Global Market Comments for August 4, 2008

1) Hurricane Edward showed up and the US threatened to close the Straights of Hormuz, but crude didn't go up. Therefore, it had to go down, crashing $7 to $119. But the only way to make oil seem cheap at $119 is to start out at $148. Natural gas hit $8.60. Wow!

2) Florida based luxury homebuilder WCI Communities (WCI) filed for chapter 11 because of its inability to roll over $1.8 billion in debt. Carl Icahn tried to take over this company a year ago at $22/share after it had fallen from $40, but failed. Sometimes your best trades are the ones you don't do. Expect more homebuilders to fail. Read the 'ghost towns' article in the Saturday WSJ.

3) The Fed meets tomorrow, so it can do nothing on interest rates.

4) June factory orders are up 1.7%, much better than expected

5) The storage business is booming as a tidal wave of foreclosures and evictions force people out of homes. Even renters are being tossed out as foreclosed owners fail to renew leases. There are now waiting lists at many locations. San Francisco facilities often have to evict individuals who try to live cheaply in their units with their furniture.

6) A group called 'Recreate 68', the same group that organized the Seattle World Trade Organization protests in 1999, is stockpiling feces in a Denver warehouse to throw at the Democratic convention. Police and health authorities are looking for the warehouse. No kidding.

7) The next credit crunch to occur will be in consumer finance. To protect against falling real estate prices, banks this year will cut existing consumer credit lines from $4.7 trillion to $2 trillion. The legendary spending habits of the American consumer will be cut off at the knees.

8) All of the new equity raised by banks and brokers this year is being used to plug holes, not fund new lending. When new equity is finally used to create new profits, the bottom will be put in financial stocks. This is a ways off. The new floor in expected write offs by the financial industry is increasingly being seen at $1 trillion, with the new ceiling at $2 trillion. This is $2 trillion that is no longer available to buy real estate. This drastic reduction in bank lending now virtually assures that the real estate sell off with be the worst since the great depression. Market declines of 40%-50% in Florida, California, and Nevada are increasingly being discussed.

Global Market Comments for August 1, 2008

1) The July non farm payroll came in at -51,000 and the unemployment rate shot up to 5.7%, a four year high. Short McCain.

2) The mortgage crisis will eventually be solved by the hedge fund industry, which, with $2 trillion in preserved capital, is taking over many functions until now performed by investment banks. The bigger houses are hiring entire 50-100 man teams from dying investment banks to take over this function. Hedge funds are also moving aggressively into private equity and M&A financing. At 22 cents on the dollar, the yields of some of this paper must be approaching 30%. As a result, hedge fund returns will soar. The investment banking industry will shrink to a shadow of its former self. Only Goldman Sachs and Morgan Stanley will remain whole.

3) Exxon Mobile (XOM) reported the most profitable quarter in the history of any US company at $11.7 billion. General Motors (GM) reported a $15.5 billion loss. It is flabbergasting to see an $11 stock report a $27/share loss. Its senior debt is now trading at 46 cents on the dollar. These two companies show perfectly how bifurcated the US economy has become. In the meantime Starbucks (SBUX) reported its first quarterly loss.

4) Irony upon irony. Bristol Meyers Squibb launched a takeover bid for Imclone at $30/share. Next week former CEO Sam Waksal gets out of jail for insider trading for dumping the stock at a much lower price seven years ago. Collecteral cancer drug Erbatux, which Waksal feared would not get approval, turned out to be a blockbuster. Martha Stewart must be stewing.

5) Word is finally leaking into the mainstream media about the Haynesville shale, the largest natural gas discovery in US history. The Louisiana/Alabama find, which is being exploited by Chesapeake Energy (CHK), may yield 13 trillion cubic feet. Mineral rights which sold for $200/acre a year ago are now going for $30,000. This has got to take natural gas prices a lot lower.

6) Walmart (WMT) put out a memo essentially ordering its employees to vote Republican in order to head off pro unionizing legislation. What are they thinking?

7) China now has 400,000 millionaires, more than any other country.

Global Market Comments for July 31, 2008

1) Q2 GDP came in at 1.9%, miles away from a recessionary reading. Domestic weakness is being more than offset by international, energy and commodity profits. If you don't have income from any of these areas then you are toast. Weekly jobless claims soared again by 48,000 to 448,000, the highest since April, 2003. If this is not confusing then you are not paying attention.

2) The five biggest shorts in the market in terms of market capitalization are Big Lots (BIG) 46%, Zions Bankcorp (ZION) 29%, MBIA (MBI) 29%, General Motors (GM) 28%, and Sears (SHLD) 28%. If they don't go bankrupt these will all be great buys on the short cover.

3) The baby boom is back! US births in 2007 surpassed 4 million for the first time since 1954. The difference is that the US population then was 163 million vs. 304 million now.

4) According to The Economist magazine's 'Big Mac' index, a lighthearted attempt at measuring global purchasing power parity (PPP), the world's most overvalued currencies are from Norway, Sweden, and Switzerland. The most undervalued currencies are from Hong Kong, Russia, and Thailand. The heart attack on a plate costs $7.88 in Norway vs. $1.71 in Hong Kong. A $5.34 Big Mac in the euro zone suggests their currency is seriously overvalued there too.The US at $4 is in the middle of the range.

