Global Market Comments for December 8, 2008
Featured trades: (HYG), ($WTIC)

1) The November nonfarm payroll came in at a breathtaking 533,000, almost double the worst case forecast, goosing the unemployment rate up to 6.7%, a 15 year high. The September figure was revised down from minus -283,000 to a gut wrenching minus -403,000, meaning that the economy has lost -936,000 jobs since the Lehman bankruptcy. There are 4.09 million people now collecting federal unemployment checks, a 26 year high. Services took the biggest hit. It is clear that a lot of seasonal Christmas hiring never happened. This figure is consistent with the minus -8.5% GDP rate this quarter alone! It is now looking more like a 1974 type recession than a 1982 type recession. Brace yourself. December will be worse.

2) There is a huge 'crowding out' problem developing in the bond market for next year. A record $650 billion in investment grade paper has to be rolled over, followed by another $50 billion in non investment grade bonds. The problem is that the credit crisis has closed the market for new issues, and the earliest it can reopen is sometime next year. At the very least, interest rates are going to be a lot higher. The market has already severely punished next year's biggest private borrowers, especially highly leveraged REIT's, which are expecting an avalanche of retail tenant bankruptcies next year. In the meantime the Federal government, which is expected to tap the markets for up to $2 trillion next year, is having no problem borrowing whatsoever. The 10 year Treasury hit yet another 50 year low yield yesterday of 2.54%, and the 30 year hit a staggeringly low yield of 3.04%.

3) All 11,000 plus mutual funds tracked by Morningstar are down on the year, a first.

4) After losing 200,000 jobs after the dot com bust, Silicon Valley could get hurt even worse this time. Hewlett Packard (HPQ) has already announced 24,000 layoffs, Sun Microsystems (JAVA) 6,000, and Ebay (EBAY) and Yahoo (YHOO) 1,000 each. Google (GOOG) is rumored to be readying the axe for 3,000.?? In the past, new start ups absorbed a lot of these. That won't happen this time because of the complete vaporization of the venture capital market.

5) After their unprecedented collapse this year, corporate bonds, with their senior claims, now offer investors a far more attractive risk/reward ratio than the underlying equities. A great way to play for the possibility that these bonds may outperform equities in the first leg of any recovery is the ETF iShares iBoxx High Yield Corporate Bond Fund (HYG). It has fallen from $103 to $62 in the past year.

6) Now that crude ($WTIC) has bounced off?? $40, and rumors are flying about a glut of products, analysts are wondering how much further Texas Tea can fall. The contango situation is the most severe in the 30 year history of the futures contract. This means that you can buy a barrel for $44 today and sell it for one year delivery at $61, storing it in the interim. Normally arbitrageurs step in here to do exactly that, but now they can't obtain financing, and can't find any empty storage if they did. Merrill Lynch put out a report saying that crude could hit $25. Will it hit the 2002 low of $17.85, the 1998 low of $10.35, or the Great Depression low of ten cents? In every case crude fell to the value of the barrel holding it. Has anyone noticed that the value of the government's Strategic Petroleum Reserve (SPR) has plunged by $75 billion since June? That is almost one bail out's worth.?? I am lowering my forecast low for retail gasoline in 2009 from $1.29 to 99 cents! Buy that Hummer while it is still cheap:).

QUOTE OF THE DAY

'Beware a 12 division strategy for a 10 division army.' Former Army Chief of Staff Eric Shinseki, fired by President Bush for opposition to his Iraq strategy, and just appointed by Obama as head of the Dept. of Veteran's Affairs.

Global Market Comments for December 3, 2008
Featured trades: (DRYS) (BDI), (FCX)

1) The ISM non manufacturer's index for November came in at 37.3, down from 44.4. This number is so solidly recessionary, it is almost unbelievable.

2) The stock market looks like the North Atlantic just after the Titanic went down. Dead bodies are floating everywhere, equipped with useless life jackets. I poked one with an oar today, and guess what turned over, but the scavenger ravaged face of Dry Ships, Inc. (DRYS), the Greek dry bulk carrier which has seen its stock drown since June. It has fallen 97% from $120 to $3. In June, it was chartering ships for $200,000/day. Today it chartered one to Cargill for $1,000 (no, there are not three zeros missing from this number). This will not cover the cost of the coffee for the crew. It seems that capital intensive industries, like shipping, don't do very well when global credit markets shut down. The industry is now facing a five year deluge of new ships ordered during the commodities frenzy. This, on top of a complete vaporization of its business, due to the near shut down of iron ore imports by China.?? Another indication of the tsunami that has hit this sector has been the complete collapse of the Baltic Dry Index ($BDI) from 12,000 to only 684. Like so many other companies now, DRYS is a huge buy here, as long as it doesn't go bankrupt next year. Women and children first?

