Global Market Comments
March 2, 2009
Featured Trades: (BAC), (GOLD), (POLAND), (CEE), (MSFT), (INTC), (ORCL), (CSCO), (BRK/A), (COP), (JNJ), (GS), (GE)
1) The US is turning into Europe. Think high taxes, high unemployment, more government involvement in everything, and much lower growth. That is the message the markets are telling us by retreating to the 6,000 handle, levels not seen since 1996, and down 54% from the peak only 17 months ago. Equity prices are shrinking to multiples, in line with a permanently lower long term growth rate of maybe 2%, a shadow of the 5% rate seen for much of this decade. Maybe this is what mature economies are supposed to look like. If you do buy American stocks, only buy the ones that are really foreign stocks with American sounding names. Microsoft (MSFT), Intel (INTC), Oracle, (ORCL), Cisco (CSCO) all get 60%-70% of their profits from overseas where high growth rates have migrated. I think I'll move to Tahiti and live off of coconuts and freshly speared fish, wearing only a loin cloth.
2) Bank of America's (BAC) Ken Lewis says that he won't resign until he pays back the $45 billion in TARP money he owes the government. So paying $50 billion for something that is really worth a negative $170 billion is a bad career move? That's a revelation! I can see that secrecy is a concept that is forever banished from the investment community. CEO's won't be able to make an acquisition, nor fund managers raise a single nickel from here on, without a complete undressing, and a full proctologic exam!
3) Warren Buffet and his managers feel like 'hungry mosquitoes in a nudist camp.' So he revealed in his annual letter to investors in Berkshire Hathaway (BRK/A). I love it! This gem is an absolute must read for anyone in the markets. Although Buffet massively outperformed the indices, book value fell 9.6%, the worst performance since he took the helm in 1965. He admitted he did some 'dumb things', like adding to his holding in Conoco Phillips (COP) at the absolute top in the oil market, at the expense of safer stocks like Johnson & Johnson (JNJ). If you analyze his balance sheet and income statement, you can see the method to his madness. He only increased his net equity exposure by $1.3 billion. Much of his new investment went into high guaranteed return instruments, like 10% preferred in Goldman Sachs (GS) and General Electric (GE). He has greatly improved the long term cash flow of BRK/A at the expense of a short term hit to book value. Moves like this justify his 'Sage' appellation.
4) Panic buying of gold coins continues to overwhelm coin dealers around the world. According to the Financial Times, the US Mint sold 193,500 American eagles in the first seven weeks of this year, more than it sold in all of 2007 at prices 40% lower. Retail investors fleeing paper assets, like plummeting stocks and bonds, are paying 5% premiums over face values. The same phenomena is appearing in other countries where gold coins are available to the public. Does this have a toppy feel to it?
5) I met my paperboy at 5:00 a.m. this morning, who is actually a Vietnamese girl driving a minivan. She delivered all five at once, which means the newspapers have outsourced local delivery to save money, who then aggregate customers to improve efficiency. Phuong took the rubber bands off of the papers when she saw that I was about to pick them up. Now that is cost cutting!
6) While American banks have their subprime crisis, European banks are being dragged under by their lending to emerging economies in Eastern Europe. Led by UniCredit in Italy, Austria's Erste Group Bank and Raiffeisen International, France's Societe Generale, Belgium's KBC, and Hungary's OTP, banks have lent $1.6 trillion to companies in these formerly communist countries at cheap rates, with minimal documentation, and few questions asked. The easily available credit caused local money supplies to explode, and sparked bull markets in both stocks and currencies. Emerging Europe grew at double and triple rates in the West, as local companies pumped up on steroids became the master of leverage. Now $400-$600 billion is due for rollovers this year from nonexistent credit markets, and the chickens'?.make that vultures, have come home to roost. Economic growth has fallen off a cliff, with Poland's seasonally adjusted industrial output down in December a precipitous 7.4% YOY. The Polish stock market fell 48% last year and the zloty is off 40% against the dollar from its June peak. The Central European Equity Fund (CEE) has crashed 80% in eight months. The crisis is so severe, it may postpone Poland's entry into the Euro block, which had been scheduled for 2011. Home mortgage borrowers are in especially bad shape. Up to 50% of their loans were denominated in Swiss francs, so the collapsing Polish currency has caused a near doubling of borrowers' monthly payments and principals since last year. Austria really has its knickers in a twist, as these heavily syndicated loans account for 80% of GDP. A 10% default rate could wipe out the entire banking system there. Germany has the smallest loan exposure, but has the most to lose, with 25% of its exports headed east. It is now in negotiation with its partners in the EC to cobble together a bailout with the help of the IMF to provide bridge financing for these loans, and hopefully ward off a further economic collapse. It looks like the headlines in Europe are about to get uncharacteristically sensational.
