems poised to go lower. Other than flight to safety, there was never a reason to go long of this currency. The trade and current account surpluses are in free fall, as Toyotas, Lexus's, Hondas, and Infinitis pile up on west coast docks. The economy is even sicker than ours, and with zero interest rates for the past 14 years, this certainly is nobody's yield play. Clearly the yen became the global carry trade's cheap date, and the cross has emerged as a highly sensitive indicator of global risk taking appetite. Could this bout of weakness be a mustard seed of economic recovery, a light at the end of the tunnel? Watch the Proshares Ultra Short Yen ETF (YCS), which gives you a 200% short play, and is up 25% in a month.

4) The City of New York has repaid municipal bonds that were issued in 1868, thought to be one of the world's oldest paying securities. The 135 year, 7% bonds were issued by a small hamlet in modern day Bronx to finance a road to one of the nation's first racetracks. It was a bet that New York City would one day expand north and annex the village, which it finally did in 1895. The city is still paying interest on bonds with 250 year maturities, which were originally floated by Winston Churchill's American grandfather. This was an incredibly clever financing for 1868.

QUOTE OF THE DAY

In the business world, the rearview mirror is always clearer than the windshield,? said Warren Buffett, the Sage of Omaha.

Global Market Comments for February 24, 2009
Featured Trades: (GOLD), (GLD), (SPG)

1) The Senate Banking Committee holds hearings while Rome burns. The S&P Case-Shiller Home Price Index showed a Q4 fall of -18.2%, the sharpest decline in its 21 year history. Prices in San Francisco fell by 31.2%. We got within 100 points of a 6,000 handle on the Dow this morning, and a print there would have sparked a global stampede to the restroom. But Bernanke managed to assuage fears today, prompting a 234 point rally in the Dow. All ears are on Obama tonight.

2) Gold finally hit a wall just above $1,000, and instantly melted $50. For many traders who got in just above $700 three months ago, it's time to say thank you very much to Mr. Market and either wait for a substantial pull back, or go on to the next trade. It was taking increasingly larger purchases of physical gold by ETF's and coins by individuals to push the price up. CME statistics showed the speculators' position soared to a net long of 215,661 contracts ($21.5 billion). The SPDR Gold Trust ETF (GLD) added five tonnes of the barbaric relic to 1,029 tonnes in just one day. The turnaround neatly sets up a double top on the long term charts with the high set last year. It may take a couple of more runs, and more bad news, which seems in abundant supply, to get the yellow metal to a true new high.

3) The forecasting firm Macroeconomic Advisors says that we are going through the 'epicenter' of the recession right now. They see Q4 GDP being revised down from -3.8% to -6.0%, and that Q1 will come in at -5%. These numbers fall somewhere in between the 1974 recession and the Great Depression in terms of their severity, and are double the worst case scenario offered only three months ago. A tsunami of infrastructure spending, stimulus, and newly recapitalized bank lending will bring positive growth of 2% in the second half. Lower interest rates are slowing down the home foreclosure rate. Many states and municipalities, like Denver, started shovel ready projects the very second that Obama signed the stimulus bill, but it will take months to see the impact on the data. In layman's terms, thing are about to get a lot worse, then a lot better pretty quickly, giving us a classic 'V' type bottom for the economy.

4) With many analysts expecting commercial real estate to be the next shoe to fall in the financial crisis, there is already maneuvering to get a bail out in place before the sushi hits the fan. 'Ghost malls' now widespread around Michigan are spreading to the coasts like a highly contagious plague. Simon Properties (SPG) and Westfield have gone to the extremes of shortening hours to save money on staffing costs and electricity. The trigger will be impending failed rollovers of the debt of a couple of big REITs, of which over a $1 trillion are coming due. The Treasury's TALF program will be expanded from CDO's backed by student loans, car loans, and credit cards to include commercial real estate loans, giving the industry the safety net, and the breather it needs.

QUOTE OF THE DAY

?There is only one side to the stock market, and it is not the bull side or the bear side, but the right side,? said Jesse Livermore, the famed stock speculator of the 1920's.