Global Market Comments for November 25, 2008
Featured trades: (GE), (FSLR), (SPWRA), (CCC)

1) The Fed announced the bail out package du jour, $200 billion for Asset Banked Securities for car loans, credit cards and student loans. They are using a ten to one debt to equity formula, which is absolutely the most efficient use of federal funds. The US government is rapidly turning into the world's largest hedge fund.

2) I am only writing this so I can tell you 'I told you so' in three years. The spike in gold since last week from $685 to $830, and the sell off in the dollar from $1.22 to $1.30, is telling us that the enormous liquidity being creating by the Fed and the Treasury now, are going to be a really BIG problem down the road. One estimate puts the total cost of the many bail outs announced so far at $4.3 trillion, and there are much higher estimates out there. To give you an idea of how much money this is, Hoover Dam, the Panama Canal, the Marshall Plan, the Louisiana Purchase, the New Deal, the S & L crisis, and the space program only cost $2.1 trillion in inflation adjusted dollars. The government's budget deficit could hit a staggering $2 trillion next year. Obama has made it clear that he is not afraid to borrow his way out of the current crisis. Go short 30 year Treasury bond futures, now at 127, down from 130 last week.

3) Treasury Inflation Protection Securities (TIPS) are now trading at levels implying that we will have negative inflation for the next ten years. Another example of a broken market.

4) Q3 GDP was revised down from -0.3% to -0.5%. Given the economic data we have seen in the last two weeks, you can pretty much count on negative?????????? -4%-5% for Q4. This is the worst since 1980, when we saw a -8% quarter in the wake of the Iranian revolution caused second oil crisis.

5) With crude at $50, threatening $40, alternative energy plans are in tatters, again. Boone Pickens, who will not receive a single one of his giant wind turbines from General Electric until 2010, is slowing down his natural gas based program. Bill Gates has written off his research on the Athabasca tar sands. But this time I don't think renewable energy will become the government subsidized orphan it became after past crude crashes. This year's near death experience with $148 crude was too close for everyone.

5) Total job losses in the financial community world wide may soar from 170,000 this year to 320,000 by 2009, about 20% of the total work force. Expect to start getting free stock tips from your male nurse, taxi driver, moving specialist, prison guard, and roto rooter man.

6) That must mean that sifting through the wreckage of this year's alternative energy plays must be a profitable enterprise. One area to focus on is the integrated solar names that have the ability to cut upstream and downstream costs, like First Solar (FSLR), down from $320 to $85, and Sun Power (SPWRA), which vaporized from $160 to $18. Another would be environmental clean up carbon recapture plays like Calgon Carbon (CCC).

7) On October 10, 404 stocks in the S&P 500 hit new lows for the year. Last Friday, only 303 hit new lows. Back in the days when technical models actually worked, this would have told you that the October 10 bottom held.

Global Market Comments for November 24, 2008
Featured trades: (C), (GS), (MS), (NVDA), (GLW), (BRCM)

1) OK, so it was a tough week! Quit whining! Wipe you nose and get back out there and put some trades on! No one ever said this was going to be easy. If it was, your cleaning lady would be running a hedge fund for minimum wage, for cash payments only. After a Marine crashes, the first thing they do is stick him back into a plane (Semper Fi!). I tell investors that if you use limited risk options strategies along with stops you can make a living at this business being wrong 40% of the time. If you are wrong 30% of the time, you are considered talented. If you are wrong 20% of the time, you are promoted to the head of the proprietary book at Morgan Stanley. The people who are wrong 10% of the time, you only read about in the newspapers when they buy a piece of modern art for $100 million. Only God is never wrong, and even Him, you have to cut some slack once in a while.

2) In the past year, the market cap of Citibank has dropped from $200 billion to $20 billion. This is what happens when the Treasury forces you to bring toxic, off balance sheet liabilities back on to your balance sheet. The Treasury's TARP initially gave C $25 billion, then another $20 billion with today's bail out, with $306 billion in loan guarantees. It really is too big to fail, so the question is, what form will it take in any restructuring? A merger with Goldman Sachs or Morgan Stanley, who could use C's deposit base, is the most likely scenario. At $5/share the stock has essentially become a cheap, perpetually dated call, and is worth a gamble here.