QUOTE OF THE DAY
'If you have been playing poker for a half an hour, and you don't know who the patsy is, it's you,' said Warren Buffet.
Global Market Comments for February 27, 2009
Featured Trades: (SILVER),
1) Welcome to the worst case scenario, with Q4 GDP revised down from -3.8% to -6.2%. Q4 will be just as bad, if not worse, then we will find a bottom. Technical analysts were ringing their hands as the Dow hit a new 12 year low and the S&P 500 broke key support at 740. Thank God I don't believe in that mumbo jumbo. Natural gas hit a new six year low at $3.90, and even gold backed off to $928. Citigroup (C) is now so cheap at $1.40 that you could launch a hostile takeover with your American Express card. It really had the flavor of a 'throw up your hands and sell everything' day.
2) I met with Thomas Ricks, author of the best selling The Gamble: General David Petraeus and the American Military Adventure in Iraq, 2006-2008, who says that we are only half way through the war, and our unfortunate involvement there could run as long as another 16 years. The surge has failed, our casualties are rising, and US credibility with Iraqis is zero. Bush blew a cozy set up that worked for a decade where Saddam was contained at minimal cost. Talking is more valuable than fighting, and it is cheaper to hire someone than to kill them. General Petraeus figured this out, so we now have 100,000 enemy fighters on the payroll costing $30 million a month. It was easy to walk away from Vietnam and leave a few million locals in re-education camps. Iraq won't be so easy, because it sits atop, or adjacent to the world's largest oil supply. Eventually, Iraq will evolve into another Lebanon where you have multiple competing armed groups. The big winner in all of this is Iran, which has seen its prestige grow in the Middle East at our expense. Iraq will continue to be a huge financial drain on the US for decades, no matter what Obama says. All very sobering thoughts, with big implications for the markets.
3) With gold bugs, survivalists, and garden variety hedge funds running victory laps over the yellow metal's recent breach of $1,000, it is easy to miss the move in silver that has been twice as impressive. Silver has run 30% this year to $14.60 an ounce, despite the steady deterioration in industrial demand. Silver ETF buying has exploded by 1,676 tonnes to bring their total to 9,929 tonnes. Sales of silver American eagle coins have doubled to four million ounces so far this year. The metal may have more to run. Hedge fund longs, which peaked last year at 50,000 futures contracts, have so far reached only 23,100 contracts in this round. But risk managers are going to have to keep an extra sharp eye on silver positions. A turnaround by the Dow or the yen against the dollar could suddenly take the air out of this bubble.
4) Anyone who has any illusions about the Canadian tar sands business should take a look at the March issue of National Geographic, not normally a prime source of financial and economic news for me. I'm not normally a big time environmentalist, but just looking at the glossy, eye opening pictures tells you that this is this an ecodisaster of Biblical proportions. A $50 billion investment by several firms over the last decade is now producing 750,000 barrels/day, and another $100 billion was headed north before prices crashed last year. You have to cut down a whole forest, remove two tons of peat, then another two tons of sand, and burn 100 barrels of oil equivalent to heat rivers of water to steam, just to produce a single barrel of oil. This gives you the world's highest production cost, thought to be $80-$100/barrel. There are now 50 square miles of sludge ponds in Northern Alberta leaching a witch's brew of poisons into the water supply, which has caused the local cancer rate to explode tenfold. We're not just talking about a few sick ducks and fish here. Canada is the largest foreign supplier of oil to the US, accounting for 19% of the total, and half of that is coming from tar sands.
One can only assume that the whole industry was built as a hedge against some Third World War, Armageddon type total cut off of all foreign crude supplies that would drive prices to $500/barrel, making all of this hugely profitable. Maybe the owners think they can get away with this because it is in the middle of nowhere. An army of lawyers about to hit these projects with a tidal wave of litigation think otherwise. After looking at these pictures and analyzing the numbers, you have to ask if it is really worth it, just so I can drive my Hummer to Walmart.
QUOTE OF THE DAY
?You cannot motivate the best people with money. Money is just a way to keep score. The best people in any field are motivated by passion,? said open source advocate Eric S. Raymond.
