Global Market Comments for March 18, 2009
Featured Trades: (XLF), (XLY), (RLX), (HGX), (HD)

1) The quality of this rally is convincing some investors that this could be the big one. After financials (XLF), which are having an obvious dead cat bounce, the leaders of the past week have been the sectors that led into this recession, like consumer discretionaries (XLY), retailers (RLX), and home builders (HGX). The chart of Home Depot (HD) tells the whole story. These are exactly the sectors you would expect to move in a new bull market.

2) Consumer prices jumped by 0.4% in February, the largest increase since July, suggesting that we may not be plunging into a deflationary death spiral after all. Rising gasoline and clothing prices led the way. Expect contradictory economic data to increase from here.

3) Here is another mustard seed. Pfizer successfully floated a jumbo $15 billion multi tranche, multi maturity bond issue to finance its $65 billion takeover of Wyeth. The three year paper was priced at 305 pips over Treasuries, with the shorter term paper 195 basis points over three month LIBOR. These are not exactly bargain terms, but the fact that this deal got done at all is proof that life is certainly returning to the corporate lending market. Seeing investors show up tells you that some of the systemic risk is starting to ebb.

4) OPEC voted to keep quotas at their current reduced levels, spurring crude to top $50 yesterday, a two month high. At this point, helping revive near comatose importers with low prices is more important for members than squeezing out a few more dollars in revenues. The cartel has done a better job keeping cheaters in line than in the past, with Saudi Arabia doing the heavy lifting on production cuts. We are backing off a couple of bucks today because of a surprise 3.2 million barrel jump in gasoline inventories. But the enormous contango has started to shrink, suggesting that the $32 low we saw in December is looking safer by the day. Could crude's revival be another early hint at a recovery in the broader global economy?

5) I'm glad that I'm not counting on an AIG bonus check to clear the bank. CNBC has turned into the AIG channel. I can only imagine how that annual review conversation went down. 'The good news is that your bonus is $5 million. The bad news is that you will have to spend $25 million in legal fees defending it'. Thank goodness for small favors. What hath Obama wrought?

QUOTE OF THE DAY

'To be right when a great power is wrong can be a dangerous thing,' said Benjamin Franklin. He should know.

Global Market Comments for March 16, 2009
Featured Trades: (CHINA), (BAC), (C)

1) Fed chairman Ben Bernanke did a great interview with CBS 60 Minutes last night. It's nice to know that the recession 'might' end this year. He ruled out the big banks going to zero, which is great news for Bank of America (BAC) and Citigroup (C). This should support global stock markets for at least another day, and every day helps! Who knew he missed only one question on his SAT test to score a 1590 and that his mother didn't want him to go to Harvard because he didn't have the right clothes? I bet it was a question in the verbal section. It was all a nice bit of hand holding while we may be enduring the worst quarter for the economy in a century. If we don't surpass the -8.1% seen in Q1, 1981, it will certainly be in the top three worst quarters of all time. Anyone going shopping, visiting a car dealer, or waiting in long lines for unemployment benefits will tell you this. By the way, BAC is now trading like a penny stock, up nearly triple from last week's low. A BAC triple? Pinch me!

2) Ian Bremmer, President of the Eurasia Group, the world's preeminent independent risk control consultant, passed through town last week to promote his latest book, The Fat Tail: The Power of Political Knowledge for Strategic Investing. The book details how money managers must become cognizant of and deal with foreign laws, regulation, government turnovers, civil unrest, expropriation, terrorism, and war, in order to survive in this increasingly complex and interconnected world. Globalization has ground to a screeching halt. Governments are now more important than multinationals in influencing our economic future, and a new form of 'state capitalism' is emerging. We are shifting from a unipolar to a nonpolar world. Iraq is morphing from war into a peace keeping operation, while Afghanistan is rapidly moving in the opposite direction. Geopolitical risks are rising. With crude at $46 a barrel there is no Iran premium currently in the market, and $20-$30 could price in very quickly. China and Brazil are the long term winners in the new set up, and the dollar is the big loser. The greatest risk to the US is its overdependence on borrowing from China. This is a must read book for any hedge fund manager struggling with his global risk exposure and looking for some great long term plays.

3) In one of the worst market timing efforts ever, the Financial Times reports that China dramatically increased it weighting in equities and other risk assets for its $1.8 trillion in reserves in early 2007, just before the markets crashed.?? The, unfortunately named, State Administration of Foreign Exchange (SAFE) boosted its holdings in US equities alone, from $4 billion to $100 billion, which have since dropped at least by half. It turns out the Middle Kingdom took its hard earned profits from US exports and used the money to buy, now worthless, American lottery tickets. I'm glad I'm not the guy who has to explain this decision to the country's senior leadership. At least poorly performing fund managers in the West don't face firing squads, or at least not yet.