3) There are now 105 companies in the S&P 500 with share prices under $10, the most in history. The 1987 record was 59 companies. The incredible thing is that several of these, like NVIDIA (NVDA), Corning Glass Works (GLW), and Broadcom (BRCM) are trading at 75% of cash on the balance sheet. I saw the same thing in Tokyo in the late nineties, and they all turned out to be huge buys.

4) William Safire believes that the new English language word of the year will be 'frugalista', defined as 'a person who lives a frugal lifestyle, but stays fashionable and healthy'. Says a lot about our times. I've added it to my spell checker.

5) My old cleaning lady called me last night for a job. She said all of her employers had recently let her go because they couldn't afford her anymore. Another sign of the times.

6) The National Association of Realtors says that October existing home sales fell by 3.1%, to 4.8 million. The median home price dropped by 11.3%, to $183,000, the sharpest plunge on record. Foreclosures accounted for 45%, a figure that in itself does not inspire conference. Expect the economic data for October and November, which will dribble out over the next few months, to be some of the worst in the economic history of the US.

Global Market Comments for November 21, 2008
Featured trades: (GS), (GOOG)

1) The Cassandras had a field day yesterday after the decisive break of the 2002 low in the Dow at 7,700, hitting the lowest level since 1997. It seems they were competing with each other to see how dire their downside targets could get. 7,000, 6,000, 4,000, 2000? The market seems to be discounting a permanent cut in the US long term growth rate to an anemic, Euro style 2%/year, down from the torrid, artificial, debt fueled 5% rate seen earlier this decade. I think the final bottom may be dictated not by levels, but by time. The candidates? End 2008, when hedge fund and mutual fund redemptions finish. Tax loss selling to beat Obama guaranteed capital gains tax increases will also be done. After that, the next window will be the Obama inauguration on January 20, when the US officially no longer becomes leaderless, and the new president shows his true hand with new policies. A major tradable rally will almost certainly spring off of these two dates. A Fed interest rate cut of 50 basis points at its December meeting is now a sure thing.

2) At 3.7%, the S&P 500 dividend yield now tops the 30 year Treasury bond yield for the first time in 50 years. Stocks are back to 1950s valuation parameters, when the Great Crash was still a recent memory, and equities were considered too risky for most investors. The melt up in the Treasury futures bond markets were truly of Biblical proportions. The long bond ($USB) gapped up eight points in two hours to 130, the sharpest move in the 30 year history of the contract. The Merrill Lynch US High Yield Index surpassed 21%, the highest in history, and a move right off the top of the charts.

3) Pit bull Henry Waxman overthrew Michigan's legendary John Dingel to become chairman of the House Energy and Commerce Committee in a palace coup. This is big, and shows you that these are not your father's democrats. If there was one person who helped Detroit shirk from producing safe, well made, fuel efficient, clean burning affordable cars, it was John Dingle. The air cover he provided virtually assured that the US auto industry would eventually disappear up its own exhaust pipe. Shifting control of this key committee, from the main car producing state, to the largest car consuming state, hints at the new priorities of a harsher, more realistic Democratic Party. Kiss the Big Three goodbye.

4) According to MDA Dataquick, the October San Francisco Bay Area median home sales price was $375,000, down 45% YOY, and lowest since 2001. Foreclosures account for 45% of sales. The highest price fall was in Contra Costa County, down 49%, while the lowest was in Marin, down 13%. The greatest foreclosure rate was 68% in Solano County, and the lowest was in San Francisco at 10.6%. More losses are to come.

5) One of the lead stocks in this leg of the downturn has been Goldman Sachs (GS), whose shares have dropped 64% from $140 to $50 in the past month. The investment bank is staying mum, but the stock is acting like something ugly is going on behind the curtains. When Hank Paulson became Treasury secretary, his stock in GS, worth $900 million, was put in a blind trust where he couldn't touch it. It is now worth only $180 million. If GS doesn't reverse its slide soon, the Treasury secretary may be looking for a bail out for himself.

