Global Market Comments for September 23, 2008

1) Yesterday was a real 'Sell the US' day. Stocks, bonds, and the dollar all fell big, a very rare occurrence. It shows you that foreigners were making large scale withdrawals of capital from the US, not wanting to get caught up in the Fall of the Roman Empire. Congress is making sausage here and it is not very pretty. Traders are watching Paulson's original three page bail out bill grow to hundreds of pages of pork and are getting nervous. The Paulson plan would not be so hard to swallow if this administration didn't have such a long and proven track record of lying. I am still waiting for them to find the weapons of mass destruction in Iraq. And why are we hearing this proposal six weeks before a presidential election? If congress doesn't deliver this week, expect the Dow to drop below 10,000 very quickly.

2) If you take the US banking system back to the 1970s you have to take house prices back to 1970s valuations. That means borrowing only four times your annual income, putting 40% down for an expensive conventional 30 year fixed rate mortgage, and a FICO score of 700 or better to qualify for all of this. This will cause the destruction of several trillion dollars of purchasing power by the American home buyer. Home prices will fall for several more years, especially in high priced markets like California and Florida.

3) Lehman senior debt is currently trading at 20 cents on the dollar and may be a buy here. The low price reflects distress sales by institutional investors like pension funds who are not allowed to hold less than single 'A' paper. CreditSights, an independent London based research firm, anticipates a recovery value in 18 months of 50 cents on the dollar. Substantial funds will be raised through the sales of Lehman's asset management division, real estate division, and the US broker. Lehman listed $600 billion in assets on its balance sheet that will have to be liquidated. It may all come down to how much of Lehman's distressed CDO's can be sold to the Treasury at a decent price as part of its $700 billion bail out.

4) About 24% of all sub prime loans are now in foreclosure. The underlying securities are trading as if 80% are going into foreclosure and that there will be no recoveries on the foreclosed properties. As soon as the government restarts the market, enough private market will step in to keep it running.

5) Fear is still rampant in the credit markets. The TED spread (the spread of US three month LIBOR interest rates over US three month T-bills) peaked last week at a record 300 basis points, but is holding in at a stratospheric 225 basis points. So far this year the spread has traded around at an average of 70 basis points.

Global Market Comments for September 22, 2008

1) Prices on 30 year T-bonds have plunged an unprecedented 8 points in two days, taking the yield up from 3.90% to 4.6%. Please see my comment last Thursday that bonds were a screaming short at 124. With all of the bail outs, the national debt has effectively risen from $9 trillion to $18 trillion in a month. Iraq and a national health care system don't fit anywhere in this scenario.

2) Since nobody knows what financial instruments are worth, money has been pouring back into the commodity trade with a vengeance since Wednesday. Gold is up from $750 to $900, the euro from $1.38 to $1.47, crude from $90 to $120, and wheat is limit up. The derivative equities are up 30% or more. The highly inflationary aspects of the bail out are coming home to roost.

3) The Short selling ban list has come in for a lot of abuse since it came out on Friday. It included four companies that don't trade, a Nigerian aviation finance company, and a biotech company, but did not include General Electric (GE), one of the biggest players out there. It just shows the desperate, slapdash way in which it was put together. The whole issue is bogus, because hedge funds, in fact, were net buyers of financial stocks this quarter, cutting their short positions by 20%. You don't get rich selling stocks already down 90%.

4) Current shareholders in Goldman Sachs may do alright. GS currently sells for 7 X earnings with a leverage of 24 X. By converting into a bank leverage will have to drop to only 12X, but more stable earnings will justify a 14X multiple.

Global Market Comments for September 19, 2008

1) The Treasury announced a blockbuster rescue package which has triggered a global buying panic, but without the details. It is creating an RTC type entity which will buy distressed assets from the banks. Short selling has been banned in 799 financial stocks. Restrictions have been lifted on company stock buy backs. The Fed has started accepting commercial paper at the discount window. The Dow jumped 1,000 points from the Thursday low. Bonds had record down moves, the ten year Treasury yield soaring from 3.3% to 3.8% and the 30 year from 3.9% to 4.4%. The Treasury-Eurodollar (TED) spread vaporized. All of this has at the very least put in a short term bottom in the stock market. But the major problem remains in that there is still insufficient lending capacity to maintain home prices at current levels.?? And the plan is too late to save Bear Stearns, Lehman Brothers, AIG, Fannie Mae, Freddie Mac, and 5 million home owners now delinquent or in foreclosure. There is the small matter of the fact that we are still going into a global recession. And if the Democratic congress does nothing on the Paulsen Plan over the weekend, the markets could give it all back on Monday.

2) The US government has now become the world's largest hedge fund, specializing in distressed debt, derivatives, credit default swaps, and insurance. Will it next add automobile manufacturing to round out its portfolio?