Global Market Comments for February 26, 2009
Featured Trades: (GM), (YEN),(YCS)
1) Weekly first time jobless claims soared from 631,000 to 677,000, taking total claims to 5.1 million, a new all time high. General Motors (GM) announced a Q4 loss, and a 6.2 billion cash burn, leaving them with a scant $14 billion left. The company will have to file for bankruptcy when this figure drops below $10 billion, or in about two months. Last year GM lost $84.7 million a day! How does a $2 stock lose $15.71/share? Apparently when people are afraid of losing their jobs, their house, and are maxed out on their credit cards, they don't run out and buy a new car. At least some fiscal responsibility is returning. Unsurprisingly, CEO rick Wagoner was back on Capitol Hill today panhandling for more money. The death watch has started.
2) Here is a novel plan put forth by a hedge fund in Florida, Derivatives Bridge, LLC. Securities backing performing mortgages worth 100% are being sold for 20% because there is no market for these securities. Have the government buy these securities for 60%, rescuing the banks, and then sell them back to the original homeowner. The homeowner then is able to refinance his home, see his mortgage principal drop by 40%, restoring his net worth and purchasing power. The cost to the taxpayer is zero. This is already possible in some countries like Denmark. If someone offered me a deal like this I'd take it in a heartbeat, even if I had to clean out the sofa cushions and raid my kids' piggy banks. They say necessity is the mother of invention.
3) There is a lot of talk today about the recent weakness of the yen, which along with gold, became the focus of the 'short America' trade. The Japanese currency has backed off from its ??88 peak a month ago to ??98, breaking several key technical levels, and seems poised to go lower. Other than flight to safety, there was never a reason to go long of this currency. The trade and current account surpluses are in free fall, as Toyotas, Lexus's, Hondas, and Infinitis pile up on west coast docks. The economy is even sicker than ours, and with zero interest rates for the past 14 years, this certainly is nobody's yield play. Clearly the yen became the global carry trade's cheap date, and the cross has emerged as a highly sensitive indicator of global risk taking appetite. Could this bout of weakness be a mustard seed of economic recovery, a light at the end of the tunnel? Watch the Proshares Ultra Short Yen ETF (YCS), which gives you a 200% short play, and is up 25% in a month.
4) The City of New York has repaid municipal bonds that were issued in 1868, thought to be one of the world's oldest paying securities. The 135 year, 7% bonds were issued by a small hamlet in modern day Bronx to finance a road to one of the nation's first racetracks. It was a bet that New York City would one day expand north and annex the village, which it finally did in 1895. The city is still paying interest on bonds with 250 year maturities, which were originally floated by Winston Churchill's American grandfather. This was an incredibly clever financing for 1868.
QUOTE OF THE DAY
In the business world, the rearview mirror is always clearer than the windshield,? said Warren Buffett, the Sage of Omaha.
Global Market Comments for February 25, 2009
Featured Trades: (C), (BAC)
1) So nationalize the banks already! Get it over with! Call it whatever you want: partial nationalization, temporary nationalization, socialization, liverwurst, or rutabaga. Just get it over with! This tortuous slow drip of on again, off again, stop gap measures is going to cost us more than if we executed the politically incorrect 'N' word. Of course, a government takeover is the worst nightmare for many Republicans. But now that former Fed governor Alan Greenspan and many fiscal conservatives are on board, this shouldn't amount to political suicide for Obama. The FDIC's Sheila Bair already does this on an almost daily basis with smaller regional banks, like Washington Mutual, but for some reason the top nine 'too big to fail' banks are sacrosanct. Their deposits have been effectively nationalized with government guarantees since last fall. The market is already selling us that many of these once hallowed institutions are now worthless. This is what Citigroup (C) at $1 and Bank of America (BAC) at $2 are telling us. Just wipe out the pitifully little the common shareholders have left, clean them up, and resell them in five years after the credit markets are restored. Every government that ever did this, like the UK in the eighties and Hong Kong in 1998, made a fortune. I was involved with both, and serious coin was made by the sellers and the buyers. Not to drive a stake through the hearts of these de facto 'zombie' banks really would risk a Great Depression II and an 'L' shaped lost decade. The markets would love decisive and surgical action like this and rocket.