MEA CULPA OF THE DAY

I have to tell you that in all honesty, I don't think I could have come through this dreadful week without losing money. It wasn't that one thing blew up, it's that everything blew up. I went into the week with a recommendation for just one small, limited risk bet that the S&P 500 would not drop more than 10% by Friday. I was short the November 780 puts which expired today. It just made it there. Having shorted the puts at $10 I would have stopped out at $20. But I almost certainly would have taken a hit on a short position in 30 year Treasury bonds as it powered its way up through my cost at 124, though a stop out at 125 for a loss of a point, and eventually to an unbelievable high of 130. All in just an hour! And how much would I have nibbled on my favorite stocks on the way down this week, like Goldman Sachs, as it went from $63 to $49, and Google (GOOG) on the way from $325 to $260? I have always worked with risking controlling hedges and tight stop losses, which always cost me a lot of money in bull markets, but left me still standing after bear markets. Trading the Japanese stock market from ??3,000 to ??39,000, and then back down to ??7,000, and the yen from ??360 to ??79, and then back to ??160, no other philosophy could evolve over a 35 year career. It's all about risk control, something the major investment banks apparently forgot to do, and was one of the reasons I left Morgan Stanley 19 years ago.

Global Market Comments for November 20, 2008
Featured trades: (VNO), (MSW), (SPG), (GM)

1) Weekly jobless claims soared by 27,000 to 542,000, the highest since 1992. Unemployment appears to be going parabolic. It is clear that the consumer rolled over and died in October, and talk is now rife of deflation. All Treasury instruments exploded to the upside, and are at maximum crisis levels. The ten year Treasury yield hit a 50 year low of 3.11%, and the 30 year yield melted to 3.60%. Now that congress has taken an auto industry bail out off the table, the bankruptcy of GM appears imminent. When we broke through the 2002 low, trap door, stop loss selling ensued. Citicorp plunged 25%. The Dow got off cheap, only down 444. Next stop, 7,000 very quickly. You can always tell when the stock market hits a new low because the CNBC anchormen look like they have just been kicked in the balls. Think of GE stock cratering. Brace yourself for tomorrow!

2) Yesterday, they really took the REIT's behind the woodshed and beat them senseless with the ugly stick. Two commercial real estate CDO's defaulted, and credit spreads blew out on all fronts. Vornado Realty Trust (VNO) dropped from $55 to $45, Mission West Properties (MSW) slid from $7.50 to $6.20, and Simon Property Group (SPG) tumbled from $50 to $40. The fear is that if GM goes under, there will be massive dumping of commercial real estate on the market by the dealer network. There is more pain expected in this sector, which until now has been largely spared. New lows were set today.

3) Everyone is now a Keynesian, with supply siders in total disarray. Congressmen are competing with each other to see how much they can spend to cure the economy. To see where this can lead, look at Zimbabwe, which currently has the highest inflation rate in history, and where prices are doubling every 1.3 days. Weimar Germany only saw prices double every 3.7 days during the early 1920s. Most shops in the capital, Harare, will only accept US dollars or South African rands, spurning Zimbabwean dollars.

4) I attended a book signing for Ted Turner yesterday, which was an absolute riot. To describe him as a larger than life figure is an understatement. The secrets to business success are to 'rise early, work like hell, and always advertise', and 'he who has the most friends, wins'. He quit taking his anti anxiety drugs because his psychiatrist was a 'quack'. The AOL-Time Warner merger was the worst in history, and personally cost him $8 billion. I sent him a resume in 1980 when he was setting up CNN and never got a response because?? I 'didn't try hard enough.' I met him as a Morgan Stanley client a few years later when he was fresh from his America's Cup win. Some 25 years later he has mellowed, but not by much. His chief passions now are his new buffalo restaurant chain, and chasing his three girlfriends.

5) The Bay Area Council says that 40% of local companies plan to lay off staff, while only 13% plan to hire. Two thirds of companies say that the credit crisis is affecting their business. The little hiring that is going on is in the health care and alternative energy areas.

6) Wholesale gasoline futures crashed to $1.03/gallon today, meaning that the local retail price could fall under $1.50/gallon by early next year!

7) If the auto industry does get a bail out, the first $60,000 will cover the cost of the private jets the CEO's chartered to go to Washington to beg, wearing their custom made suits, tin cups in hand. What dodos! Later we learn that the GM retirees health care organization is the world's largest buyer of Viagra.

8) PC Magazine, which I have been reading for 20 years, will stop publishing its print edition in February. This is just the latest example of a business wholly migrating its business entirely to online.

QUOTE OF THE DAY

'There is no asset class that too much money can't spoil', said Barton Biggs of Traxis Partners, a global hedge fund.

