Global Market Comments for January 16, 2009 Featured Trades: ($GOLD), (GM) 1) Captain 'Sully' Sullenberger of US Air's flight 1549 did an unbelievable job landing his Airbus 320 on the Hudson River yesterday. As a pilot who had flown across the Atlantic and across the English Channel hundreds of times, I have spent a lot of time contemplating ditching. In flight school you get to practice ditching on a simulator, watch FAA movies of staged ditches, and endlessly memorize pre ditch checklists. But you never get to practice them. It is all just theory. You can count the number of double engine failures of jets in all of aviation history on just one hand, and the rest happened when planes ran out of gas. To keep your cool and pull one of these off in frigid waters, and not lose anyone, is a miracle. It's like trying to land an aluminum beer can at 125 mph without denting it. 2) I attended a lecture by New Yorker Magazine columnist Malcolm Gladwell last night, author of The Tipping Point, Blink, and Outliers, and probably the most prolific publisher of original, consensus challenging ideas today. Half English and half Jamaican, the preeminent challenger of clich??s and stereotypes was himself a clich?? and a stereotype, wearing the standard issue New York intellectual's blazer, pressed shirt, blue jeans, and loafers, to compliment his gaunt face and conspicuous afro. His latest book challenges the myth of meritocracy, that luck is a bigger factor in success than privilege or education, that in fact all meritocracies are rigged. Bill Gates built Microsoft not by being brilliant, but by having the good fortune to be raised by a family who could send him to one of the few Seattle high schools that then had a computer program. The Beatles made it only because they practiced probably more than any other group in history. The falling crime rate since the seventies was not the result of a series of get tough measures, but the removal of lead from gasoline in 1973. Successful hockey players are almost exclusively born during the first three months of the year, enabling them to beat the crap out of younger, smaller competitors in their junior years. It is cheaper to deal with the homeless than ignore them, because of the massive drain they create on the public health system. He cited the infamous example of the drunk 'Million dollar Murray' who single handedly drained Reno's emergency rooms. All in all, a night well invested. 3) 2008 was a frustrating year for gold bugs, who waited a half century for the financial system to collapse, only to see the barbaric relic's price drop 30% when it finally came. Ironically, it turned out that the yellow metal was just as dependent on the financial system as everything else. You take away credit and leverage from gold owners, and the metal falls just as fast as copper, aluminum, lead, coal, crude, real estate, stocks, corporate bonds, and your beanie baby collection. Gold has a particular problem in that the dozen central banks that were dissolved to create the ECB still have 500 tons a year of the metal to liquidate, and they are behind their allowed schedule on these sales. There haven't been enough Indian weddings, Middle East investors, coin collectors, new technological applications, and cavity ridden teeth to soak up this excess supply. The $800 low we hit this week suggests we may go lower first, before taking a run at the highs again. 4) General Motors is so desperate to raise cash that they are selling a large part of their vintage car collection through auctioneer Barrett-Jackson. On offer are a 1918 Cadillac for $60,000, a 1960 Impala for $85,000, and a 1969 Pontiac GTO for $200,000. They may have trouble getting rid of the 2001 Pontiac Aztec for $40,000, cited by many as the ugliest car ever designed. 5) Oil sands producer BA Energy of Edmonton, Alberta filed for bankruptcy. Oil sands are the most expensive energy alternative out there, needing crude prices of $80-$90/barrel to stay competitive. The technology required the burning of the equivalent of 100 barrels of tar sands to create one barrel of oil. Expect more to follow.

