Global Market Comments for October 1, 2008

1) The democrats are going to get the bail out bill through by turning it into a Christmas tree with presents for all of the wavering members. So far on the list: subsidies for mental health, alternative energy, makers of US based wooden arrows, and a tax cut for small businesses for Republicans. Poulson's original three page bill is now up to 400 pages. Rumors of a proposed ???300 billion bail out of European banks by the ECB was later denied by France, who else?

2) Since 1990, October has been the top performing month of the year for the Dow, followed by November and December. Since 1950, five out of nine bear markets ended in October. The 1929 and 1987 stock market crashes also happened in October.

3) Emerging markets account for just 11% of the world's stock market capitalization, but will deliver 70% of global growth over the next two decades, according to the Capital Group. The iShares MSCI Emerging Markets Index Fund (EEM) is a strong buy here, which has fallen from 45% from $55 to $30 over the past year. Look for an easy double over the next two years and a tenfold return over ten years.

4) The high school drop out rate in California is 25%, ranking it 43^rd in the nation. In the Los Angeles School District, the state?s largest, the rate is 50%. Appalling. And you wonder why things are going to hell in a hand basket here. Ebay's Meg Whitman says finding qualified staff is now the biggest impediment to doing business in California.

5) The average compensation of a Goldman Sachs employee last year was $600,000, and that includes the janitors and the secretaries. CEO Lloyd Blankfein earned $70 million, making him the eighth high paid executive in the US. This year it will be less.

6) We are about to see huge buying of JP Morgan (JPM) and Citibank (C) by index funds. With the disappearance of so many of banks, JPM and C now account for a much larger percentage of the banking industry, and index funds must buy their shares to maintain market weightings. The concentration of the banking system is accelerating at an amazing rate. These two banks alone now account for one third of all US bank deposits.

8) Investors withdrew $74.5 billion from equity mutual funds in September, an all time record. As a result the S&P 500 Index had its worst month in history. This is historically a great buy signal.

Global Market Comments for September 30, 2008

1) The Bail Out Bill II will be voted on Thursday. That took the Dow up 485.

2) Three month LIBOR hit 7% overnight, a 500 bp premium to Fed funds. During the 1987 stock market crash the premium only got up to 200 bp. Mortgage backed securities are now trading at levels implying a 55% default rate. During the great depression the default rate peaked at 12%. Things are way out of whack.

3) A number of indicators are pointing to a major long term bottom in the stock market soon. The S&P 500 volatility index hit an all time high of 48% on Monday. Every time the VIX traded at this level the market was up 7%-15% within a month. The market PE multiple is down to 13. The Index is now 30% off its year ago high. The hedge funds told us yesterday that big cap tech will lead the next bull market with their massive selling of the sector yesterday. This is where they had their big long positions. The BRIC countries are also very attractive here.

4) Wachovia Bank went under because of its 2006 acquisition of Golden West Financial for $24 billion. The company was the inventor of option arms, and had a portfolio almost entirely made of these high risk loans, 60% of which were made in Florida and California. Citibank immediately wrote off $42 billion of Wachovia's loans. This has to go down as one of the worst takeovers in history, which vaporized the buyer within two years. Talk about 'caveat emptor' with a turbocharger. Unfortunately, along with the WAMU deal, this means that the greatest destruction of loan capacity is going on in California. JP Morgan was the largest bank in the US for a whole weekend until Citibank passed it with this deal on Monday, taking its deposits up to $1.3 trillion.

7) The really important move yesterday was not in the stock market but in the Baltic Dry Shipping Index ($BDI), which has melted 70% from 1,200 to 3,746 since May. The index measures the average cost of chartering carriers of iron ore, coal, wheat, and other bulk commodities, and is a very accurate, but volatile measure of marginal global economic activity. Especially affected is the Brazil-China route. An entire fleet of ships is sitting idle off the Brazilian coast hoping for charters at any price.

QUOTE OF THE DAY

'To say derivative accounting in America is a sewer is an insult to sewage': Berkshire Hathaway's Charlie Munger.

Global Market Comments for September 26, 2008

1) The government seized WAMU and sold it to JP Morgan without even telling WAMU's senior management because they were all on a plane to meet with a potential buyer. Common, preferred, and debt holders were all wiped out. Morgan immediately wrote off $31 billion of WAMU's debt, about 20% of the total.

2) From 2002 to 2007, $100 billion poured into BRIC country stock markets. In the last three months $25 billion has come out, taking these markets down 39%-58%.

3) The five largest sovereign wealth funds are the United Arab Emirates (Dubai) $625 billion, Norway $322 billion, Singapore $215 billion, Kuwait $213 billion, and China $200 billion.

4) The trailing ten year return on the S&P 500 is the lowest since 1974. This signals that the market is in the process of forming a major multi decade bottom. It has made this low only four other times in history.

