Global Market Comments for November 14, 2008
Highlighted Trades: (SPY), (LSBRX), (COP), (WMT)
1) Yesterday we did a month's worth of trading in two hours. The VIX went from 60% to 70%, then back down to 57%. If you have any doubts about what this market is doing, take a look at this chart, which shows the S&P 500 trading in a clearly defined 815-1000 box.
2) Through a combination of market losses and redemptions, the value of hedge fund assets has dropped from $2 trillion to only $1 trillion this year. The bulk of these losses has been in highly leveraged long debt/short treasury strategies put on at ridiculously low spreads. The average hedge fund return year to date is -15.43%. A major shake out in this area has been long overdue.
3) In 1932 the P/E multiple for the S&P 500 bottomed at 5.6 times, giving you an earnings yield of 17.86%. In 1974 the bottom was at 7.9 times (12.66%), and in 1982 it bottomed at 6.6 times (15%). With the S&P at 815 yesterday it was at a 10 X multiple. But interest rates have never been at zero before. Adjusted for this, the 'real' P/E multiple is probably 7-8 times.
4) Triple 'B' rated corporate bonds are trading at the largest spreads over Treasuries since the 1930s and could well outperform stocks from here. This paper is now trading at 60-70 cents on the dollar yielding 10-12% per annum. Any return to normalcy by the credit markets could bring a quick 50% capital gain. One good way to play this would be the Loomis Sayles Bond Fund (LSBRX), which has dropped from $15 to $10 and currently carries a 9.8% yield.
5) The Great Depression is now hot. According to Barnes & Noble, sales of John Kenneth Galbraith's 1955 book, The Great Crash, skyrocketed last month. Netflix says that John Steinbeck's 1940 movie, 'The Grapes of Wrath' has been flying out the door. Wait for the 'Lindyhop' to become the rage dance next year.
6) October retail sales came in at -2.8%, the worst on record. This was not exactly a surprise.
7) A one penny drop in the retail price of gasoline leads to a $1 billion increase in US consumer spending power. The $1.30 tumble in the price of gas since July puts an extra $130 billion in consumers' pockets.
8) Warren Buffet has substantially increased has stake in Conoco Phillips (COP), which is down from $95 to $43. He is starting his buy of crude on the cheap. George Soros is increasing his holding in Walmart (WMT), which has pulled back from $64 to $47. Whale watching can be very instructive and profitable.
TRADE FOLLOW UP
The December S&P mini 870 call I recommended yesterday at $40 traded as high as $80 this morning, giving you an overnight profit of $200,000 on a 100 lot. This shows you the kind of limited risk, high returns that are out there right now. When the market does a month's worth of movement in two hours you take the profit. You don't want to take weekend risk right now, and with implied volatilities sky high, the time decay could cost you a fortune. Take the money and run! No one ever got fired for taking a profit.
Global Market Comments for November 13, 2008
1) Weekly jobless claims came in at 516,000, a new seven year high. Oil imports have dropped from 11 million barrels/day to 8.8 million b/d. Because of the huge price drop the cost of these imports has fallen from $1 billion/day to only $500 million/day since July, causing the US trade deficit to shrink at a dramatic rate. This has been a big factor behind the strength of the dollar. While the average price of crude for 2008 is now at $108, the average for the past eight years is only $50. All we are doing now is reverting to the mean.
2) The Chinese economy is decelerating at a rate not seen since the Tiananmen Square massacre of 1989. China watchers are now talking about a Q4 growth rate of only 5.8%, down from 8% last quarter. Imports are down 5.7%, which is why copper has collapsed to a new three year low of $1.65, and exports are off a worrying 2.3%. As far as US retailers are concerned, kids never went back to school in September, and Santa Claus and the elves are going on strike in December. The Aluminum Corporation of China has just cut capacity by 38%, while China Eastern Airlines has grounded 10% of its fleet. There has been widespread defaulting on contracts for metals and bulk commodities by Chinese importers, which have halved in price. China has become the canary in the coal mine for the global economy. See the chart for the iShares FTSE/Xinhua China 25 ETF (FXI), down from $70 to $19.
3) There are now 400 commercial aircraft parked in the desert near Palmdale, California gathering dust and waiting out the recession. Most of these are older fuel inefficient aircraft from the large airlines.
