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.

Global Market Comments for November 17, 2008
Special wine edition. 5 page issue today.

Highlighted Trades: (GM), (STZ), (FO), (DEO), (SPX)

1) Expect to hear a lot of hand ringing about the auto industry this week. Its representatives want us to believe that 10% of all the jobs, and 20% of retail sales are somehow car related, and the destruction of the industry would bring the onset of a nuclear winter. I have to tell you that as an analyst of the Japanese car industry for 35 years I have watched Detroit self destruct. Over the last ten years GM has invested $310 billion in its business, which is now effectively worth zero. Depreciation during this time was $128 billion, meaning that the company has vaporized $182 billion of capital. I have heard every excuse: high fuel prices, foreign competition, greedy unions, and excessive regulation. But during this same period Japanese car makers moved from strength to strength, and have taken over one third of the US car market. The bottom line is that Detroit can't make a decent, profitable product people want to buy, and hasn't for decades. If you are going to throw these people a life preserver, make sure it is made out of lead.

2) One of the first signs of the economy turning next year will be a spate of hostile takeover bids. According to Sullivan & Cromwell, the leading M & A law firm in New York, so many great companies are selling so cheaply they are bound to attract deep pocketed suitors.

3) Banks extended $200 billion in new loans in October, more than in the previous eight months combined. Companies are drawing down their revolvers since the bond markets are closed, even when they don't need the money. Banks are happy to do this because with these spreads, the business is now the most profitable in its history.

4) Santa Clara county's measure 'B', which provides funding for the BART extension from Fremont to San Jose, and had been given up for dead, may actually pass. With 14,000 more absentee votes still to be counted, the measure only needs 360 more votes to pass out of a total of 607,698 cast. All other Bay Area transportation measures have passed.

5) According to Neil Kashkari, the bureaucrat responsible for administering the Treasury's TARP program, there are 58 million mortgages in the US, and another 20 million homes are owned free and clear. The underwater capital of the US is Mountain Valley, CA, just east of Livermore, where 90% of homeowners owe the bank more than their property is worth.

6) I took a look at the three major listed wine producing companies to see how recession proof their stocks have actually been. The answer is not very much. These companies are so diversified that it is hard to get any read of how much the impact of profits from wine have really been. As a group, their shares have dropped more than the market as a whole. There is no doubt that the stocks have been dragged down by the general implosion of market multiples. Their diversification efforts, especially into highly cyclical housing and travel related sectors, seemed to have gotten them into more trouble than kept them out. And the largest wine producer in the US, Gallo, has stayed privately held, not looking like such a bad idea right now. See charts below:

UK Based Diageo (DEO) has seen its stock melt 42% from $90 to $52. It is the largest multinational beer, wine, and spirits company in the world with the purest play in this area. Its core holding is Guinness beer, and includes a presence in hotels (Grand Metropolitan, Intercontinental Hotel), and travel. Its best known brands include Johnnie Walker, Smirnoff, Captain Morgan rum, Jose Cuervo tequila, Sterling Vineyards, and of course Alameda's Rosenblum.

Fortune Brands (FO) is the old American Tobacco Company and has seen its stock drop 61% from $82 to $32. It has a presence in golf (Titleist, Footjoy), homebuilding (Masterbrand Cabinets, Moen, and Master Lock), and spirits (Jim Beam, Laphroaig, Courvosier, Kamchatka vodka, Gibley's gin, Ronrico rum). In 2007 it sold its wine operation (2.6 million cases/year of Clos du Bois and others) to Constellation Brands for $885 million.

Constellation Brands (STZ) watched it stock plunge 62% from $26 to $10. It is the largest public vineyard owner in the world, producing over 57 million cases/year, including Franciscan Oakville Estate, Simi Winery, Ravenswood, Arbor Mist, and Clos du Bois. In 2004 it bought Mondavi USA, and in 2006 it acquired Vincor International for $1.4 billion.

8) Here is the best forecast for GDP growth for the British economy that I have seen, which is lagging the US economy by about six months. It suggests that the US economy will bottom out soon. The market is discounting a 'U' recovery, but will get a 'V' because of the massive amount of liquidity hitting the system.

