Global Market Comments for December 22, 2008
Featured trades: (SKS), (WMT), (TGT), (JWN)

1) Traders were expecting a Santa Rally today and got a Grinch instead, with a three digit decline in the Dow. Markets were buzzing about a piece on the front page of the Wall Street Journal today announcing the impending demise of the commercial real estate market. More than $160 billion in debt is coming due in 2009, and $530 billion in the next three years, and no secondary market for such debt currently exists. The TARP grows again.

2) Retailers are hunkering down to survival mode as the Christmas shopping ends, depriving them of their last opportunity to dispose of inventory at retail prices for the foreseeable future. In a market where the only thing that talks is price, big discounts this month are to be followed by even better buys next month. Saks Fifth Avenue (SKS) is already holding 70% off sales. There is a seismic shift going on, seeing shoppers flee in droves from high cost luxury products sold at Saks and Nordstrom (JWN), towards the bargain basement at Walmart (WMT) and Target (TGT). In fact, Walmart is the only Dow stock that is up this year. Store buyers have adopted a 'less is more' philosophy, giving ultimatums to suppliers to cut prices or else. Retailers are slashing credit lines on their own credit cards to dodge an explosion in uncollectable receivables. Brand consolidation is another common cost saving strategy. Despite the best managerial efforts, many companies are headed for the morgue. Any LBO with debt due in 2009 is toast. The International Council of Retailers expects 73,000 stores to close in the first half of 2009, laying off 600,000 workers. This is not a happy place to be right now.

3) Credit Suisse believes that there will be 6 million more foreclosures over the next four years. The $1 trillion subprime crisis is now behind us, with most resets completed by the end of this year. One Lehman pool floated two years ago saw 43% of these borrowers default. But there is another $1 trillion plus in Alt-A and option ARM loans still out there, and the resets on these don't peak until 2010. This means that residential real estate will be a black hole for at least another five years. The median price of a home in Northern California has dropped from $629,000 to $350,000 in the past year, an eight year low.?? It's a great time to rent!

4) With more revelations of truly unbelievable losses over the weekend, it is clear that Bernie Madoff has done more damage to the State of Israel than 50 years of terrorist attacks by Hamas, Hezbollah, and the PLO combined.

5) The average life of a computer connected to the Internet, before it is destroyed by a virus, worm, or Trojan horse, without any security software at all, is 16 minutes.

6) Using the Black-Schoales options prices model, someone has calculated that the Treasury has earned an unrealized $8 billion profit in its newly acquired warrant and preferred holdings in US banks so far.

7) If 2008 was the year from Hell for hedge funds, 2009 will be worse for venture capital funds, which will see their most Darwinian year ever. Since there is neither M&A nor IPO's now, the exit for these investors is closed for the foreseeable future. All management attention is being focused in helping existing portfolios of companies survive with what they have by squeezing out marginal revenues and cutting expenses to the bone. What little new capital that is trickling in is from Asia, and that is going mostly into clean technology and life sciences. Information technology is now an orphan. Countless start ups starved of cash will go under, and most likely take several venture capital funds and management firms with them. Not good for Bay Area commercial real estate.

QUOTE OF THE DAY

'Engles never flew on an airplane; Stalin never wore Dacron,' said the late Chinese premier Deng Xiaoping on launching his economic reforms 30 years ago.

Global Market Comments for December 19, 2008
Featured trades: (UAUA), (LUV), ($XJY)

1) Detroit gets $17.4 billion in life support, and the markets go to sleep. It's a Band-Aid over a stab wound through the heart. Industry analysts figure the real cost of a desperately needed ground up remake of Detroit is closer to $125 billion. Toyota announced its first loss in its 71 year history. The Bank of Japan cut interest rates to 0.1% to stem the furious inflow of capital by panicky Japanese banks dumping foreign investments, which has driven the yen ($XJY) up to a decade long high of ??87.