4) If you are worried about obtaining credit, this is the most important chart in your life right now. It shows the Treasury/Eurodollar spread which has been improving continuously for the past month, thanks to treasury's flooding of the global financial system with cash, and is now at 180. This is a vast improvement from 500 basis points a month ago, but is still well above the 70 bp that prevailed before the Lehman bankruptcy.
5) The German government has confirmed it is now in recession for the first time in five years. Bad for Poland.
6) The Economist magazine conducted a global online presidential election for the US. Out of 53,000 voters, Obama won 83%. Only three countries went for McCain: Algeria, Zaire, and of course Iraq. Foreigners have long complained to me that they can't vote in our elections, even when they are more affected than we are by the outcome, especially when they live on one of our bull's-eyes.
7) Global equity markets have lost $18 trillion in value in six weeks. At 8,300 the Dow is at the lowest level since 1996. The average price/sales ratio for stocks since then has been $1.18. Today it is at 76 cents, meaning that you need a 55% rise in share prices just to get back up to a ten year average.
TRADE OF THE TODAY
Here was another chance today to buy equity index calls again at the bottom of the 815-1000 in the S&P 500. There has got to be a short squeeze ahead of the G-20 meeting. Today you could buy the S&P 500 mini December 850 calls at $40, which don't expire until December 19. 100 of these puppies will cost you $200,000. If we keep this range, these calls will explode to the upside shortly. If we break down, a subsequent dead cat bounce will get you out at cost.
JOKE OF THE DAY
The Treasury's TARP program should be renamed the BARF program: 'Bad Advice for Ruining Finance.'
Global Market Comments for November 13, 2008
1) Weekly jobless claims came in at 516,000, a new seven year high. Oil imports have dropped from 11 million barrels/day to 8.8 million b/d. Because of the huge price drop the cost of these imports has fallen from $1 billion/day to only $500 million/day since July, causing the US trade deficit to shrink at a dramatic rate. This has been a big factor behind the strength of the dollar. While the average price of crude for 2008 is now at $108, the average for the past eight years is only $50. All we are doing now is reverting to the mean.
2) The Chinese economy is decelerating at a rate not seen since the Tiananmen Square massacre of 1989. China watchers are now talking about a Q4 growth rate of only 5.8%, down from 8% last quarter. Imports are down 5.7%, which is why copper has collapsed to a new three year low of $1.65, and exports are off a worrying 2.3%. As far as US retailers are concerned, kids never went back to school in September, and Santa Claus and the elves are going on strike in December. The Aluminum Corporation of China has just cut capacity by 38%, while China Eastern Airlines has grounded 10% of its fleet. There has been widespread defaulting on contracts for metals and bulk commodities by Chinese importers, which have halved in price. China has become the canary in the coal mine for the global economy. See the chart for the iShares FTSE/Xinhua China 25 ETF (FXI), down from $70 to $19.
3) There are now 400 commercial aircraft parked in the desert near Palmdale, California gathering dust and waiting out the recession. Most of these are older fuel inefficient aircraft from the large airlines.
4) If you are worried about obtaining credit, this is the most important chart in your life right now. It shows the Treasury/Eurodollar spread which has been improving continuously for the past month, thanks to treasury's flooding of the global financial system with cash, and is now at 180. This is a vast improvement from 500 basis points a month ago, but is still well above the 70 bp that prevailed before the Lehman bankruptcy.
5) The German government has confirmed it is now in recession for the first time in five years. Bad for Poland.
6) The Economist magazine conducted a global online presidential election for the US. Out of 53,000 voters, Obama won 83%. Only three countries went for McCain: Algeria, Zaire, and of course Iraq. Foreigners have long complained to me that they can't vote in our elections, even when they are more affected than we are by the outcome, especially when they live on one of our bull's-eyes.
7) Global equity markets have lost $18 trillion in value in six weeks. At 8,300 the Dow is at the lowest level since 1996. The average price/sales ratio for stocks since then has been $1.18. Today it is at 76 cents, meaning that you need a 55% rise in share prices just to get back up to a ten year average.
TRADE OF THE TODAY
Here was another chance today to buy equity index calls again at the bottom of the 815-1000 in the S&P 500. There has got to be a short squeeze ahead of the G-20 meeting. Today you could buy the S&P 500 mini December 850 calls at $40, which don't expire until December 19. 100 of these puppies will cost you $200,000. If we keep this range, these calls will explode to the upside shortly. If we break down, a subsequent dead cat bounce will get you out at cost.