Global Market Comments for January 15, 2009 Featured Trades: (BAC), (XEU) 1) By the time Bank of America (BAC) waded through the incredible opaque balance sheet of newly acquired Merrill Lynch, they had turned green around the gills. The toxic assets they stumbled on to put the Love Canal to shame. Only more TARP money on top of the $25 billion they have already taken can repair the damage. The news gave shareholders the willies, which dumped the stock 20% today. Implied volatility on the company's stock options leapt from 130% to 200% overnight. Did BAC buy a pig in a poke? Did they overpay at $50 billion? I'm sure Merrill shareholders are laughing all the way to the bank. Give former Merrill CEO John Thain a Nobel Prize for salesmanship. The only certainty in all of this is that BAC's 12% dividend is toast. But they are still the leper with the most fingers. 2) The 30 year fixed mortgage interest rates hit a new all time low of 4.96%. Looking at the tidal wave of government cash going into this sector, I think it could eventually go below 4%. It will soon be cheaper to buy than to rent. 3) The US trade deficit for November fell to a five year low of only $40 billion. Imports plummeted by 12%, while exports declined by 6%. Cashed starved Americans are just not buying anything anymore. Another major factor has been the $400 billion in the US bill for foreign oil, which is falling in both price and volume. It is the 'J-curve' effect in reverse. This has all been a driving force behind the strong dollar, and will continue for the foreseeable future. 4) Americans' new found thrift is happening at China's expense. Ten million workers have been laid off since the financial crisis began, and a wave of bankruptcies by retailers and small manufacturers going into the Chinese New Year (the year of the ox) is expected to toss more out on the street. Long term watchers of the Middle Kingdom worry that riots and civil strife is not far off. 5) European Central Bank President Jeane-Claude Trichet finally cut interest rates by 0.5%. The euro didn't care and dove to a one month low. Trichet is seriously behind the curve and the market smells blood. 6) I never ceased to be amazed by what the Internet throws at me. Take a look at this brilliant, professionally produced guerilla marketing effort by JC Penneys' jewelry department. It is a riot! It shows you the lengths to which companies are struggling to discover new advertising and business models. Husbands and boyfriends beware! Just paste this link to a new browser. It takes about five minutes to view.?? http://bewareofthedoghouse.com/VideoPage.aspx.

Global Market Comments for January 14, 2009 Featured Trades (C), 1) The financial supermarket is an idea whose time has clearly gone, as we learn that it was just a strategy to lose more money, in more exotic places, in more exciting ways. The sale of Citibank's (C) crown jewels at fire sale prices, like the deal with Morgan Stanley for Smith Barney, just to get enough cash to make it through the quarter, marks the beginning of the end. I believe that we are witnessing an effective voluntary dissolution of (C) to head off an involuntary chapter 11 filing. US bank earnings forecasts are still lost in Lala land. Expect more surprise shotgun marriages between banks, and dilution of existing bank common shareholders. 2) The Citibank developments, which have been unfolding since Monday, stuck a thumb in the eye of the stock market's fragile 2009 rally. The 857 level in the S&P 500 a make or break point for the market, and traders had no problem taking it through the key number like a hot knife through butter. Bank and railroad sub indexes have already broken through their November lows, and retest for the main indeces is now in the cards. The markets are now telling us that the 'end of the world' trade is back in play. 3) I attended a luncheon today for old college economics professor, former Labor Secretary Robert Reich. The bad news is that we will lose another three million jobs this year, taking unemployment easily into double digits. The good news is that we are not entering another Great Depression, or even a Japanese style lost decade. We are in the midst of a cyclical recession, albeit a very deep one, from which we will emerge in 2010. Part of the problem is that the share of earnings of the top 1% of American income earners has soared from 8% in 1980 to 23% in 2006. These people don't spend their money, they invest it, effectively removing it from the retail economy. 4) In July, when gas was at $4.49 a gallon, I told you to buy a Hummer. Now I'm telling you to go skiing. Friends tell me that despite the best snow in years, the slopes at Vail are deserted. According to my old CPA, who is now the CFO of Vail Resorts, visitors are down 5.8%, lift ticket sales are down 7.8%, and hotel bookings are down 14.8%. Parking for private jets at the airport is easily available for the first time in years. Indeed, Costco is now offering two for one discount lift passes for almost every ski resort at Lake Tahoe. 5) Crude dives. More than 325 million barrels of crude are now in storage worldwide, a new record. This is equivalent to four days of global consumption, 16 days of US consumption, and 32 days of US imports, and the world is running out of storage. 6) With the Big Three carmakers now in their final death throes, there is one car maker whose sales are still booming. Smart Cars saw December sales jump 24% MOM to a total for the year of 25,000 units. With gas prices low, dealers are still able to market the 30 mpg vehicles as a hedge against future gas price spikes. At $12,000 they are so cheap they don't need financing, are environmentally friendly, easy to park, a new fashion item, and are 'cute.'

QUOTE OF THE DAY

'Ten billion, here, ten billion there, and pretty soon you're talking about real money,' said the late senator Everett Dirksen.