2) Looks like the San Francisco Chronicle may be about to join the dustbin of history. The industry rag, Editor and Publisher, says that the privately owned Hearst Corporation has given the venerable paper an ultimatum to cut costs or close. The 150 year old Chronicle lost $50 million last year. Of course, this may all be a ploy just to beat up one of the last surviving unions, but they have made a similar threat to their paper in Seattle. Ironically, Hearst acquired the Chronicle and dumped the San Francisco Examiner in 2,000, which was then put on a crash diet and made profitable by its new owners. If the Chronicle goes it will join the Philadelphia Enquirer which went under last week, and the soon to be shut Christian Science Monitor. Google has been eating their lunch for years, and classified ads have migrated to Craig?s List. It is tough to chop down a forest to make paper, get a union to print it, and manually distribute your product, and then compete against a one man email blast on costs. If the Chronicle goes it will be survived by a much smaller SFGate.com, one of the most successful web based newspaper portals out there. There could be a ninth earning save by a surprise buyer. But moguls willing to hemorrhage ?? ?? money just to promote a political view are a dying breed. Rupert Murdoch has been the only recent buyer of newspapers, and something tells me that a match with the Chronicle would not exactly be one made in Heaven. In five years there will probably be only two mass circulation papers left, The New York Times and the Wall Street Journal, with the Washington Post as an outlyer. Thousands of small, local, niche publications will take up the slack. As a long time print journalist dating back to the typewriter days myself, I am sad to see newspapers go. But you can't exactly sit like Denmark's old King Canute and order the tide to stop rising. Journalism is degrading into an army of guys banging away at the computers at 3:00 AM in their boxer shorts. Trust, accuracy, objectivity, style, and taste will be the victims.
3) I thought Joe Biden's chief economist Jared Bernstein made an interesting comment today. He inferred that Obama had a tough time crafting a stimulus and recovery plan because so many government data releases last year were massaged, distorted, obfuscated and misrepresented to hide how serious the unfolding economic crisis really was.
4) Expatriates have been bailing on Dubai so fast that there are now 3,000 abandoned luxury cars parked at the airport. Those with multiyear leases who don't want to pay early return penalties are just abandoning their vehicles with the keys left in the ignition, some with apology notes taped to the windshield. Failure to pay debts can get one locked up in a local prison.
QUOTE OF THE DAY
'Do not allow our newspapers to degenerate into propagandist organs,' said the late press baron, William Randolph Hearst.
Global Market Comments for February 24, 2009
Featured Trades: (GOLD), (GLD), (SPG)
1) The Senate Banking Committee holds hearings while Rome burns. The S&P Case-Shiller Home Price Index showed a Q4 fall of -18.2%, the sharpest decline in its 21 year history. Prices in San Francisco fell by 31.2%. We got within 100 points of a 6,000 handle on the Dow this morning, and a print there would have sparked a global stampede to the restroom. But Bernanke managed to assuage fears today, prompting a 234 point rally in the Dow. All ears are on Obama tonight.
2) Gold finally hit a wall just above $1,000, and instantly melted $50. For many traders who got in just above $700 three months ago, it's time to say thank you very much to Mr. Market and either wait for a substantial pull back, or go on to the next trade. It was taking increasingly larger purchases of physical gold by ETF's and coins by individuals to push the price up. CME statistics showed the speculators' position soared to a net long of 215,661 contracts ($21.5 billion). The SPDR Gold Trust ETF (GLD) added five tonnes of the barbaric relic to 1,029 tonnes in just one day. The turnaround neatly sets up a double top on the long term charts with the high set last year. It may take a couple of more runs, and more bad news, which seems in abundant supply, to get the yellow metal to a true new high.
3) The forecasting firm Macroeconomic Advisors says that we are going through the 'epicenter' of the recession right now. They see Q4 GDP being revised down from -3.8% to -6.0%, and that Q1 will come in at -5%. These numbers fall somewhere in between the 1974 recession and the Great Depression in terms of their severity, and are double the worst case scenario offered only three months ago. A tsunami of infrastructure spending, stimulus, and newly recapitalized bank lending will bring positive growth of 2% in the second half. Lower interest rates are slowing down the home foreclosure rate. Many states and municipalities, like Denver, started shovel ready projects the very second that Obama signed the stimulus bill, but it will take months to see the impact on the data. In layman's terms, thing are about to get a lot worse, then a lot better pretty quickly, giving us a classic 'V' type bottom for the economy.
4) With many analysts expecting commercial real estate to be the next shoe to fall in the financial crisis, there is already maneuvering to get a bail out in place before the sushi hits the fan. 'Ghost malls' now widespread around Michigan are spreading to the coasts like a highly contagious plague. Simon Properties (SPG) and Westfield have gone to the extremes of shortening hours to save money on staffing costs and electricity. The trigger will be impending failed rollovers of the debt of a couple of big REITs, of which over a $1 trillion are coming due. The Treasury's TALF program will be expanded from CDO's backed by student loans, car loans, and credit cards to include commercial real estate loans, giving the industry the safety net, and the breather it needs.