4) The top Ten Messages Found on Bernie Madoff's answering machine, according to comedian David Letterman:

10) 'This is Barnes & Noble. I'm sorry we don't sell calendars for the year 2159.'
9) 'Hey Bernie, I've been out of the country-how are my investments doing?'
8) 'Blockbuster calling. Your copies of 'The Great Escape' and 'The Shawshank Redemption' are overdue.'
7) 'Do I have the correct number? Is this 1-800-F***-***?'
6) 'It's Ruth'?if you go out, remember to swindle some milk and eggs.'
5) 'If you're under house arrest why aren't you home?'
4) 'Sorry, I didn't mean to dial your number. I just sat on my phone.'
3) 'Hi Bernie, its A-Rod's cousin. You looking to bulk up for prison?'
2) 'It's Michael Phelps. Need something to help you relax?'
1) 'It's George W. Bush. Can I still get in?'

QUOTE OF THE DAY

'How badly can you get hurt falling out of a basement window,' said Bob Brusca of Fact and Opinion Economics about current stock prices.

Global Market Comments for March 12, 2009
Featured Trades: (TBT)

1) Forbes Magazine has published its annual list of the 400 wealthiest, and the carnage has been awesome. The net worth of the elite club has shrunk from $4.4 trillion to $2.4 trillion, with the average dropping from $3.9 billion to $3 billion. Bill Gates, worth $40 billion, jumps back up to the number one position, even though he lost $18 billion in 2008. The number of billionaires has plunged from over 1,100 to 793. Among the fallen are Citigroup's Sandy Weil, Facebook's Mark Zukerberg, and AIG's Hank Greenberg, and of course, Sir Alan Stanford.?? China managed to add five new billionaires, including Wang Chuanfu, founder of battery maker BYD, who has attracted backing from Warren Buffet for his electric car efforts.

2) The global economic collapse has finally hit China with full force, knocking down exports by 25.7%, and shrinking imports by 24% in February. The ghastly figures show how rapidly international trade is shrinking. The Middle Kingdom's trade surplus is in free fall, and it is just a matter of time before the renminbi starts to fall against the dollar. Do you suppose that anyone in the US government understands that this will lead to fewer Chinese purchases of Treasuries, just when they need to sell the most? Better double up on the TBT, the 200% short long bond ETF.

3) Looks like we are going to have to invent ourselves out of this mess. One third of US GDP is produced by companies that were created after 1980. Almost all new jobs are created in firms that are less than five years old. These figures show that innovation is the primary driver of new hiring.

QUOTE OF THE DAY

' For decades, the money shufflers, the paper shufflers, have been the captains of the universe. That is now changing. The people who produce real things will be on top. You're going to see brokers driving taxis,' said legendary investors Jim Rogers, former partner of George Soros.

Global Market Comments for March 10, 2009
Featured Trades: (GE), (ABX), (SPX), (WTIC), (OIL)

1) It only took a few dew drops of good news for the Dow to recover from its near death experience and rocket 350 points. The 'I love America trades' of long bonds and Treasuries came back with a vengeance. The 'short America trades' were last seen running down the street with their tails between their legs, with gold breaking key support at $900. News that Citigroup was profitable in 2008, and rumors of the suspension of the uptick rule and mark-to-market accounting were enough to do the trick. It also helped that every technical analyst on the planet was screaming 'Buy!'Although this may not last, even a single day of fresh air is welcome.

2) While most industries are facing the worst conditions in 70 years, the market for business journalists is booming, who investors increasingly look to for advice on how to save their last dollar. During the first two months of this year the financial network CNBC, a subsidiary of General Electric (GE), averaged 282,000 home viewers, compared to 264,000 last year and 233,000 in 2007. The financial crisis is boosting profits there, much as the Gulf War did for CNN in 1991. The network is now increasingly becoming the story itself, offering a rallying point for criticism of the Obama administration as it plays to its overwhelmingly conservative audience. Anti bailout comments by futures markets reporter Rick Santelli, who called those behind on mortgages 'losers', sparked nationwide 'tea party' rallies. The theatrical Jim Cramer accused Obama of causing 'the greatest wealth destruction of any US president,' inviting a White House counterattack. Convincing people they are sick, and then offering to sell them the medicine for a cure, has always been a great business strategy.

3) There is one canary in the coal mine that was squawking loud and clear yesterday. Chinese stockpiling, hedge fund short covering, and rebel interruption of exports from Nigeria drove crude to a two month high yesterday at $48.50, up 50% from its December low. The huge contango, where far month futures contracts traded at enormous premiums, has shrunk dramatically, taking selling pressure off of the front month contract. Perish the thought, but could this be an early indicator of an economic recovery? Today's stock market action certainly says so. Go buy that Smart car!

3) The Financial Times printed a great interview with Peter Munk, the visionary chairman of Canada based Barrick Gold (ABX), the world's largest gold producer. He says that it will only take decisions by a few central banks to move gold up to $2,000 an ounce. The feeling of insecurity is here to stay, and the appeal of gold as a hedge has broadened enormously. With a new floor of gold at $800, the profitability of gold mining companies is soaring. Gold is a win-win play because if financial distress continues, so will gold's flight to safety bid. If the economy recovers, jewelry demand will come roaring back. The world's gold supply is constrained, as miners are having to dig deeper and deeper. Send me another sack of American eagles!

QUOTE OF THE DAY

'If I had only followed CNBC's advice, I'd have a million dollars today, provided that I'd started with $100 million,' said John Stewart of the comedy program, The Daily Show.

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.