Global Market Comments for February 20, 2009
Featured Trades: (POT), (PBR), ($COPPER), (SCHW)

1) Gold blasts through $1,000 to a new high for the year. Need I say more?

2) Here is another thought about Obama's mortgage bailout plan. It is so small, and helps so few, it isn't really a bail out at all. It doesn't help those with mortgages over $625,000, a second home, investment properties, and those who have no mortgages (20% of the US total). Those who do qualify will have to run a gauntlet of qualifications and paperwork. No wonder the market for mortgage backed securities completely shut down! The plan does enable Obama to satisfy the left wing of the Democratic Party crying out for some government relief of their constituents, like Nancy Pelosi. It also makes a nice headline.

3) Here's another one for the unintended consequences file. The bankruptcy of Lehman Brothers could lead to up to 50 of London's better restaurants going under. The defunct investment bank was a profligate spender of expense accounts, corporate events, and bonus payments, racking up huge bills. Restaurateurs?? are coping by cutting staff costs, offering cheaper cuts of meat and more chicken dishes, bargain wines like Argentinean malbec and Spanish rioja, and great value for money prix fix menus.

4) Exchange traded funds, or ETF's, were one of the hot financial products of 2008, and enable investors to go 100% or 200% long or short any number of indexes, sub indexes, industry groups, bonds, currencies, and commodities. The largest issuers have been Barclay's iShares, State Street's StreetTracks SPDR's, Rydex, and PowerShares. Sponsors of ETF's have filed for registration of another 850 such products, including ETF's for many new single country funds for Columbia, Egypt, Argentina, Peru, and the Nordic countries. Charles Schwab (SCHW) has also announced that it is entering this field for the first time. These will allow fund managers to make more narrow and specific bets in the capital markets. But they will also increase market volatility, as they obviously did last year.

5) Someone recently bought a portfolio of performing home loans with an average FICO score of 698 for 14 cents on the dollar, giving a current yield of 45%. This shows you how shabbily these illiquid assets are being treated. It also tells you what the world is going to look like without leverage. Everything is going to be a lot cheaper for a long time.

6) Legendary investor George Soros has substantially increased his investment in Potash (POT) and Petrobras (PBR), two stocks I love. Potash is the Saskatchewan based world's largest miner of potassium carbonate, which is in heavy demand for fertilizer from China. The stock is only just recovering from a melt down from $240 to $50. Petrobras is Brazil's oil major, which has made a sting of offshore oil discoveries. PBR gives you a triple play on the recovery of crude prices, a long in the Brazilian currency, the Real, and the high growth rate of this emerging economy. All three offer great entry points right now. A classic 'George' play.

7) In 2007, global urban dwellers surpassed rural ones for the first time. Some 90% of all new urban dwellers are in emerging markets. By 2015 three out of four urban dwellers will be in emerging markets, according to the UN. Half of all emerging market urban dwellers do not have access to clean water, nor have their garbage collected. This has major implications for long term investment themes. Buy copper ($COPPER).

QUOTE OF THE DAY

'Pass this package by tomorrow, or we won't have an economy on Monday,' said Fed chairman Ben Bernanke at the Treasury's emergency meeting in October.

Global Market Comments for February 18, 2009
Featured Trades: (NAT)

1) Obama's mortgage bailout package is out, and the market didn't care, hitting new six year lows. After wading through pages of arcane, mind scrambling detail, it appears that $75 billion will be made available to distressed homeowners to cut mortgage payments to 31% of their income. It allows cram downs, where bankruptcy judges can reset loan principal amounts. The plan only applies to conforming loans of $625,000 or less, which account for 50% of the $12 trillion in debt outstanding. This means that only 4-5 million homeowners will qualify, who own less than 7% of the US housing stock. Homeowners with jumbo loans in CA, NV, NY, AZ, and FL, who are now seeing default rates of 9%, need not apply. At best, the plan is merely a 'feel good,' political measure that will do nothing to halt the downward spiral in home prices.

2) An increasing number of companies are claiming that the current financial crisis entitles them to trigger 'force majeure' clauses to get out of contracts. Hoosier Energy successfully did so to get a stay on $120 million in loan repayments to John Hancock. Now Dow Chemical is attempting the same to void their $15.4 billion takeover of Rohm & Haas, as is Donald Trump in getting out of a $40 million loan guarantee for a condo tower in Chicago financed by Deutsche Bank. At the very least, the threat of litigation is forcing counterparties to the table to reconsider terms.