2) Crude at $33! Who would have thought it possible? With gasoline on its way to 99 cents a gallon, it's back to gridlock as usual in the San Francisco Bay Area. The morning back up at the Bay Bridge extends to an hour again, and there are never any parking spaces at the BART station. Hummer drivers are no longer wearing their disguises. A lease on a Prius has gone for $550/month in July to only $200/month. United Airlines (UAUA) is now considered a model of management savvy, while those irresponsible dopes at Southwest Airlines (LUV) recklessly hedged three years worth of fuel consumption at $51/ barrel. That's the way the markets are right now; hero one moment, goat the next.

3) If you think the 77% collapse in crude is a big move, look at it in Euros and the yen. Texas tea denominated in Euros has plunged 79% since July, and a staggering 87% against the yen. Crude has dropped from ???238/barrel to ???45/barrel, and from ??16,600/barrel to ??2,870/barrel.

4) The Federal Reserve says that the net worth of Americans has shriveled by $7 trillion in the past year. According to Zillow.com, a residential real estate website, the value of US housing stock alone has dropped by $1.9 trillion in the first three quarters of 2008. One out of seven mortgages is now under water.

5) With the Fed now committed to unlimited buying of Fannie Mae and Freddie Mac long dated paper, interest rates on conventional 30 years mortgages have suddenly hit an all time low of 5.17%, and are almost certain to drop below 4% quickly. This is consistent with the Japanese experience, which saw mortgages drop to 3.5% with the discount rate at zero at the bottom of the Japanese deflation in the late nineties. The no brainer for consumers here is to refinance and lock in 30 year fixed rates when we hit the 3% handle, if they can, because we will see 12% mortgage rates after inflation rears its ugly head.

6) New York's serendipitous governor David Paterson is struggling with the decision of who to appoint to fill Hillary Clinton's vacated Senate seat. President John F. Kennedy's daughter Caroline Kennedy is the emotional favorite, but is too inexperienced. New York State Attorney General Andrew Cuomo has paid his dues, but doesn't inspire the masses. Want to hear an outlier? Put underemployed Bill Clinton back to work! Everything else bizarre has happened this year, so why not? You heard it here first.

7) Senior management at Credit Suisse was offered the choice of a fruit cake or an illiquid collateralized debt obligation derivative for a Christmas bonus. They ran out of fruit cakes in the first hour. Really!

QUOTE OF THE DAY

'The depression is over,' said President Herbert Hoover in May, 1930. It still had eight more years to run.

Global Market Comments for December 17, 2008
Featured trades: ($BSE), (TBT), (BAC), WFC), (AMGN), (XOM), (MS), (COF), (VLO), (DRYS)

1) The big trade to make in 2009 will be to dump your safe assets, and pour into risky ones. That is what zero interest rates are telling you to do. Throw in the fact that global shipping is now essentially free, and fuel is free compared to where it was six months ago. Dump the stocks that saved your bacon this year like Bank of America (BAC), Wells Fargo, (WFC), Amgen (AMGN), and Exxon (XOM), and buy shares that have been destroyed, like Morgan Stanley (MS), Capital One (COF), Valero Energy (VLO), and Dry Ships (DRYS).

2) OPEC announced production cuts of 2.2 million barrels/day, and crude responded by dumping 5% to $43. Ninety nine cents a gallon here we come! I told you to buy that Hummer six months ago!

3) Zero interest rates triggered the largest one day drop in history of the dollar against the euro, from $1.36 to $1.43. Watch out for the unintended consequences of the ZIRP policy. There is no free lunch.

4) An estimated $400 billion is now frozen in hedge fund redemptions, most in those funds with bond oriented strategies.

5) In case you missed it, Barron's convened a panel of top portfolio managers a year ago to ascertain their market outlooks for the end of 2008. The consensus view was that the S&P 500 would reach 1,650, and earnings would climb to $100/share. Today the Index is at 900, having just visited 760, and earnings are headed for $50/share. I am thinking of cancelling my subscription.