QUOTE OF THE DAY
?There is only one side to the stock market, and it is not the bull side or the bear side, but the right side,? said Jesse Livermore, the famed stock speculator of the 1920's.
Global Market Comments for February 23, 2009
Featured Trades: (C), (XOM), (GM), ($NIKK)
1) The Treasury moved to raise its stake in Citigroup (C) by up to 40% by converting preferred into common, yet another step down the road to creeping nationalism. With C trading as low as $1.20 on Friday, taking its market cap down to a mere $10 billion, does anyone care? The markets have already delivered their own judgment. Does this mean my ATM is going to start working with the same frustrating inefficiency of Amtrak, another poorly run government entity? The market cap for all 24 banks in the S&P 500 subsector has shrunk to $269 billion, less than the capitalization of Exxon (XOM) at $354 billion. The stock market hated all of this and fell 251 to a new 12 year low at 7,114.
2) On Friday General Motors (GM) hit a low of $1.60/share, taking its market cap below $1 billion. CEO Rick Wagoner says he 'doesn't know' if the company will need additional bail out money at the end of March if its $18 billion February request gets funded. The lowest market cap the company saw during the Great Depression was $4 billion. This company is toast.
3) My old friend, Stephen Roche, chairman of Morgan Stanley Asia, says that the current US bubble is four times larger than Japan's, whose market is still down 80% from its 1989 high (no typos here). The American consumer, who at the peak accounted for 72% of GDP, has been left for dead. Japan's bubble was caused by a collapse in capital spending, which never accounted for more than 17% of GDP. If we make China our whipping boy, as the Democratic Congress is historically inclined to do, they could come back to bite us in the hand. Treasury Secretary Geithner's recent comment that China is a 'currency manipulator' hasn't helped. Our financial markets are now desperately dependent on the Middle Kingdom recycling their trade surplus into our bond market. A Chinese boycott would trigger a collapse in the dollar, and send US interest rates sky high.
4) Which online businesses are currently booming??? According to the data firm ComScore, in a total online audience of 190 million in January, traffic to employment sites like CareerBuilder.com, Monster.com, and Yahoo's Hot Job Searches, leapt by 46% to 26.7 million, driven by the collapse of the job market. Visits to tax sites like IRS.gov, CA.gov, and H & R Block were up 176% MOM to 24.7 million, as weary taxpayers seek assistance on this unpleasant annual chore. Consumers looking for travel bargains for the spring triggered a stampede to sites like VacationstoGo.com, Disney Travel, and Expedia.com, which were up 46% to 13 million clicks. Concerns about salmonella poisoning drove a lot of traffic to a range of government websites. Facebook finally broke into the top ten, with 57.2 million visits.
5) I finally got my hug from the terrorist and ex-bomber who used to pal around with Obama during his reckless youth. Yesterday I donned my only tie died T-shirt and went to Berkeley to meet University of Illinois professor Bill Ayers, who was raising money for a Middle Eastern children's charity. It was fascinating to listen to this echo from the sixties, and to see political radicalism in its modern incarnation. It's no longer about mass demonstrations and civil disobedience (and bombing). It's about online networking and organization, which the Democratic campaign proved so effective at in the last election. Closet socialists on the left and hardliners on the right, who thought Obama was pretending to be a moderate just to win the votes, will be sorely disappointed. He really is a moderate! Ayers was joined by his wife, former Weather Underground activist Bernardine Dohrn, a former resident of the FBI's ten most wanted list. After having been told by the government that this was one of the most dangerous people in America, who should be hunted down at any cost, I was pleasantly surprised by the demure, but eloquent grey haired little old lady who appeared on stage. It occurred to me that Obama could be one of the greatest 'black swans' ever. Who gave odds that this guy would win a year ago? Now he is President, and his impact on the markets, and on history will be momentous.
QUOTE OF THE DAY
'You cannot multiply wealth by dividing it,? said the late Dr. Adrian Rogers, past president of the Southern Baptist Convention.
Global Market Comments for February 20, 2009
Featured Trades: (POT), (PBR), ($COPPER), (SCHW)
1) Gold blasts through $1,000 to a new high for the year. Need I say more?
2) Here is another thought about Obama's mortgage bailout plan. It is so small, and helps so few, it isn't really a bail out at all. It doesn't help those with mortgages over $625,000, a second home, investment properties, and those who have no mortgages (20% of the US total). Those who do qualify will have to run a gauntlet of qualifications and paperwork. No wonder the market for mortgage backed securities completely shut down! The plan does enable Obama to satisfy the left wing of the Democratic Party crying out for some government relief of their constituents, like Nancy Pelosi. It also makes a nice headline.