3) George Soros, who is now approaching 80, is about to publish another book entitled The Crash of 2008 and What It Means. Conditions are now worse than during the Great Depression, when total credit peaked at 160% of GNP. It was at 365% a year ago, and may reach 500% before we turn a corner. Obama's fiscal stimulus package is great, but is just a down payment. A new mortgage system has to be built out of the ashes of the old, where originators have to absorb the first 10% of any ensuing loss. The banking system needs to be recapitalized, with bad assets diverted into a government financed 'side pocket', much like the large, illiquid hedge funds are doing. The government needs to use taxation to guarantee a $70 floor for oil prices to spur an alternative energy industry. The international financial system needs to be remade through the creation of new, American sponsored 'Standard Drawing Rights' (SDR's) which the IMF can use to support weaker emerging economies. It is all well thought out. This summary will save you from having to wade through George's normally dry, turgid prose.

4) With 50 million barrels of crude in storage at sea, tanker companies have the buffer they need to weather the first globally synchronized recession. As long has crude for delivery in a year trades at a $10-$15 premium to the spot price, known as contango, this fleet will grow. Slow steaming, or cutting cruise speeds from 15 to 13.5 knots to reduce fuel consumption, is having the effect of taking another 35 million tons of tanker capacity off the market. With a 10% yield, Nordic American Tanker Shipping (NAT) is now the highest dividend paying stock listed on the NYSE, and gives you a pretty safe way to play this anomaly. The stock has no debt, $500 million in unused credit lines, and a bargain PE multiple of 9 X.

5) Some 20% of US electricity comes from nuclear power. Half of that is powered by fuel made out of reprocessed Russian nuclear weapons which we bought from the old Soviet Union. I didn't know that. Talk about pounding swords into plow shares!

6) Here are the top internet search terms for December. Amazingly, 0.6% of all Internet traffic was looking for Santa.
Rank ???? ??Search Term ???? ??Volume
1. ???? ??santa tracker ???? ??0.04%
2. ???? ??obama shirtless ???? ??0.03%
3. ???? ??norad santa tracker ???? ??0.02%
4. ???? ??track santa ???? ??0.02%
5. ???? ??after christmas sales ???? ??0.01%
6. ???? ??eartha kitt ???? ??0.01%
7. ???? ??michael jackson ???? ??0.01%
8. ???? ??mnemonics ???? ??0.01%
9. ???? ??www.itunes.com ???? ??0.01%
10. ???? ??itunes.com ???? ??0.01%

Global Market Comments for February 13, 2009
Featured Trades: (ABX), FCX), (GOLD)

1) We learned yesterday that not only does the Obama administration watch the stock market carefully, it also has a technical analyst on board. We were exactly at a crucial support point on the charts when the Treasury leaked the home mortgage subsidy plan, triggering a ferocious 300 point short covering rally in the Dow. A couple of points lower, and a deluge of stop loss sales would have been triggered, taking the market down 500. The message from the Feds is that if you want to play on the short side here, do so at your own peril. Suddenly, running a hedge fund has become harder, as if we didn't have enough on our plate already.

2) If you have been regularly reading my letter you should by now have sacks of gold American Eagles stacked up against the walls, your portfolio is brimming with gold mining stocks like Barrick (ABX), Freeport McMoran (FCX), and Rangold Resources (GOLD), and your safety deposit box is groaning from the weight of the gold bars it is holding. The barbaric relic is now up 20% since I recommended it in December, and you are no doubt wondering how to spend your new found fortune. Gold has since become the trade of the first quarter, with the open interest on call options on the Street Tracks Gold Shares ETF (GLD) exploding from 445,000 to 1.1 million in just the past few weeks. Options implied volatilities are suggesting that gold could hit $1,115/ounce by June. Oops, you forgot to buy the yellow metal? Use $50 pullbacks to get long. Investors will continue to pour into the sector, since it is one of the few things the government can't create more of with a printing press.

3) New Hampshire's Republican Senator Judd Greg withdrew his nomination for Commerce Secretary, the second such to go down in flames. The bribes he must have gotten not to switch sides had to be enormous. Why is the administration having difficulty filling this position at the height of the worst financial crisis in 70 years? Who wouldn't want to take the job of social director on the Titanic?

