Global Market Comments for September 15, 2008

1) In last Friday's newsletter I predicted that Merrill Lynch (MER) would be the next target for the cloud of locusts. I had no idea that it would be gone in a few hours! The scary thing is that Bank of America (BAC) was willing to pay $50 billion for MER, but not $1 for all of Lehman. A year ago, people were laughing at BAC as a bunch of stupid, boring bankers who didn't 'get' complicated things like CDO's , mark to model, derivatives, and credit default swaps. News of the deal knocked BAC's stock down $5 to $28. Don't expect anything more from BAC as they will be choking on both the MER and Countrywide acquisitions for a couple of years. Do expect raging bull statues and posters to start appearing at Bank of America branches everywhere. The Dow was down 500 points on the day, but could have been down 1,000 without this transaction.

2) I have no doubt that creditors of the bankruptcy estate will get most, if not all, of their money back. The Lehman bankruptcy is solely the result of mark to market accounting rules, where the markets ceased to exist. Fully current securities originally sold to investors at 100 were marked down to 20 or even zero, when their true value is probably closer to 60 or 80. The bankruptcy court will allow a quiet, ??orderly liquidation over a long period of time in private placement form, allowing realizations to get closer to their true values. The sale of Neuberger Berman and the European real estate division could raise $15 billion as early as next week. Barclay's Bank, having passed on buying the whole company yesterday, is still trying to buy just the investment banking division on the cheap. However, creditors may have to wait years before they see their final checks.

3) The next domino to fall may be WAMU (WM), which may disappear by the end of the week. JP Morgan (JPM) is considering a take over bid. The stock traded down to $2 this morning, down 96% from last year's peak.

4) AIG is now taking its turn on the ropes, its stock down 80% in a week. The company's ten year bonds crashed from 95 to 60. It is trying to sell its car finance operation, its aircraft leasing unit, obtain equity capital from private equity firms or Warren Buffet, and procure a bridge loan from the Fed. The state of New York has offered $20 billion in short term loans.

5) China cut interest rates for the first time in six years. The government is having trouble restarting the economy after the Olympic shut down in the face of the new global recession.

6) Crude got as low as $94 today as the global recession spilled into the oil trade. Traders are using every tropical storm as a selling opportunity. Since crude hit $148, my short term downside target for crude has been the $60 handle, now not so far away.

Global Market Comments for September 12, 2008

1) Lehman is a dead man walking. Expectations are now so high that if Lehman (LEH) is not sold by Sunday the market will be down big on Monday. The cloud of locusts is already looking for its next victim. At the top of the list? Merrill Lynch (MER) who's stock has plummeted from $90 to $17. Citibank put out a report today saying that MER's breakup value is in fact $40/share, dividing into $16 for the asset management division, $15 for investment banking, and $9 for its holding in private equity firm BlackRock, Inc. (BLK).

2) The August Producer Price Index came in at -0.9%, the biggest drop in two years, as the collapsing cost of commodities, especially gasoline, fed through the system. Crude briefly touched $99.90 today. Have we flipped from inflation to deflation in just one month?

3) Almost all commodities have given up enormous gains this year and are now showing substantial losses. But this is just a dip in a long term up trend underpinned by very strong fundamentals. Over the next 40 years the world population will increase from 6.5 billion to 9 billion, the US populations from 300 million to 400 million, and California from 30 million to 60 million. All of these people are going to need to eat, travel, and have a place to live. But we may have to wait for this global recession to end before the bull market in commodities resumes.

4) MacDonald's (MCD) announced an impressive 4.5% increase n US sales in July, and a 10% jump in Asian sales, pumped up by its Olympic sponsorship. I am impressed by how much of US spending is going into discount providers like MCD, Walmart (WMT), Target (TGT), and the Dollar Store, all great performers this year. I wonder if the same thing is going on in the wine industry. Two buck Chuck anyone?

5) The top ten banks in the world need $500 billion in equity over the next year to meet tier one capital requirements. The world is equitizing. Many banks are only rolling over debt at half the original principal, demanding the balance be put up in equity by the borrower.

QUOTE OF THE DAY

'At this stage of the game Lehman is reduced to burning furniture to keep the office warm.' Bill Ackman of hedge fund Pershing Square, L.P.

Global Market Comments for September 11, 2008

1) The Great Unwind of 2008 continues. Gold down from $1,100 to $740. Crude from $148 to $100.25, Natural Gas from $13.50 to $7, Silver from $21 to $10.40. The Russian stock market, with the ruble depreciation has plunged 50% since July. The best of breed commodity stocks are all down 50%, like Freeport McMoran Copper & Gold (FCX), US Steel (X), Potash (POT), Chesapeake Energy (CHK), and Joy Global (JOYG). The euro has retraced one third of a seven year up move in only eight weeks, and has hit my short term target of $1.38. Please see my earlier recommendation to short the euro at $1.58. Watch out for the snap back on all of these. They have moved too far too fast.

2) The details were released today by the promoters of the California bullet train, which will see $9.95 billion in bond issues on the November ballot. The $32 billion, 800 mile project will whisk passengers from Los Angeles to San Francisco in 2 ?? hours for $55 at a blazing 220 miles/hour, starting in 2018. The measure is expected to pass handily, as Californians always enjoy splurging on this sort of luxury.