Global Market Comments for January 13, 2009 Featured Trades: (PTEN) 1) The 'all clear' signal given by the markets last week has been cancelled. All of the 'feel good' trades, like stronger crude, gold, commodities, and Dow, have all viciously reversed in lockstep. The 'feel bad' trades like a stronger yen, euro yen, and Treasuries have once again reared their ugly poxy heads. There are basically only two trades in the world right now: 'things are getting better' and 'things are getting worse.' Only corporate bonds have held up because they are the cheapest thing out there, and will be the earliest to recover. I have a feeling that this kind of choppy, frustrating, range trading will continue for another six months. Things will become even more difficult to trade when the economic data evolves from all bad, to some good, some bad, later in the year. If you want to trade the market, lie down and take a long nap first. Like until September. 2) Hybrids now account for 2.4% of the severely diminished US car market, and 125,000 of these, or half, are accounted for by Toyota's Prius. The Japanese car maker has been developing this vehicle for more than a dozen years, and has had a competitively priced product on the market that consumers love for eight years. The just launched 2009 model is bigger, more powerful, with better mileage, for the same price. And the company's plug in version, now in fleet testing, which will enable drivers to live a largely carbon free existence, will be available in the US in 2010. Listening to Detroit and its apologists promise Congress they can save their industry with a ground up design of an inferior, later, and more expensive product, shows you how delusional they really are. 3) If you don't like the way the markets have been behaving lately, blame sun spots, which have been appearing in the fewest numbers since 1913. Many days this autumn saw no sun spots at all! Many economic historians are convinced of the validity of this theory. Fewer sun spots correlate with colder winters and agricultural failures, which feed into the economic cycle. Higher wheat and soybean prices this month are already starting to reflect this. 4) After last year's carnage, you can expect the remnants of the hedge fund industry to split in two. One group will inherit large, illiquid fixed income positions, like convertible bonds and subprime CDO's, and evolve into private equity funds, which they should have been all along. The rest will retreat to trading large liquid global positions that did well during the nineties, offering investors quarterly redemptions they now demand. Fees will fall across the board. This is how hedge funds will cope with a new world that is transitioning from excess capital to a capital shortage. 5) The world is drowning in crude. The spot/June contango is now up to an unbelievable $12. This means that you can buy crude today at $38, store it, and resell it for June delivery for $50. The trade has filled 75% of the world's storage capacity, and the balance can be had only for an enormous premium. There are so many dislocations going on in the world economy today that it is hard to keep track of them all. 6) I continue to feel like a kid in a candy store with these oil service stocks because I believe they have one more good crude spike in them. Look at Patterson-UTI Energy (PTEN), which operates 403 rigs for oil and gas drilling in the Midwest. The stock has been truly trashed by the oil glut, so the PE is now down to 5 X, and the dividend stands at a generous 5.5%. At its book value you are buying a rig for $5 million, which costs $15 on the open market. This means that it is now cheaper to drill on the floor of the New York Stock Exchange than in an oil field. I did business with these guys in my wildcatting days and they are a standout bunch.

QUOTE OF THE DAY

'Sometimes the end of an old technology is more exciting than the beginning of a new technology,' says comic Jay Leno of his new 650 horsepower SLR McLaren Mercedes.

Global Market Comments for January 12, 2009 Featured Trades: (FLS) 1) If you had any doubt where the next equity play is going to be, take a look at the chart below, which I lifted from The Economist. It shows that by the end of this year, 80% of GDP growth will be generated by emerging economies, while only 20% will come from developed ones. Time to brush up on your Portuguese, Russian, Hindi, Mandarin or Cantonese, and for good measure, Korean. Forgetting you know where Wall Street is might also help.

2) Hennessee Group says that hedge funds lost an average 18.9% in 2008, the worst year ever. Despite all of the moaning, I think this is pretty good for a year when all known asset classes, except Treasuries, dropped by half. And the jungle telegraph tells me that there are thousands of disciplined, risk controlled, low leveraged traders out there who used the volatility to generate great years, but are keeping a low profile. Making tons of money has suddenly gone out of fashion. 3) War sure has changed in the Internet age. Israelis are coming home from work, setting up lawn chairs outside, and making videos of incoming missiles. They then post these on YouTube to be viewed by cheering supporter in the US. The closest explosions are getting the most views. 4) Many economists believe that the Great Depression?? was only ended by the massive spending brought on by WWII, which cost $4 trillion in today's dollars. So when Obama says that we are looking at trillion dollar deficits as far as the eye can see, he is not kidding. 5) I continue to like buying key oil infrastructure stocks here at throw away prices, as cheap undated calls on the future resurgence of crude prices. Flowserve (FLS) is a global supplier of pumps, valves, seals, automation, and services to the power, oil, gas, and chemical industries. After a 75% drop in the stock, it now sells at a PE multiple of 7 X, giving you a return on equity of 33%. It's a perfect case of a baby being thrown out with the bath water. Remember my call eight months ago to buy airline stocks as cheap puts on crude before their 400% rise? Same thing. You are getting free leverage on multiple fronts with no expiration date. 4) Some 23% of the population of California does not speak English, compared to 14.5% for the entire US. These numbers have gone up since Homeland Security closed the border with Mexico.