5) It?s looking like China's economic slowdown is more than just a post Olympic hangover. The US Christmas selling season is expected to be a disaster this year and that will make a big dent in Chinese exports, the main driver of the economy. Home prices in Southwest China are down 20% and may enter a US style meltdown. The Shanghai and Hong Kong stock markets are already reflecting as much, down 68% and 45% respectively. Economic growth may fall from an 11% annualized rate earlier this year to under 8%. If it falls to zero, there will be a revolution. Expect bulk commodity prices to fall further.

TRADE OF THE DAY

Time to come out of the bull cylinder I recommended yesterday. The congressional talks are obviously in trouble, and with the WAMU failure there is a real chance of a crash on Monday. And there is already a big profit in the position. Time to say 'thank you very much Mr. Market', take the gift and retreat to the sidelines. If your friends make a killing on a giant up move on Monday, just let them pay for dinner next time. Capital preservation is key here. The October mini S&P 1100 puts you sold yesterday for $13 you can now buy back for $10 because the market is taking the weekend's time decay out in advance and short dated volatility has come in a bit. The Dec mini S&P 1300 calls you bought for $18 you can now sell for $25 because of a 200 point move up in the market and because longer dated volatility is holding up. The overnight net profit on the position is $15, or $750,000. Just trying to show you how I operate. Take the money and run.

Global Market Comments for September 25, 2008

1) Those who work in the financial industry see the world ending on their screens, then walk outside and see people and cars on the street, shops doing business, the sun shining, and everything appearing normal. It's surreal. Many businesses and banks are months away from shutting down from the lack of operating cash and no one realizes it. It's like an atomic bomb has been dropped, but hasn't hit the ground yet. Even if the bail out package passes, home prices are still going down and we are still falling into a recession. 30 day T-bills were trading at 0.40% today, which means that banks are parking their money with the government instead of lending it.?? Phone calls to congressmen from constituents were running 300:1 against the package. The Wall Street Bail out is a misnomer. The money is going to thousands of banks around the country, not Wall Street. And it is a restructuring more than a bail out.

2) August new home building permits in California plunged by 58% YOY, the largest fall since the Great Depression. San Joaquin County (Stockton) was the worst, down 65%. Solano County was best off, showing a 3.3% rise.

3) Weekly jobless claims skyrocked to 493,000, a seven year high.

TRADE RECOMMENDATION

Position your self for a post bail out rally. Sell 100 X October S&P mini 1100 puts for $13, taking in $650,000 in premium and use these proceeds to buy 100 X December 1300 calls at $18 for $900,000. The net cost of the entire position is $5, or $250,000. Run the October puts into expiration, keeping the entire premium, and sell the December calls on any rally. This is profitable on any rise in the market and any decline in implied volatilities from sky high levels in the mid thirties a rally would bring, while protecting your long volatility position from time decay with a long dated option. The technical term for this position is a 'short dated bull cylinder'.

Global Market Comments for September 24, 2008

1) Congress plays the fiddle while the economy burns. Bernanke is warning that the US may enter a decade of sub par growth, as Japan endured during the nineties.

2) Bill Gross at Pimco, the country's largest bond fund manager, has calculated that the government could make a $56 billion profit on the $700 billion bail out package. He assumes that the government borrows at 5%, buys distressed assets at 65% of face value, and sees a 20% default rate on a 40% decline in home prices, all conservative assumptions. Pimco has offered to manage the entire plan for the government for free. You won't see a better deal than that.

3) There is a huge legal mess brewing in England where it appears that Lehman was engaging in the practice of rehypothecation, which was made illegal after the Barings collapse. This involves the relending of securities held in customer accounts to third parties to raise cash. This is why Lehman's prime broker has been unable to return securities held in segregated customer accounts. At this stage the bulk of Lehman's unclaimed assets are in Europe. In this enviroment, possession is nine tenths of the law.

4) I spent 1 ?? hours last night with Meg Whitman, the just retired CEO of Ebay. A classically trained Harvard MBA with stints at Disney and P&G, in ten years she built Ebay revenues from $4 million to $8 billion, and staff from 30 to 16,000. The company booked $50 billion in revenues last year and would rank as the country's 9^th largest retailer. More than 1.3 million people now make a full time living selling stuff on Ebay. Ebay packages account for 20% of shipments by the German post office, Ebay's second largest market. Over 1 million cars were sold on Ebay last year and are now the company's largest revenue item. (I bought one of the first cars sold on Ebay eight years ago and watched with amazement as maps were emailed to me daily tracking its progress from Texas to San Francisco). Whitman is now the co-chair of the McCain campaign and is evidence of the emergence of a new type of Republican; engaging, pragmatic, professional, and economically oriented, not an ideological religious fanatic.

QUOTE OF THE DAY

'Unattended real estate has the half life of a head of cabbage.' A hedge fund manager in reference to the possible government takeover of 1 million foreclosed homes.