JOKE OF THE DAY
The Treasury's TARP program should be renamed the BARF program: 'Bad Advice for Ruining Finance.'
Global Market Comments for November 12, 2008
Special Crude Oil Issue
1) A number of big hedge funds are starting to circle around $50 as a place to get involved on the long side with crude. Hundreds of companies faced a near death experience with crude at $148, where no business model was profitable. This time around they are going to be hedging their fuel needs for the next several years like crazy, especially the airline industry. Marginal oil supplies like tar sands, deep offshore, and most alternatives are going back to the wilderness. The credit crisis has frozen financing of many new traditional oil fields. Below $50 OPEC producers start shutting in production, especially the emergency supplies they brought on stream only six months ago. Buy crude at $50 an you might get a double out of it over the next two years, and a quadruple in the next economic recovery.
2) Now that crude is threatening $50/barrel, it is clear that someone in Mexico City was thinking. The world's sixth largest oil producer has hedged all of next year's oil production at $70-$100/barrel through long dated put options at a premium cost of $1.5 billion. I wish I had been the one to write that ticket! Oil accounts for 40% of Mexico's government revenues, and this strategy locks in the country's earnings at much higher levels.
3) Since we are talking about crude, has anyone noticed that the foreign oil import bill for the US has dropped from $900 billion to $400 billion since June, and that the $500 billion in savings is hugely stimulative for the economy? This is especially true for big oil consuming industries like airlines, trucking, downstream refiners and petrochemicals. Great for United (UAUA), YRC Tricking (YRC), Tesoro (TES), and DuPont (DD), as well as the oil consuming BRIC's of China (FXI) and India ($BSN).
4) David Hale, a global economist at Chicago based Hale Advisors, believes that the US is not headed for a lost decade like Japan's. The speed of action by the Fed and the many measures taken by the Treasury should resolve most of the banking problems in a year. The IMF calculates that American real estate loan losses total $1.7 trillion, and that only half of this has been written off. The TARP program funded by congress will finance a write off of the remaining half. A recession of this magnitude historically ignites an economic rebound at a 5% annualized growth rate. However, this time more stringent lending standards will probably only allow a 2.5% recovery growth rate.
5) If you want to see truly Great Depression era charts look at these two. The Market Vectors Russia ETF (RSX) has cratered from $60 to $12. The Baltic Dry Shipping Index ($BDI) has vaporized from 12,000 to 820! Both are huge buys at some point.
JOKE OF THE DAY
The only person who should be picking bottoms here is your proctologist.
Global Market Comments for November 12, 2008
Special Crude Oil Issue
1) A number of big hedge funds are starting to circle around $50 as a place to get involved on the long side with crude. Hundreds of companies faced a near death experience with crude at $148, where no business model was profitable. This time around they are going to be hedging their fuel needs for the next several years like crazy, especially the airline industry. Marginal oil supplies like tar sands, deep offshore, and most alternatives are going back to the wilderness. The credit crisis has frozen financing of many new traditional oil fields. Below $50 OPEC producers start shutting in production, especially the emergency supplies they brought on stream only six months ago. Buy crude at $50 an you might get a double out of it over the next two years, and a quadruple in the next economic recovery.
2) Now that crude is threatening $50/barrel, it is clear that someone in Mexico City was thinking. The world's sixth largest oil producer has hedged all of next year's oil production at $70-$100/barrel through long dated put options at a premium cost of $1.5 billion. I wish I had been the one to write that ticket! Oil accounts for 40% of Mexico's government revenues, and this strategy locks in the country's earnings at much higher levels.
3) Since we are talking about crude, has anyone noticed that the foreign oil import bill for the US has dropped from $900 billion to $400 billion since June, and that the $500 billion in savings is hugely stimulative for the economy? This is especially true for big oil consuming industries like airlines, trucking, downstream refiners and petrochemicals. Great for United (UAUA), YRC Tricking (YRC), Tesoro (TES), and DuPont (DD), as well as the oil consuming BRIC's of China (FXI) and India ($BSN).
4) David Hale, a global economist at Chicago based Hale Advisors, believes that the US is not headed for a lost decade like Japan's. The speed of action by the Fed and the many measures taken by the Treasury should resolve most of the banking problems in a year. The IMF calculates that American real estate loan losses total $1.7 trillion, and that only half of this has been written off. The TARP program funded by congress will finance a write off of the remaining half. A recession of this magnitude historically ignites an economic rebound at a 5% annualized growth rate. However, this time more stringent lending standards will probably only allow a 2.5% recovery growth rate.