4) Noted economist David Hale sees Obama's stimulus package and bank bailout paving the way for a US led a global economic recovery from this summer. The plans will act as an insurance policy against a worsening of conditions, and may be worth 3% of GDP growth. The spending is necessarily back ended because of the time delay needed by large projects. It is spread out over the following years:

2009-$170 billion
2010-$356 billion
2011-$174 billion
2012-$48 billion
2013-$25 billion
2014-$24 billion
2015-$11 billion

Q1 GDP could fall by as much as 6% as a huge inventory liquidation ensues. The new TALF will make available $1 trillion to private investors cheaply to buy CDO's backed by credit card, student loans, and home mortgages. It is significant enough to have a major impact on prices, although the market has not digested this yet. The program will preclude any further major bank failures and lead to a rally in bank shares, although many small banks will still go under. The collapse of the global auto industry, with sales falling from 50 million annually to 39.5 million in a year, has been especially damaging for export economies. Japan will see -11% GDP this year, the worst since WWII, followed by -6% for Germany, and -4% for the UK. What to buy now? Gold, which could see new highs this year. What a surprise! Net, net, it is a pretty upbeat, but realistic analysis.

QUOTE OF THE DAY

'The rate of profit is always highest in the countries that are going fastest to ruin,' said Adam Smith in The Wealth of Nations on the dangers of 'overtrading.'

Global Market Comments for February 11, 2009
Featured Trades: (IWM), (LSE-AJG), (BAC)

1) After the passage of an $800 billion in stimulus, and another bank bailout package, I don't see any market boosting events on the horizon. Hence the Dow's 400 point swan dive yesterday. The market is not going to wait until the end of the year for all of this stuff to work. Until then, we only have Obama moaning about the Republican caused train wreck of an economy he inherited, and Congress highlighting how incompetent and crooked our financial leaders are. This isn't exactly going to inspire investors to rush out and buy stocks. Look for new lows.

2) I always hate listening to Barney Frank's House Financial Services Committee hearings. Bank of America (BAC) CEO Ken Lewis took an eight hour train ride from North Carolina to attend. Talk about the blind leading the one eyed. I can't believe how much Morgan Stanley's CEO John Mack has aged. I'd rather listen to someone scratch their fingernails across a chalk board. And our fate is in their hands! Sheesh. No wonder gold hit a new high for the year of $948. The people are voting with American Eagles.

3) More than 48 million Americans own shares in the top five banks.

4) Some 90% of all mortgage lending is now coming from the government. The balance is being made by large banks to borrowers with FICO scores of 800 or better, or by small regional banks you never heard of that never got into the securitization business.

5) According to one recent poll, 44% of the workforce is worried about losing their jobs. These people aren't going to be trading up to new houses anytime soon.

6) These are indeed dark days for Silicon Valley's venture capital industry. With the exit door slammed shut for years to come, new money is staying away, avoiding the high risk multiyear lock up. Angel investors have gone back to heaven. The deterioration of the economy has been so rapid that the rationale for many start ups is no longer there. Many web 2.0, next generation models for social networking sites, video sharing sites, wikis, blogs, and folksonomies never made it to profitability, and will be swept away. Expect a lot of once hard to get office space to become available for cheap on Sand Hill Road soon.

7) This is a great time to buy small cap stocks in any equity market, including Japan. This sector was one of the worst hit in the recent melt down, but historically it outperforms by a large margin in the first 12 months after the end of a recession. Once their survival is no longer in doubt, these often debt dependent stocks rocket on any improvement in the economic trend. This is the only time I ever hire outside managers, because I haven't the patience, the manpower, or the expertise to scour over the balance sheets and earnings statements of hundreds of obscure little niche companies. I have always been a big cap player because I have always dealt with investors who had to get $100 million to work in the market in a hurry, an impossibility in the small cap arena. In the U.S., buy the iShares Russell 2000 Index ETF (IWM). For the Japan play, buy the closed end Atlantis Japan Growth Fund (LSE-AJG) traded in London, managed by my old friend Ed Merner, at $8.05, a bargain basement 27% discount to its NAV of $11.04, if you are lucky enough to find shares to buy.

Atlantis Japan Growth Fund

QUOTE OF THE DAY

'Necessity never made a good bargain,' said Benjamin Franklin.