6) Investors are ecstatic over the Fed's new zero interest rate policy (ZIRP), driving the prices of 30 Treasury bonds up 25% just since Monday. But the inevitable long term result has to be hyperinflation. Once the Fed puts hard dollars out there it is hard to call them back. In order to deal with one bubble, they are creating another, in Treasury bonds. In fact, the fuel for such inflation has been building up since the beginning of the first Bush administration, which more than doubled the national debt to $10 trillion in a mere eight years. The chart below shows that while Roosevelt's New Deal was derided by Republican's as wastefully excessive at the time, it was actually quite small in modern terms. Once the bond markets fully reflect the new interest rate regime, and complete their once in a century spike up, the long bond will be a screaming short. You can short long bond futures outright, which give you 20:1 leverage, or short the US Lehman 20 year plus ultra short ETF, (TBT), which offers a 200% short position in the sector.

Global Market Comments for December 16, 2008
Featured trades: (GM), (GS)

1) The Consumer Price Index fell by 1.7% in November, the biggest drop since records began in 1947. New housing starts plunged to an annual rate of only 625,000, an all time low. The replacement rate is 1.2 million units. This helped force the Fed to cut rates by 1% to zero, a historic low. Traders were stunned into momentary inaction, much the same way a stick of dynamite thrown into a pond paralyzes the fish. Even the most uber doves were not forecasting zero rates until sometime next year, after the economy worsened considerably, and all other options had been exhausted. The Dow rocketed 359 points. This guarantees that 2009 will be a healing year for the economy and all asset classes. Zero interest rates make it a whole new ball game.

2) Wall Street was also invigorated by the news that Goldman Sachs (GS) lost only $2.1 billion in Q4. The big hits were in credit products and real estate. It shrank its balance sheet by 18% to $885 billion, an urgent deleveraging. The company sees its best opportunities going forward in international business. It also plans to cherry pick through the smoking wreckage of the US regional banking system to make selective acquisitions to boost its deposit base, an important direction, now that it is a bank. The stock jumped 7% on the news, but is still selling at a 25% discount to book value. The cream of Wall Street used to work their whole lives to be able to buy this stock at book. Now the public can get it at a generous discount. Is the book real?

3) There are now 50 million barrels of crude in storage in tankers at sea, equivalent to 2 ?? days of total US consumption, and five days worth of imports. If OPEC doesn't cut production dramatically and soon, the price will hit $30/barrel. The problem is that non OPEC member Russia can't cut output without enraging Putin's political power base. Russia has to pump as much as it can to support the Ruble.

4) I'll tell you what GM's problem is. My dad was a religious lifetime GM customer, buying a new Oldsmobile every five years. Once he even flew to Detroit for a factory tour and drove his new prize home. Thirty years ago I told him he was doing GM no favors by buying their cars, and the only way to force them to improve a deteriorating product was to buy better made German and Japanese vehicles. This was right after the State of California had forced auto makers to install seatbelts on new cars. Airbags and ABS brake systems were still years away. His response, 'I didn't fight the Japs for four years so I could buy their cars.' (He was a Marine). GM's problem is that my Dad passed away seven years ago. Of the original 17 million WWII veterans, 1,500 a day are dying, and there are only 1.5 million left. All of them loved Detroit because it built great Jeeps, Sherman tanks, and half tracks. Their kids prefer German, Japanese, Italian, Korean, and soon, Chinese, and Indian vehicles. It is no coincidence that GM's problems really accelerated with the passing of the 'greatest generation.'

5) Stability is in imminent threat of breaking out all over. Spreads on the best quality junk bonds are finally starting to narrow. Commodities have seen a week of moderate trading. The metals have gone quiet. And we have seen two back to back moves in the Dow only in double digits for the first time in three months, as forced hedge fund selling abates. Part of this explained by the year end wind down. But it is also hinting at the financial market crisis is finally ending. Zero interest rates will be a big help.

6) The Madoff scandal will lead to the certain death of the Fund of Funds industry. This niche created feeder funds which at the peak raised one third of the $2 trillion of all hedge fund assets. They offered high net worth clients and institutions manager selection, due diligence, and performance monitoring in exchange for a 1% fee on top of the 2% and 20% management and performance fees charged by the end hedge funds. Up to half of all FOF money was thought to be invested with Madoff, which proves they were sleeping more than risk monitoring.?? Apparently, good due diligence involved just a round of golf at a prestigious country club. On a good day this whole industry was a fee hungry rip off, and its disappearance will not be missed.