5) If you want to see truly Great Depression era charts look at these two. The Market Vectors Russia ETF (RSX) has cratered from $60 to $12. The Baltic Dry Shipping Index ($BDI) has vaporized from 12,000 to 820! Both are huge buys at some point.
JOKE OF THE DAY
The only person who should be picking bottoms here is your proctologist. :
Global Market Comments for November 11, 2008
Highlighted stocks: (WPPGY), (FNM), (JPM), (GM)
1) Once again, buying the dips and selling the rips works. If you sold the S&P mini 830 puts on Friday at $20 and bought them back yesterday at $5, you could then resell them again today for $20. This time they only have seven trading days to expiration. Not that I want to do this, now that the S&P has broken its support at 900. But it does show you the opportunity out there. It seems that the maximum reward/ risk trades out there are to add risk on Friday and take it off on Monday because all the disasters are happening on weekends.
2) Martin Sorrell, CEO of WPP Group (WPPGY), the world's largest advertising agency, sees 2009 as a tough year. Internet advertising will have a growth recession much like China has growth recession, increasingly only 10%. Cable TV will be up small, magazines will be flat, and TV networks and print newspapers will be down big. The profit margin of the newspaper industry has dropped from 30% to 15% in the last ten years and may turn negative this year. More evidence of the migration of traditional business to online.
3) Ultra bear Professor Nouriel Roubini of New York University, who has been dead on right about this year's economic collapse, sees the recession lasting until early 2010. He sees the maximum drop in GDP of only 5%. Now you have a bottom to trade against. He represents the worst case scenario. By the way, he also sees crude going to $200 in the next up cycle.
4) Fannie Mae (FNM) announced that the temporary increase in their conforming loan limits to $729,000 will expire at the end of the year and the new limit in 2009 will fall back to only $625,000. This will hit the housing markets in California and Florida hard, which were heavily dependent of government financing at the higher limits to move excess inventories. There is a chance that the next stimulus package could bump the FNM loan limit back up again. After all, the four states worst hit by the housing crisis all went for Obama: California, Nevada, Florida, and New York, which together chipped in 118 of the 270 electoral votes he needed to win.
5) I spoke to JP Morgan Chase (JPM) today who says that contrary to press accounts the loan business is booming. Banks do better lending on double the volume of houses at half the 2005 price. JPM is also very active in lending to buyers at foreclosure auctions. This does not apply to jumbo loans over $625,000 where borrowers have to pay interest rates 2.5% over conforming loans. Jumbo rates these days are around 8.5%. You can get an FHA 30 fixed conforming loan today for $729,000 at 6.5% with only 3% down, a FICO score of 580, and a debt service/income ratio of 50%. An annual income of $95,000 would support this.
6) General Motors (GM) fell under $3 today, the lowest since 1943, and taking the market cap down to only $1.7 billion. The market has already reached a verdict on what is going to happen to this company. Watch out for the second derivative effects.
Global Market Comments for November 11, 2008
Highlighted stocks: (WPPGY), (FNM), (JPM), (GM)
1) Once again, buying the dips and selling the rips works. If you sold the S&P mini 830 puts on Friday at $20 and bought them back yesterday at $5, you could then resell them again today for $20. This time they only have seven trading days to expiration. Not that I want to do this, now that the S&P has broken its support at 900. But it does show you the opportunity out there. It seems that the maximum reward/ risk trades out there are to add risk on Friday and take it off on Monday because all the disasters are happening on weekends.
2) Martin Sorrell, CEO of WPP Group (WPPGY), the world's largest advertising agency, sees 2009 as a tough year. Internet advertising will have a growth recession much like China has growth recession, increasingly only 10%. Cable TV will be up small, magazines will be flat, and TV networks and print newspapers will be down big. The profit margin of the newspaper industry has dropped from 30% to 15% in the last ten years and may turn negative this year. More evidence of the migration of traditional business to online.
3) Ultra bear Professor Nouriel Roubini of New York University, who has been dead on right about this year's economic collapse, sees the recession lasting until early 2010. He sees the maximum drop in GDP of only 5%. Now you have a bottom to trade against. He represents the worst case scenario. By the way, he also sees crude going to $200 in the next up cycle.