5) It looks like the real estate market is headed towards a dreaded 'L' bottom. So far The Case Shiller 20 market index has dropped from 210 to 160, or 24% since 2005. The average postwar real estate pull back in the index is 33%, or back to 2002 levels. But in past real estate busts we had a functioning financial system. This time we don't. Since 2000 Wall Street has taken down 85% of all home mortgages. They are currently taking none. They can't because industry capital has dropped by half in the past year. They are distress selling mortgages, not buying them. As home prices fall, forced selling accelerates because the refis aren't there, driving prices still lower in a downward death spiral. ?Aspirational value? is a term you hear a lot about these days. Some sectors of the loan market, like sub prime and Alt-A have ceased to exist. This all argues for at least another 10% drop in home prices over the next year (more in California, Nevada, and Florida), and then five years of bouncing sideways along the bottom. This could be real estate's lost decade.

6) The City of San Francisco is going to require companies with more than 20 employees to help subsidize mass transit.

7) American Express (AXP) is cutting credit card limits in sections of the country with the biggest real estate falls, like California and Florida, to reduce delinquency rates.

Global Market Comments for July 30, 2008

1) Panic buying of crude is back. Weekly gasoline inventories showed a shocking decline of 3.5 million barrels, so crude soared $7 to $127. The $120 level was a perfect bear trap. Goldman Sachs put out a report that current demand destruction is temporary and that crude will hit $149 by year end. I don?t buy it.

2) The credit crunch hit its one year anniversary today. Last July 30 was when the two Bear Stearns hedge funds were declared effectively worthless.

3) The SEC extended its short selling ban on 19 banks until August 12. It says that it needs time to evaluate the impact of the ban so it can propose broader short selling restrictions. A stay of execution. The Fed also extended the emergency discount window access until January 1, saying that the financial system is still 'too fragile'.

4) According to Malcolm Gladwell in 'Blink', only 2% of US males are over 6'2', but 30% of Fortune 500 CEO's surpass this height.

5) The market is still digesting the Merrill (MER) refi. By pricing their CDO's at 22 cents on the dollar it suggests that $220 billion in such securities were sold by the whole industry for $1 trillion. It was the grossest overpricing in history. What a selling job! This is why I distrust anything Wall Street is trying to sell.

6) The next giant rumored to fall is AIG Group (AIG), which after huge asset sales still has a scrotum tightening asset to equity leverage ratio. By this, I mean a highly dilutive distress recapitalization at ruinous terms. You can play these for a trade, but don't leave your screen to go to the bathroom.

7) Chesapeake Energy's (CHK) Aubrey McClendon argues that new technology has made possible enormous gas field discoveries over the last four years which will solve our energy crisis. These include gas shale fields in Barnet, TX (where I was active as a driller), Hainesville, AL, Fayetteville, AK, Marcellus, PA, and Woodford, OK.?? McClendon (of 'Swift Boat Veterans for Truth' fame) has bought several hundred million dollars worth of his own stock, which soared from $30 to $80 earlier this year.

8) New mortgage applications fell 14.1% last week to the lowest level since December, 2001.

Global Market Comments for July 29, 2008

1) As crude dies, stocks fly. Oil down to $120.50, a new two month low. Alert! Alert! Regular gas at a bargain $3.99/gallon seen in the East bay! For $1 I'll tell you where.

2) Merrill Lynch (MER) is raising a staggering $8.5 billion in new equity. The more they say they don't need capital the more they raise. Existing shareholders will be diluted by a hefty 20%, except for those recent private placement investors with anti dilution clauses. The money will go to help cover their loss incurred in selling $30 billion face value in mortgage backed obligations for a mere $6.7 billion. This sets a benchmark value for sub prime debt at 22 cents on the dollar. It makes you wonder how dire their capital position really was yesterday. The stock has imploded, from $90 to $22 in the past year. All eyes are now on Lehman (LEH), the next shoe to fall.

3) The S&P Case-Shiller real estate price index for June was down -15.8% YOY and is still falling. Las Vegas (-28.4%) and Miami (-28.3%) showed the biggest losses. San Francisco was down -22.9%. Charlotte, Dallas, and Denver all showed monthly gains. Prices are now at summer, 2004 levels.

4) US Steel (X) reported vastly better earnings than even the most optimistic forecasts as the steel shortage puts it in the driver's seat on pricing. Weakness in autos, which now accounts for only 15% of sales, is being more than offset by demand from China. 85% of the company's sales are in cold rolled steel. X is the winner here, because it alone among steel producers owns iron ore supplies. However, if commodity prices turn, look out belooooow!

5) The Conference Board's consumer confidence index for July rose from 51.0 to 51.9, the first rise since December. Given the huge decline seen in the previous month this is not much of a dead cat bounce. Job security is the main concern.

6) The SEC's short selling restrictions on banks expire tonight. If they don't renew them, or if there is any fiddling, waffling, or equivocation, expect the market to tank tomorrow.

QUOTE OF THE DAY

'Americans eventually do the right thing, after exhausting all other possibilities,' said Winston Churchill.