3) Here's another one for the unintended consequences file. The bankruptcy of Lehman Brothers could lead to up to 50 of London's better restaurants going under. The defunct investment bank was a profligate spender of expense accounts, corporate events, and bonus payments, racking up huge bills. Restaurateurs?? are coping by cutting staff costs, offering cheaper cuts of meat and more chicken dishes, bargain wines like Argentinean malbec and Spanish rioja, and great value for money prix fix menus.
4) Exchange traded funds, or ETF's, were one of the hot financial products of 2008, and enable investors to go 100% or 200% long or short any number of indexes, sub indexes, industry groups, bonds, currencies, and commodities. The largest issuers have been Barclay's iShares, State Street's StreetTracks SPDR's, Rydex, and PowerShares. Sponsors of ETF's have filed for registration of another 850 such products, including ETF's for many new single country funds for Columbia, Egypt, Argentina, Peru, and the Nordic countries. Charles Schwab (SCHW) has also announced that it is entering this field for the first time. These will allow fund managers to make more narrow and specific bets in the capital markets. But they will also increase market volatility, as they obviously did last year.
5) Someone recently bought a portfolio of performing home loans with an average FICO score of 698 for 14 cents on the dollar, giving a current yield of 45%. This shows you how shabbily these illiquid assets are being treated. It also tells you what the world is going to look like without leverage. Everything is going to be a lot cheaper for a long time.
6) Legendary investor George Soros has substantially increased his investment in Potash (POT) and Petrobras (PBR), two stocks I love. Potash is the Saskatchewan based world's largest miner of potassium carbonate, which is in heavy demand for fertilizer from China. The stock is only just recovering from a melt down from $240 to $50. Petrobras is Brazil's oil major, which has made a sting of offshore oil discoveries. PBR gives you a triple play on the recovery of crude prices, a long in the Brazilian currency, the Real, and the high growth rate of this emerging economy. All three offer great entry points right now. A classic 'George' play.
7) In 2007, global urban dwellers surpassed rural ones for the first time. Some 90% of all new urban dwellers are in emerging markets. By 2015 three out of four urban dwellers will be in emerging markets, according to the UN. Half of all emerging market urban dwellers do not have access to clean water, nor have their garbage collected. This has major implications for long term investment themes. Buy copper ($COPPER).
QUOTE OF THE DAY
'Pass this package by tomorrow, or we won't have an economy on Monday,' said Fed chairman Ben Bernanke at the Treasury's emergency meeting in October.
Global Market Comments for February 19, 2009
Featured Trades: ($GOLD), (DGP), (GLD), (WFC), (EPD)
1) GOLD! GOLD! GOLD! This is the cry being heard worldwide by investors in the Great Gold rush of 2009, looking for a generic 'short America' trade. Where in the past gold seekers used sluices, shovels, and jackhammers to extract the glittery stuff in California's Sierras, Alaska's Klondike, and South Africa's Rand, today the instrument of choice is the mouse. Online traders are unleashing clicks by the millions to buy ETF's, American Eagles, mining shares, and futures contracts. With stock traders sitting on their haunches, wondering if the Dow will hold 7,000, this is the only thing that is working right now. Gold is no longer just catastrophe insurance. Traders are buying gold more for what it isn't, than what it is. It isn't made of paper, made in the US, or held in custody by Bernie Madoff or Stanford Financial. The yellow metal hit a new high for the year of $887 overnight, and the risk of a 'melt up' is increasing. The Street Tracks Gold Trust ETF (GLD) is now the seventh largest holder of the barbaric relic in the world. For the newly aggressive, look at the DB Gold Double Long ETF (DGP), which gives you a 200% long exposure to gold, and is up 54% in a month. Who says there is nothing to buy out there?
2) We learn today that Stanford Financial invested with Bernie Madoff. A Ponzi scheme investing in a Ponzi scheme. Is this what we have come to? What ironic justice! It also appears that many of the world's top professional golfers invested with Stanford and have been wiped out.
3) Wells Fargo Bank (WFC) has been in a free fall for the last two weeks, as investors bail out of the stock in fear of nationalization, or an Alt-A loan loss driven bankruptcy. The stock has vaporized 47% in three weeks, down to a new 12 year low. Veloceraptor like hedge funds have been major short sellers of the stock because it is one of the last banks with any meat still on the bone. Demand for out of the money puts is soaring. The stock is being dragged down further by big selling of bank and financial ETF's, like the Financial Select Sector SPDR (XLF), which has WFC as its second largest holding at 8.74%.