4) Fannie Mae (FNM) announced that the temporary increase in their conforming loan limits to $729,000 will expire at the end of the year and the new limit in 2009 will fall back to only $625,000. This will hit the housing markets in California and Florida hard, which were heavily dependent of government financing at the higher limits to move excess inventories. There is a chance that the next stimulus package could bump the FNM loan limit back up again. After all, the four states worst hit by the housing crisis all went for Obama: California, Nevada, Florida, and New York, which together chipped in 118 of the 270 electoral votes he needed to win.
5) I spoke to JP Morgan Chase (JPM) today who says that contrary to press accounts the loan business is booming. Banks do better lending on double the volume of houses at half the 2005 price. JPM is also very active in lending to buyers at foreclosure auctions. This does not apply to jumbo loans over $625,000 where borrowers have to pay interest rates 2.5% over conforming loans. Jumbo rates these days are around 8.5%. You can get an FHA 30 fixed conforming loan today for $729,000 at 6.5% with only 3% down, a FICO score of 580, and a debt service/income ratio of 50%. An annual income of $95,000 would support this.
6) General Motors (GM) fell under $3 today, the lowest since 1943, and taking the market cap down to only $1.7 billion. The market has already reached a verdict on what is going to happen to this company. Watch out for the second derivative effects.
Global Market Comments for November 10, 2008
1) Today it was all about China, which announced a massive $586 billion stimulus package. On a GDP adjusted basis, this is like the US spending $3.3 trillion. The scary thing is that China believes that it has to stimulate an economy with an official growth rate of 8%. Asian stock markets soared, and there was a huge move up in commodity prices and shares of producers worldwide. Gold was up $30 and crude made it all the way back up to $66. With $1.6 trillion in foreign currency reserves China can afford this while the US can't. There is no doubt this will shorten the global recession.
2) Today President elect Obama meets President Bush for the first time in the oval office. I would love to be a fly on the wall in that room. What is in Area 52? Who really killed John Kennedy? Where are the missing 18 minutes of the Nixon tapes? Were we visited by aliens in Roswell, New Mexico? Does Osama bin Laden really exist? The possibilities boggle the mind.
3) MacDonald's (MCD) knocked the cover off the ball again with a continuing sales surge overseas, led by Asia, up 10%. If the economy doesn't improve soon we will all not only be eating at Mickie D's, we will be working there too. The stock was up nearly 10% to $58.
4) On the other hand, Circuit City (CC) filed for Chapter 11 bankruptcy. This was a long time in coming. Great for Best Buy (BBY). DHL is shutting down its US operations, laying off 9,500.
5) Deutsche Bank downgraded General Motors (GM) with a share price target of zero. Clever. The stock fell 30% to new low of $3.00, the lowest since 1946.
PROFIT OF THE DAY
The November S&P mini $830 puts I recommended you short on Friday at $20 you could buy back this morning at $5. You caught a double play. Not only did the S&P 500 move up 50 points in your favor, the VIX came in from 64% to 56%. Take the three day profit of $75,000 on 100 contracts. There are several lessons to be learned here. Investors these days are not only risk averse, they are risk intolerant. Those few brave souls who are willing are willing to commit capital are being paid extortionate amounts of money to do so. A 2.5% profit for holding a non leveraged position for just a weekend is pretty good. This is a trading market, so when it gives you a gift like this you take it. Make the volatility work for you. The market will always give you another chance to get back in. Also, use the volatility to keep positions small. Remember, pigs get slaughtered. Leave the last 10% of a trade for the next guy. Enough homilies?
TRADE IDEA
Google, last year's darling of the market, has more than halved in four months. With a 70% market share in internet search, the company has basically become the toll taker for the internet. At $315 GOOG is now selling at a multiple well under 20 times while it is one of the few companies to continuously increase earnings this year. The company is a cash machine also most as efficient at the US Treasury, and has almost as many reserves as Fort Knox. Even though economic conditions are dire, it is still increasing sales as advertisers accelerate their epochal shift away from traditional print and broadcast media to the internet. Its only potential competitor is Microsoft (MSFT), which first ignored the internet, then was hobbled by the Justice Department, then finally stumbled over its own big feet with a series of small and meaningless acquisitions. Its latest attempt to break the Google monopoly with a takeover of Yahoo (YHOO) came to naught. Although Google is excessively wasteful on things outside its core business, like space travel, its still offers a rare chance to get into a best of breed company on the cheap.