3) Update on the foreclosure capital of the world, Stockton, California, where one out of 25 homes are in foreclosure. Prices are down 50% from the top, but unit sales are now up 300% as the scavengers pour in. Many trying to buy distressed properties find the local lenders are too overwhelmed to deal with them. The new problem: squatters and thieves who are stripping the copper wiring, copper pipes, and resalable fixtures out of abandoned houses, causing hundreds of thousands of dollars in damage, and wiping out bank equity. Solar panels, which resell on the black market for $1,000 to crooked contractors, are especially popular. Realtors are now carrying pepper spray because they don't know who they will find on the other side of the door of houses they are showing to prospective buyers.

4) Walt Disney (DIS) has had every possible thing thrown at it this year, including high gas prices, a recession, and terrorist threats, and the lines are as long as ever. All of this has only knocked the stock down 25% from $35 to $26. CEO Robert Iger is doing a tremendous job. This is a rare chance to buy one of the world's great brands and franchises at a discount price for a long term hold. And with the Fannie Mae bail out in place, Snow White gets to keep her castle.

QUOTE OF THE DAY

One US senator in response to today's sex scandal among Interior Dept. staff who handled oil leases: 'It is not possible to have an arms length relationship with someone you are having sex with.'

Global Market Comments for September 10, 2008

1) Lehman (LEH) held its much anticipated conference call. The bottom line is that all of the saleable parts will be sold and the toxic waste will remain with LEH on a $600 billion balance sheet. The Q3 loss is $3.9 billion on $5.6 billion in net mark to market losses. A majority stake in Neuberger Berman will be sold. The commercial real estate division will be spun off as a separate public company in Q1 2009. Book Value is $27.29/share, meaning that the company is selling at a breathtaking 73% discount to book value. No foreign capital has been raised.?? The stock traded down to $7.40 and then back up to $8.40. Take out asset management and real estate from LEH and there is nothing left but an empty shell. The bond business that was the core of LEH's remaining business model no longer exists. Dick Fuld might as well try to get an above market premium for a buggy whip manufacturer. There is no doubt now that LEH is going down. The only unknown is the cause of death that will appear on the death certificate.

2) Bill Gross says that Newport Beach based PIMCO, with $829 billion in assets, the largest bond fund manager in the world, made $8 billion on Monday on the Fannie Mae and Freddie Mac bail outs. Great trade Bill!

3) OPEC announced a surprised production cut of 500,000 barrels/day and crude prices went down. The reason: China announced a big drop in auto sales last month. $60 here we come!

4) The Air Force announced that it was canceling its open bidding for a new tanker aircraft, saying they cannot get a result before the next change in administration. This is a huge win for Boeing (BA), which had lost an earlier contest against Airbus backed Northrop Grumman (NOC). BA is down today, as its machinists' strike extends to its first week.

5) Ford has launched its Fiesta ECOnetic diesel car, which will get 65 miles/gallon. However, the car will only be available in Europe because of regulatory and cost reasons.

6) Commercial real estate is now facing a credit crisis. The market is seizing up because of the lack of financing, so sellers are holding properties back from the market. While stable rents and cash flows are supporting valuations fairly well, those facing imminent debt rollovers are being forced to sell properties at distress prices. This is the only way they can dodge the bullet of large negative cash flows caused by the higher cost of new borrowing. Investors are especially worried about those properties with large retail exposure.

Global Market Comments for September 9, 2008

1) The biggest financial bail out in US history, and the nationalization of the majority of American home mortgages and we only get a one day rally. Hank Paulson must be slitting his own wrists. All this at the price of doubling the national debt, from $9 trillion to $18 trillion. Investors have figured out that shrinking these two behemoths means that less money is going to be available to buy real estate, especially in expensive places like California and Florida. Stocks fell 260 and bonds soared, with the 30 year hitting an unimaginable 4.31%.

2) Pending home sales for July dropped 3.2% and 6.8% YOY according to the National Association of Realtors. Sales in the West fell 10.6%.

3) The US housing market has lost $6 trillion in value in three years, and may lose another $6 trillion before it hits bottom. That is a big hit to consumer spending power. The home ATM is busted.

4) The grape harvest in Livermore Valley will be smaller than usual, according to Jim Ryan of Concanon Vineyards. Frost, a dry winter and spring, wind damage at bloom time, and a scorching summer are to blame. Statewide yields will be down 15-20%, which should help prices.

5) $1.2 trillion in mortgage resets are due in the next year which will trigger 40%-80% increases in monthly payments.?? Not good for housing, and you can kiss WAMU (WM), Wachovia Bank (WB), and Suntrust (STI) goodbye.

6) Apple had a conference in San Francisco today to announce a new family of IPODS, and people could care less. Instead they had a laser like focus on how much weight Steve Jobs had gained since he made his last public appearance. His jeans hung on him like a scarecrow. 'The reports of my death are greatly exaggerated,? said Jobs.

7) Counter parties continued to deal with Lehman in the money markets today because of the near certainty that it will imminently be taken over. Potential candidates are Nomura Securities, HSBC, Blackstone, Black Rock, Lazard, Greenhill & Co., or a Japanese bank. Although Lehman, with 26,000 employees and 50% of its revenues coming from overseas, is considered a steal at the current market value of $7 billion, private equity firms currently have a $5 billion cap on all financings.?? Lehman has raised $12 billion in equity capital this year. Lehman's big mistake has been to demand a substantial premium on a complete bail out, all the way down from $30/share.