3) I found the article about Better Place very interesting. What I hadn't realized was that the replaceable batteries for cars have to be so big that they can only be moved with a fork lift. It is noteworthy that the two countries that have stepped up to this plan have small areas with an abundance of electricity generating alternative energy sources, wind in Denmark, and solar in Israel. Israel has the additional incentive in that all of its crude has to be expensively imported from the US. I suspect that there will be several alternative transportation systems on offer out there in a couple of years, much like existed in the early 1900s, when gasoline, diesel, alcohol, electric, and steam all competed equally. Gasoline won because it was the cheapest. It is not the cheapest anymore.

TRADE OF THE MONTH

The Goldman Sachs September $75 puts, which I recommended on Tuesday that you short at $1, expired worthless today, generating a paper profit of $150,000. The stock closed at $129, $54 out of the money. In fact, if I had been actively trading this week I could have made three round trips in these puts between $1 and $0.25, generating a total profit of $400,000. This shows you the opportunities that are begging out there.

Global Market Comments for September 18, 2008

1) Now is the best time ever to start a hedge fund. It is like going into the insurance business the day after the 100 year flood. All of the model busting worst case scenarios have happened. Dow up 450 on RTC type bail out rumor.

2) The global liquidity crisis accelerates. 90 day T-bills traded at 0% yield yesterday, which means that net after fees they yielded negative interest rates. Investors are solely interested in preservation of capital now and could care less about returns. The same thing happened in Japan for most of the nineties.

3) The Fed injected $155 billion overnight into the global financial system through a series of central bank swap lines. Eurodollar borrowing costs spiked up to an historical high of 3.20%, 120 basis points over the Fed funds rate. No corporate bonds have been issued since September 10. The yield on the 30 year long bond fell below 4% for the first time in history. They have to be a screaming short here.

4) The dollar fell back to the $1.45 level as traders figured out that the $1 trillion in Fed bail outs announced so far, will be highly inflationary down the road. I would have stopped out of my long dollar position at $1.39. See earlier recommendation to go short 30 year Treasury futures at 124!

5) Gold moved up $143 in two days, and it is not just the Indian wedding season that is doing this. Don't touch it here. Gold will collapse at the first sign of stability.

6) Dow Jones announced that it is replacing AIG with Kraft (KFT) in the Dow 30 index. The Dow is now heavily underweight financials, but Dow Jones is afraid to add any new names in these conditions. The world is running low on shorts in the financial sector because so many have gone to, or are close to, zero.

7) I met with some senior officials from Toyota last night. They are not going to bring out an all electric car, believing that the green trend in the auto market will stop with a plug in gasoline hybrid with a long range initial charge of 40-120 miles. A plug in Prius comes out next year.

8) The VIX volatility index hit 38% yesterday, up from 18% in July. The historic high was 48% in 1998 when Long Term Capital Management had a trillion dollar short volatility position to unwind. This is the most reliable

Global Market Comments for September 17, 2008

Note: If world ends, there will be no comment for September 18.

1) The government nationalized AIG, taking 79.9% of the stock in exchange for an $85 billion bridge loan. The trillion dollar company provides 18% of the life insurance in the US. This is a steal for the government, which will make tens of billions of dollars on the deal. AIG has huge exposure in California, taking in $3.7 billion in premiums last year. It insures 1.6 million cars and motorcycles, 12 million home mortgages, $750 million in workers compensation insurance, and one out of four aircraft. Some of the better known subsidiary names are American Home Insurance, 21^st Century auto insurance, and National Union Fire Insurance.

2) Housing starts for August fell a precipitous -6.2% to an 895,000 annualized rate, a 17 year low. Builders are obviously not interested in adding to already bloated inventories.

3) Lumber (LB) ($LUMBER) has been the worst performing commodity over the last three years, thanks to the collapse in the housing market, taking the CME contract from $400 down to $185. With a year's worth of new home inventory sitting out there, there are not a lot of buyers of wood these days. Industry capacity utilization is now down to 75% of its 77.35 billion board feet capacity. While plant closings and mothballing has provided some respite in recent months, there is a new threat looming. The collapse of the Canadian dollar against the greenback from $1.10 down to 93 cents is enabling imports to undercut US producers for the first time in years. This contract may provide the first hint to the recovery in house prices. Lumber closed at $2.14 today.

4) It's time to look at the wreckage of the BRIC markets to grasp the opportunities out there. Brazil's Bovespa ($BVSP) has vaporized 39%, from 75,000 to 46,000. Russia has melted 58%, from 2,500 to 1,038. India's Sensex ($BSE) has plunged 43%, from 21,000 to 12,000. My preferred China vehicle is the Hang Seng, and it has really been beaten with the ugly stick, down 45% from 32,000 to 17,500. (The Shanghai market, which foreigners can't buy, is down and astounding 68%, from 6,000 to 1,930). I always thought of these as 'roach motel' markets. You can check in, but you can't check out. Liquidity only exists on the upside. But going forward from these levels, these markets will generate far and away the highest equity returns.

QUOTE OF THE DAY

'People are saying these banks are too big to fail. That may mean they are also too big to manage.' Warren Buffet.