Global Market Comments for December 24, 2008
Featured trades: (PLD), (WTIC)

1) Consumers slashed spending 0.6% in November, despite rapidly falling prices. Unemployment claims jumped 30,000 to 586,000, a 14 year high. National savings rates are soaring from zero to 5%, as baby boomers rush to rebuild seriously depleted nest eggs going into a feared Depression. . It seems that they are getting the religion of thrift and frugality late in life. Maybe too late.

2) Energy traders are stunned by the fact that during one of the worst nationwide cold freezes in memory, crude prices have gone down for nine consecutive days. Demand is falling faster than production can be cut. Russia can't cut output in Siberia because idle wells freeze in winter, and have to be redrilled. The $10 forecast targets are now coming out of the woodwork. There are 25 ultra large tankers at sea storing Texas tea, and that number is growing daily. I think the reality is that we are in the late stages of an overshoot to the downside, and that we will get a decent recovery in prices next year, one credit becomes available. Then prices will stabilize around the $50 range. This is still too low for high cost producers like Iran and Venezuela, which may see governments fall. Expensive deep offshore, tar sands, and most alternative sources are also in deep sushi. Smart consumers are locking in as many long term supplies as they can at these prices.

3) REIT Prologis (PLD) was the top performing stock in the market today, up 31% to $13. You sure can pick em!

TRADE IDEA

I think the long bond is a screaming short here. It might well see a peak next week with the year end book closing, where everyone is piling government securities on to their balance sheets in a race to look the most conservative. At a 2.50% yield for 30 years, there is no way that investors are being compensated for their risk, especially with current government reflationary efforts guaranteed to bring a resurgence of inflation. I think the futures contract will go from 140 now to 70 over next three years, once the hyperinflation hits. With a futures contract offering 20:1 leverage that gives you a return of 2,000%! However, this is not a riskless trade. There have already been several rounds of stop loss buying by traders who jumped into this strategy too early, as the unimaginable buying kicked in at 120, 125, 131, and 136. In Japan the ten year bond eventually hit a low of 0.46%, making our ten year at 2.1% look incredibly generous. That works out to a futures price of 200 or more. Of course we are not Japan. The Treasury has done more to repair things in three months than Japan did in ten years, and Japan has still not adopted full mark to mark accounting. Some 18 years after their bubble burst, the country is still seeing subpar growth, and ten year yields have made it back up to only a measly 1.25%. There are also constant games going on in the futures markets like expiration plays, engineered short squeezes in the underlying, and bogus news leaks. PIMCO, the Newport Beach based Pacific Investment Management Company, the world's largest private bond investor, plays this market like a violin.

INTERESTING TRIVIA OF THE DAY

'Rudolph the Red Nose Reindeer' was created by former retailer Montgomery Ward as a one off Christmas advertising promotion in 1939.

A CHISTMAS STORY

Going to buy a Christmas tree with my dad was always the most exciting day of the year when I was growing up in Los Angles in the fifties. With its semi desert climate, Southern California offered pine trees that were scraggly at best. So the Southern Pacific Railroad made a big deal out of bringing trees down from much better endowed Oregon to supply revelers. But you had to go down to the freight yard at Union Station on Alameda Street to pick it up. I remember a Santa standing in a box car with trees piled high to the ceiling, pungent with seasonal evergreen smells, handing them out to crowds of eager, grinning buyers for a buck apiece. There were still a lot of steam engines in use those days, and watching these great lumbering machines as big as houses, whistling and belching smoke, was the thrill of a lifetime. We took our prize home to be decorated by seven kids hyped on adrenalin, chugging eggnog. A half century later I remember it like it was yesterday. What a great guy my dad was!

1)Existing home sales plunged 8.6% in November to 4.49 million, according to the National Association of Realtors. The median sales price fell by the largest amount on record, plunging 13.2% in November to $181,300, from $208,000 a year ago. That was the lowest price since February 2004 and the biggest year-over-year drop since the index began in 1968. If anyone tells you the real estate market has bottomed, just turn around, and politely walk away. Santa flips the market the bird.

2) The French distributor of Bernie Madoff?s funds, Rene De la Villehuchet, committed suicide in his New York office this morning, slashing both of his wrists with a box cutter while he was sitting at his desk. His Luxembourg based Luxalpha fund suffered a total loss of $1.4 billion, and the man had his entire net worth invested in the fund. The scandal is creating the Permanent Employment Act of 2008 for lawyers. Anyone who redeemed the Madoff funds in the last six years, and some have taken out up to $500 million, will be targeted by the bankruptcy trustee with a fraudulent conveyance suit and a claw back. This establishes a new performance benchmark for money managers. If you end the year breathing, you had a good year.

3) The Japanese markets were closed today for the emperor?s 75th birthday. Some 34 years ago I was one of 10,000 in front of the Tokyo Imperial Palace, waving a little Japanese flag for his father?s birthday. A hunched, aged Emperor Hirohito came out and gave a strained, arthritic wave, and smiled.

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 week alone 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 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, something the chart below is more than hinting at. Buy the iShares FTSE/Xinhua China 25 ETF (FXI). If you want a high beta single name, go for Baidu (BIDU), the Google of China. This would also be good for major American exporters like Boeing (BA), Caterpillar (CAT), and Microsoft (MSFT).

5) The Belgian government fell on the back of the scandal the emanated from the Fortis Bank bankruptcy. Expect this crisis to claim more governments.

7) The troubled REIT Prologis (PLD) dumped its China holdings for a fire sale price of $1.3 billion. GIC Real Estate was the buyer. The stock jumped 15% to $10.50. Please see my November recommendation to buy the stock at $3.75.

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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.