Global Market Comments for November 19, 2008
Featured trades: (MSFT), (ORCL), (SY), (INTU), (PLD)

1) October housing starts came in at a shocking minus -4.5%, a 791,000 annualized rate, 409,000 below the replacement rate. Huge disruptions in the classical economic data by the credit freeze are ongoing, and will continue for the next couple of months. October CPI fell to 3.7% YOY, the biggest drop since WWII.

2) To give you an idea of how much liquidity is out there, excess banking reserves held by the Federal Reserve are now at $400 billion, and are expected to rise to $600 billion by year end. The normal figure is zero to $2 billion. No typo here. In October, a massive $143 billion in net capital flows came into the US as investors bailed on their foreign investments, especially in their BRIC, euro, and sterling holdings.

3) When the market turns there is going to be a huge movement of cash into technology stocks, the only debt free, fast growing sector of the economy. Buy software names first, because they see the most rapid improvement in profitability in any recovery, and because they have nothing to physically make, no assembly lines to restart. Think Microsoft (MSFT), Oracle (ORCL), Sybase (SY), and Intuit (INTU).

4) The City of San Francisco is raising the minimum wage in 2009 from $9.36 to $9.79/ hour. It looks like I am getting a raise.

5) Watch the market slide whenever there is congressional testimony. When investors see the stupidity of the people voting on crucial economic and financial matters that affect our country, which they clearly will never understand, they just want to throw up their hands in despair and go away.

6) Q4 will almost certainly be the bottom of this recession, and October the worst month. Watch the economic data get less worse after that. If you can make it through the next six months, you have made it.

7) I'll make a gentlemen's bet with you. I think oil will trade at over $100 sometime next year, nearly double the current price. The loser pays for lunch at either the Olympic Club or the Marines' Memorial Association. Semper Fi.

8) Prologis (PLD), the world's largest developer of commercial warehouse space, and a leading manager of REIT's, has seen its shares collapse 94% from $65 to a low of $3.62. It is effectively trading as if the company has already gone bankrupt. The Denver based company employs 1,500, managing 2,898 properties, totaling 548 million square feet in 115 countries. It had been a highly leveraged call on the growth of international trade, which is now imploding with unprecedented speed. PLD listed $40.8 billion in assets on its balance sheet, and until recently, was one of the largest listed REIT's. CEO Jeffrey Schwartz, a 14 year veteran at the company who spearheaded its growth into China, where it now has 3.3 million square feet, resigned on November 12 and will be replaced by CFO Walter Rakowich. Thus, the keys to PLD have been handed over from the visionary risk taker to the bean counter. On November 4, the company announced a Q4 dividend of 52 cents, giving the shares now trading at $3.78/share an effective annualized yield of 55%! The company refused to issue a forecast for 2009, which didn't exactly inspire shareholders. PLD's 5 5/8% bonds due in 2016 are trading at just 43 cents on the dollar, giving it a low grade junk yield of 16.7% over Treasuries. PLD is now clearly in survival mode. It has suspended development of the $8.4 billion of projects in the pipeline. It is dependent on rolling over $353 million of company debt and $1.46 billion of fund debt in 2009 in credit markets, which are now effectively closed. It hopes to carry out distressed sales of $2 billion of assets by next year to deleverage its balance sheet. On November 13 it told shareholders it would save $290 million by slashing its future dividends, and another $100 million in cutting administrative costs. The stock has clearly been pulled down by the general distress in the sector in an environment where leverage has become a dirty word. The default rate on commercial properties is expected to soar from this year's 1% to as high as 5% next year. 18 publicly traded REIT's have cut or suspended dividends so far this year. PLD was badly hurt by a deal with Lehman Brothers struck in July, 2007, at the absolute peak of the market, where it bought a $1.85 billion national portfolio of warehouses from Dermody Properties and the California State Teachers Retirement System. Lehman was unable to repackage and resell the debt. There are dozens of stocks like this out there now where share prices have fallen to the level of an undated, highly leveraged call option. It is a bet that we have a 'V' type recession, not a 'U', and that credit markets recover rapidly next year. I give it a 50:50 chance of survival. But the risk/reward ratio is good. If you are wrong, you lose $3.75. If you are right, the stock could very quickly make it back up to $20, giving you a return of 533%. If you were running a portfolio, you would be buying these all day long, where the mathematics of venture capital applies. If four out of five go bankrupt, you breakeven. If only three out of five go under, you double your money. You need to buy five PLD's, not just one.