TRADE OF THE DAY

I turned on my screens this morning to find another free money trade staring me in the face. With the index at 850 you could sell the November S&P 500 780 puts for $10. These expire at the Friday opening in four trading days, and it a great opportunity to short once in a lifetime volatility at 69%. The time decay in these ultra high implied volatility options in at last few days is truly geometric. A short sale of 100 contracts would bring in $50,000. The S&P 500 would have to drop more than 80 points in four days, or the Dow 800 points from an already low level of 8,300, to lose money on this trade. Even if GM goes bankrupt this week, you probably won't get a move of this magnitude. Another rich uncle type of trade.

Global Market Comments for November 14, 2008
Highlighted Trades: (SPY), (LSBRX), (COP), (WMT)

1) Yesterday we did a month's worth of trading in two hours. The VIX went from 60% to 70%, then back down to 57%. If you have any doubts about what this market is doing, take a look at this chart, which shows the S&P 500 trading in a clearly defined 815-1000 box.

2) Through a combination of market losses and redemptions, the value of hedge fund assets has dropped from $2 trillion to only $1 trillion this year. The bulk of these losses has been in highly leveraged long debt/short treasury strategies put on at ridiculously low spreads. The average hedge fund return year to date is -15.43%. A major shake out in this area has been long overdue.

3) In 1932 the P/E multiple for the S&P 500 bottomed at 5.6 times, giving you an earnings yield of 17.86%. In 1974 the bottom was at 7.9 times (12.66%), and in 1982 it bottomed at 6.6 times (15%). With the S&P at 815 yesterday it was at a 10 X multiple. But interest rates have never been at zero before. Adjusted for this, the 'real' P/E multiple is probably 7-8 times.

4) Triple 'B' rated corporate bonds are trading at the largest spreads over Treasuries since the 1930s and could well outperform stocks from here. This paper is now trading at 60-70 cents on the dollar yielding 10-12% per annum. Any return to normalcy by the credit markets could bring a quick 50% capital gain. One good way to play this would be the Loomis Sayles Bond Fund (LSBRX), which has dropped from $15 to $10 and currently carries a 9.8% yield.

5) The Great Depression is now hot. According to Barnes & Noble, sales of John Kenneth Galbraith's 1955 book, The Great Crash, skyrocketed last month. Netflix says that John Steinbeck's 1940 movie, 'The Grapes of Wrath' has been flying out the door. Wait for the 'Lindyhop' to become the rage dance next year.

6) October retail sales came in at -2.8%, the worst on record. This was not exactly a surprise.

7) A one penny drop in the retail price of gasoline leads to a $1 billion increase in US consumer spending power. The $1.30 tumble in the price of gas since July puts an extra $130 billion in consumers' pockets.

8) Warren Buffet has substantially increased has stake in Conoco Phillips (COP), which is down from $95 to $43. He is starting his buy of crude on the cheap. George Soros is increasing his holding in Walmart (WMT), which has pulled back from $64 to $47. Whale watching can be very instructive and profitable.

TRADE FOLLOW UP

The December S&P mini 870 call I recommended yesterday at $40 traded as high as $80 this morning, giving you an overnight profit of $200,000 on a 100 lot. This shows you the kind of limited risk, high returns that are out there right now. When the market does a month's worth of movement in two hours you take the profit. You don't want to take weekend risk right now, and with implied volatilities sky high, the time decay could cost you a fortune. Take the money and run! No one ever got fired for taking a profit.

Global Market Comments for November 13, 2008

1) Weekly jobless claims came in at 516,000, a new seven year high. Oil imports have dropped from 11 million barrels/day to 8.8 million b/d. Because of the huge price drop the cost of these imports has fallen from $1 billion/day to only $500 million/day since July, causing the US trade deficit to shrink at a dramatic rate. This has been a big factor behind the strength of the dollar. While the average price of crude for 2008 is now at $108, the average for the past eight years is only $50. All we are doing now is reverting to the mean.

2) The Chinese economy is decelerating at a rate not seen since the Tiananmen Square massacre of 1989. China watchers are now talking about a Q4 growth rate of only 5.8%, down from 8% last quarter. Imports are down 5.7%, which is why copper has collapsed to a new three year low of $1.65, and exports are off a worrying 2.3%. As far as US retailers are concerned, kids never went back to school in September, and Santa Claus and the elves are going on strike in December. The Aluminum Corporation of China has just cut capacity by 38%, while China Eastern Airlines has grounded 10% of its fleet. There has been widespread defaulting on contracts for metals and bulk commodities by Chinese importers, which have halved in price. China has become the canary in the coal mine for the global economy. See the chart for the iShares FTSE/Xinhua China 25 ETF (FXI), down from $70 to $19.