4) The longer crude stays below $40, the more production is being taken off the market. At this stage all 35 million barrels of storage at the Cushing, Oklahoma delivery point for west Texas intermediate are brimming with crude. The 709 million barrel Strategic Petroleum Reserve (SPR) is nearly full. And there is another 50 million barrels stored in supertankers at sea which is building by the day. Demand has collapsed so fast, that oil companies can't shut down production fast enough. The scary thing about this is that when the next crude spike upward in crude comes, it will be worse than the last one. Take advantage of the current distress prices to accumulate oil infrastructure stocks. Kinder Morgan Energy Partners (KMP) has a PE multiple of 25 and a dividend yield of 8.3%. Enterprise Products Partners (EPD) has a $10 billion portfolio of fractionation facilities, storage, offshore drilling platforms, and 32,478 miles of product, natural gas, and crude pipelines, and carries a modest PE multiple of 12 X and a dividend yield of 9.2%. More expensive Kinder Morgan Energy Partners (KMP) with a PE multiple of 25 X and a dividend yield of 8.3% is also worth a look see.
QUOTE OF THE DAY
'He that lives upon hope will die fasting,' said Benjamin Franklin.
Global Market Comments for February 18, 2009
Featured Trades: (NAT)
1) Obama's mortgage bailout package is out, and the market didn't care, hitting new six year lows. After wading through pages of arcane, mind scrambling detail, it appears that $75 billion will be made available to distressed homeowners to cut mortgage payments to 31% of their income. It allows cram downs, where bankruptcy judges can reset loan principal amounts. The plan only applies to conforming loans of $625,000 or less, which account for 50% of the $12 trillion in debt outstanding. This means that only 4-5 million homeowners will qualify, who own less than 7% of the US housing stock. Homeowners with jumbo loans in CA, NV, NY, AZ, and FL, who are now seeing default rates of 9%, need not apply. At best, the plan is merely a 'feel good,' political measure that will do nothing to halt the downward spiral in home prices.
2) An increasing number of companies are claiming that the current financial crisis entitles them to trigger 'force majeure' clauses to get out of contracts. Hoosier Energy successfully did so to get a stay on $120 million in loan repayments to John Hancock. Now Dow Chemical is attempting the same to void their $15.4 billion takeover of Rohm & Haas, as is Donald Trump in getting out of a $40 million loan guarantee for a condo tower in Chicago financed by Deutsche Bank. At the very least, the threat of litigation is forcing counterparties to the table to reconsider terms.
3) George Soros, who is now approaching 80, is about to publish another book entitled The Crash of 2008 and What It Means. Conditions are now worse than during the Great Depression, when total credit peaked at 160% of GNP. It was at 365% a year ago, and may reach 500% before we turn a corner. Obama's fiscal stimulus package is great, but is just a down payment. A new mortgage system has to be built out of the ashes of the old, where originators have to absorb the first 10% of any ensuing loss. The banking system needs to be recapitalized, with bad assets diverted into a government financed 'side pocket', much like the large, illiquid hedge funds are doing. The government needs to use taxation to guarantee a $70 floor for oil prices to spur an alternative energy industry. The international financial system needs to be remade through the creation of new, American sponsored 'Standard Drawing Rights' (SDR's) which the IMF can use to support weaker emerging economies. It is all well thought out. This summary will save you from having to wade through George's normally dry, turgid prose.
4) With 50 million barrels of crude in storage at sea, tanker companies have the buffer they need to weather the first globally synchronized recession. As long has crude for delivery in a year trades at a $10-$15 premium to the spot price, known as contango, this fleet will grow. Slow steaming, or cutting cruise speeds from 15 to 13.5 knots to reduce fuel consumption, is having the effect of taking another 35 million tons of tanker capacity off the market. With a 10% yield, Nordic American Tanker Shipping (NAT) is now the highest dividend paying stock listed on the NYSE, and gives you a pretty safe way to play this anomaly. The stock has no debt, $500 million in unused credit lines, and a bargain PE multiple of 9 X.
5) Some 20% of US electricity comes from nuclear power. Half of that is powered by fuel made out of reprocessed Russian nuclear weapons which we bought from the old Soviet Union. I didn't know that. Talk about pounding swords into plow shares!
6) Here are the top internet search terms for December. Amazingly, 0.6% of all Internet traffic was looking for Santa.