3) Despite the 11 wide releases this past weekend, the movie industry could be facing tough times in 2009. Movie makers earned $10 billion this year from ticket sales, and another $25 billion from DVD sales. But the number of consumers willing to fork out $30 for a blue ray disk, and another $200 for a machine to run it, will certainly decline. A Screen Actor's Guild slated for January will also cut into new releases. Optimists point out that fans flocked in droves to theaters during the Great Depression. But that was when tickets sold for five cents!

4) One big target in the Treasury's desperate reflationary program is the 30 mortgage fixed interest rate, which has stayed stubbornly high, despite 3 ??% in Fed rate cuts in 16 months. It is doing this through massive buying of long dated instruments. Mortgage rates are being dragged down, kicking and screaming all the way, by sinking long bond rates, which hit new 50 year lows yesterday. Expect the 30 year rate to drop 100 basis points to 4.5% and help put a floor under the housing market. This is where monthly mortgage payments become competitive with rents. Mortgage Bankers Association figures say the strategy is working. In the last week of November a sudden 50 bp drop in rates to 5.50% caused new applications to soar to double the previous record. Hold off on that refi!

5) Leading copper producer and former hedge fund darling, Freeport McMoran (FCX), suspended its dividend today, knocking the stock down 20%. Shriveling demand from China has cut the price of the red metal from $4.10 to $1.50 in a heartbeat. China shut down its economy for the Olympics, but lost the directions on how to restart. Boom to bust in four months, and this is going on everywhere. This is a huge buy on the rebound.

Global Market Comments for December 2, 2008
Featured trades: (POT), (MOS), (AGU), ($NIKKEI), (GM)

1) It's official. We are in a recession. And the great news is that we have been in a recession since December, 2007, as I suspected all along. This means that we are 13 months into a postwar recession that averages 14 months. To match the longest postwar recession we would have to go 24 months, or until November, 2009. Proof that we are closer to the end than the beginning. This was all worth 270 points for the Dow.

2) Renee Haugerud of Galtere International Funds, one of the top performing hedge funds this year, says that commodities are only resting now, and will lead the charge in any recovery. The world is now seeing a tectonic shift away from paper assets towards hard assets that has only just started, and has at least six more years to go. Equities peaked last year and bonds are peaking now. Long commodities/short equities should be a core strategy for every hedge fund manager going forward. A tip off for this was the massive rally in commodities linked equities we saw last week. I think she is dead on right. Watch the Ags, energies, and metals, as well as the Ag names Potash (POT), Mosaic (MOS), and Agrium (AGU).

3) By 1982, after a vicious 15 year bear market, equities had become the most hated asset class. Households had cut stocks to only 4% of assets. By 2000, equities were loved passionately, rebounding to 60%. We have now had eight years of subpar stock markets, and analysts are wondering how sparse the allocation will go this time.

4) Nobody knows better how to deal with a prolonged depression than the Japanese. After 18 years of restructuring, companies there may be in the best position to withstand the current deflationary onslaught. Land is carried on the books at ancient acquisition costs, and securities holdings are severely depressed, but all market to market. Since there has been little new investment for a decade, plant and equipment has been largely written off. With the Nikkei 225 at ??7,883, down 80% from its 1990 peak of ??39,000, this adds up to a market selling at a severe discount to book value. You effectively get the management, R&D, distribution, and brands of these companies for free. When cash accounts for half of your market cap, you are in great shape to withstand a downturn.

5) General Motors (GM) reported November car sales down a mind numbing 41%, far worse than even the most draconian forecasts. Even Toyota was down 33%. This, on the day when GM goes back to Washington to panhandle for more money. The saddest thing is, they will probably get it. A more productive use of this money would be for congress to disburse it only in one dollar bills, then pile it up in Detroit and set fire to it. That way the frozen city would at least get some free heating.

QUOTE OF THE DAY

'The limit should not be the amount of money we commit to a recovery, but the number of ideas we come up with.' Paul Krugman, winner of the 2008 Nobel Prize for economics. Among Krugman's ideas for how to spend immediately: $350 billion for national infrastructure, extended jobless claims, and direct aid to the states on the edge of bankruptcy in order to provide services.