3) There are now 400 commercial aircraft parked in the desert near Palmdale, California gathering dust and waiting out the recession. Most of these are older fuel inefficient aircraft from the large airlines.

4) If you are worried about obtaining credit, this is the most important chart in your life right now. It shows the Treasury/Eurodollar spread which has been improving continuously for the past month, thanks to treasury's flooding of the global financial system with cash, and is now at 180. This is a vast improvement from 500 basis points a month ago, but is still well above the 70 bp that prevailed before the Lehman bankruptcy.

5) The German government has confirmed it is now in recession for the first time in five years. Bad for Poland.

6) The Economist magazine conducted a global online presidential election for the US. Out of 53,000 voters, Obama won 83%. Only three countries went for McCain: Algeria, Zaire, and of course Iraq. Foreigners have long complained to me that they can't vote in our elections, even when they are more affected than we are by the outcome, especially when they live on one of our bull's-eyes.

7) Global equity markets have lost $18 trillion in value in six weeks. At 8,300 the Dow is at the lowest level since 1996. The average price/sales ratio for stocks since then has been $1.18. Today it is at 76 cents, meaning that you need a 55% rise in share prices just to get back up to a ten year average.

TRADE OF THE TODAY

Here was another chance today to buy equity index calls again at the bottom of the 815-1000 in the S&P 500. There has got to be a short squeeze ahead of the G-20 meeting. Today you could buy the S&P 500 mini December 850 calls at $40, which don't expire until December 19. 100 of these puppies will cost you $200,000. If we keep this range, these calls will explode to the upside shortly. If we break down, a subsequent dead cat bounce will get you out at cost.

JOKE OF THE DAY

The Treasury's TARP program should be renamed the BARF program: 'Bad Advice for Ruining Finance.'

Global Market Comments for November 12, 2008
Special Crude Oil Issue

1) A number of big hedge funds are starting to circle around $50 as a place to get involved on the long side with crude. Hundreds of companies faced a near death experience with crude at $148, where no business model was profitable. This time around they are going to be hedging their fuel needs for the next several years like crazy, especially the airline industry. Marginal oil supplies like tar sands, deep offshore, and most alternatives are going back to the wilderness. The credit crisis has frozen financing of many new traditional oil fields. Below $50 OPEC producers start shutting in production, especially the emergency supplies they brought on stream only six months ago. Buy crude at $50 an you might get a double out of it over the next two years, and a quadruple in the next economic recovery.

2) Now that crude is threatening $50/barrel, it is clear that someone in Mexico City was thinking. The world's sixth largest oil producer has hedged all of next year's oil production at $70-$100/barrel through long dated put options at a premium cost of $1.5 billion. I wish I had been the one to write that ticket! Oil accounts for 40% of Mexico's government revenues, and this strategy locks in the country's earnings at much higher levels.

3) Since we are talking about crude, has anyone noticed that the foreign oil import bill for the US has dropped from $900 billion to $400 billion since June, and that the $500 billion in savings is hugely stimulative for the economy? This is especially true for big oil consuming industries like airlines, trucking, downstream refiners and petrochemicals. Great for United (UAUA), YRC Tricking (YRC), Tesoro (TES), and DuPont (DD), as well as the oil consuming BRIC's of China (FXI) and India ($BSN).

4) David Hale, a global economist at Chicago based Hale Advisors, believes that the US is not headed for a lost decade like Japan's. The speed of action by the Fed and the many measures taken by the Treasury should resolve most of the banking problems in a year. The IMF calculates that American real estate loan losses total $1.7 trillion, and that only half of this has been written off. The TARP program funded by congress will finance a write off of the remaining half. A recession of this magnitude historically ignites an economic rebound at a 5% annualized growth rate. However, this time more stringent lending standards will probably only allow a 2.5% recovery growth rate.

5) If you want to see truly Great Depression era charts look at these two. The Market Vectors Russia ETF (RSX) has cratered from $60 to $12. The Baltic Dry Shipping Index ($BDI) has vaporized from 12,000 to 820! Both are huge buys at some point.

JOKE OF THE DAY

The only person who should be picking bottoms here is your proctologist.