Rank ???? ??Search Term ???? ??Volume
1. ???? ??santa tracker ???? ??0.04%
2. ???? ??obama shirtless ???? ??0.03%
3. ???? ??norad santa tracker ???? ??0.02%
4. ???? ??track santa ???? ??0.02%
5. ???? ??after christmas sales ???? ??0.01%
6. ???? ??eartha kitt ???? ??0.01%
7. ???? ??michael jackson ???? ??0.01%
8. ???? ??mnemonics ???? ??0.01%
9. ???? ??www.itunes.com ???? ??0.01%
10. ???? ??itunes.com ???? ??0.01%
Global Market Comments for February 17, 2009
Featured Trades: (TM), ($GOLD), ($SSEC)
1) In three short weeks we have gone from an administration that had a political interest in portraying the economy as not as bad as it really was, to one that paints the economy as worse than it really is. The markets don't like it. It says a lot that the Dow is taking a run at a new six year low, and is perilously close to a 12 year low, the day Obama signs his stimulus package.
2) Gold continues to move from strength to strength, hitting a new high for the year of $972 today, up 22% from my recommended entry point.?? In January, gold ETF's bought a record 104 tonnes of the yellow metal. Last week alone, purchases soared to an astonishing 110 tonnes. There has also been huge buying of December, 2009 1,000 calls, suggesting that some players are hoping for a melt up if we break the old highs at $1,050. Looks like we have found our new bubble. Let the games begin!
3) Nobel Prize winning economist Paul Krugman published a blistering editorial in the New York Times yesterday where he makes the shocking observation that there has been no increase in Americans' net worth since 2001. The entire surge in asset prices this century was nothing more than a Madoff style illusion. This is what we should have been expecting all along, since as a nation, we have been spending more than we have been saving for a decade. Krugman uses the just released Federal Reserve Survey of Consumer Finances to support his position. Housing has another 10-15% to drop, and the fall is unstoppable. The just passed $787 billion stimulus package is only a quarter the size of the reflationary program that ended the Great Depression, known as WWII. All sobering food for thought. Now we have to restart the century all over again!
4) I thought you'd be interested to know the top 20 websites visited on the internet in December. No big surprises here.
Rank ???? ??Website ???? ??Market Share
1. ???? ??www.google.com ???? ??6.38%
2. ???? ??mail.yahoo.com ???? ??4.7%
3. ???? ??www.myspace.com ???? ??3.71%
4. ???? ??www.yahoo.com ???? ??3.65%
5. ???? ??mail.live.com ???? ??1.74%
6. ???? ??www.facebook.com ???? ??1.65%
7. ???? ??www.ebay.com ???? ??1.64%
8. ???? ??search.yahoo.com ???? ??1.52%
9. ???? ??www.msn.com ???? ??1.17%
10. ???? ??www.youtube.com ???? ??0.98%
11. ???? ??www.gmail.com ???? ??0.93%
12. ???? ??images.google.com ???? ??0.55%
13. ???? ??www.amazon.com ???? ??0.5%
14. ???? ??www.wikipedia.org ???? ??0.5%
15. ???? ??mail.aol.com ???? ??0.44%
16. ???? ??my.yahoo.com ???? ??0.4%
17. ???? ??www.pogo.com ???? ??0.4%
18. ???? ??search.msn.com ???? ??0.4%
19. ???? ??www.craigslist.org ???? ??0.37%
5) According to the New York Stock Exchange, the five largest shorts in the market are: Ford Motor (F), Citigroup (C), General Electric (GE), American International Group (AIG), and Wells Fargo (WFC).
6) Japan's Q3 GDP shrank 3.3%, worse than expected, and the current quarter may show a greater decline. Exports fell a stunning 45%. The country's finance minister, Shoichi Nakagawa, appeared drunk at a press conference, then resigned. The Tokyo stock exchange is off 14% YTD, making it the world's worst performer. Toyota has chopped the price of a new Prius to $20,000, with 0% financing, to clear an enormous backlog of unsold vehicles to make way for the launch of the new plug-in version at the end of this year.
7) One of the few mustard seeds out there continues to be the Shanghai stock market, up 32% YTD, and the best performing stock market in the world. Pundits with short memories are rehabilitating the 'decoupling' theory again, which so far has only 'decoupled' investors from their money. While the Middle Kingdom's growth rate has backed off from a torrid 13% to probably 5%, it is the only major economy that is actually growing. The bet is that their stimulus package, which has a much higher component of infrastructure as opposed to social spending and tax cuts, will work better than ours. Betting against China has been a loser for 30 years now.
QUOTE OF THE DAY
'Stocks have reached a permanently high plateau,' said Irving Fisher in 1929, one of the founders of the science of economometrics. Fisher lost a $10 million personal fortune in the 96% collapse in the market that ensued.