OBITUARY OF THE DAY
Marjorie Deane, one of my early mentors at The Economist, passed away last week at 94. She was one of the first female financial journalists, joining the magazine as a statistician in 1947, and was eventually awarded and MBE by the Queen. Despite her fame, when she was only 62, she graciously invested her time and energy to nurture a scraggly, young, and nearly starving writer in Tokyo. When I worked in her office during the summers I noticed that her bottom desk drawer was always well stocked with gin, vodka, and white wine, even though she was a teetotaler. It was 'to keep my writers out of the pubs', she said. The writers said it was how she kept her sources loose lipped. The wine was always the perfect temperature because The Economist never bothered to heat its offices at 25 St. James's Street. Her estate went to a foundation to help young financial journalists. A giant of financial journalism passes.
Global Market Comments for November 10, 2008
1) Today it was all about China, which announced a massive $586 billion stimulus package. On a GDP adjusted basis, this is like the US spending $3.3 trillion. The scary thing is that China believes that it has to stimulate an economy with an official growth rate of 8%. Asian stock markets soared, and there was a huge move up in commodity prices and shares of producers worldwide. Gold was up $30 and crude made it all the way back up to $66. With $1.6 trillion in foreign currency reserves China can afford this while the US can't. There is no doubt this will shorten the global recession.
2) Today President elect Obama meets President Bush for the first time in the oval office. I would love to be a fly on the wall in that room. What is in Area 52? Who really killed John Kennedy? Where are the missing 18 minutes of the Nixon tapes? Were we visited by aliens in Roswell, New Mexico? Does Osama bin Laden really exist? The possibilities boggle the mind.
3) MacDonald's (MCD) knocked the cover off the ball again with a continuing sales surge overseas, led by Asia, up 10%. If the economy doesn't improve soon we will all not only be eating at Mickie D's, we will be working there too. The stock was up nearly 10% to $58.
4) On the other hand, Circuit City (CC) filed for Chapter 11 bankruptcy. This was a long time in coming. Great for Best Buy (BBY). DHL is shutting down its US operations, laying off 9,500.
5) Deutsche Bank downgraded General Motors (GM) with a share price target of zero. Clever. The stock fell 30% to new low of $3.00, the lowest since 1946.
PROFIT OF THE DAY
The November S&P mini $830 puts I recommended you short on Friday at $20 you could buy back this morning at $5. You caught a double play. Not only did the S&P 500 move up 50 points in your favor, the VIX came in from 64% to 56%. Take the three day profit of $75,000 on 100 contracts. There are several lessons to be learned here. Investors these days are not only risk averse, they are risk intolerant. Those few brave souls who are willing are willing to commit capital are being paid extortionate amounts of money to do so. A 2.5% profit for holding a non leveraged position for just a weekend is pretty good. This is a trading market, so when it gives you a gift like this you take it. Make the volatility work for you. The market will always give you another chance to get back in. Also, use the volatility to keep positions small. Remember, pigs get slaughtered. Leave the last 10% of a trade for the next guy. Enough homilies?
TRADE IDEA
Google, last year's darling of the market, has more than halved in four months. With a 70% market share in internet search, the company has basically become the toll taker for the internet. At $315 GOOG is now selling at a multiple well under 20 times while it is one of the few companies to continuously increase earnings this year. The company is a cash machine also most as efficient at the US Treasury, and has almost as many reserves as Fort Knox. Even though economic conditions are dire, it is still increasing sales as advertisers accelerate their epochal shift away from traditional print and broadcast media to the internet. Its only potential competitor is Microsoft (MSFT), which first ignored the internet, then was hobbled by the Justice Department, then finally stumbled over its own big feet with a series of small and meaningless acquisitions. Its latest attempt to break the Google monopoly with a takeover of Yahoo (YHOO) came to naught. Although Google is excessively wasteful on things outside its core business, like space travel, its still offers a rare chance to get into a best of breed company on the cheap.
OBITUARY OF THE DAY
Marjorie Deane, one of my early mentors at The Economist, passed away last week at 94. She was one of the first female financial journalists, joining the magazine as a statistician in 1947, and was eventually awarded and MBE by the Queen. Despite her fame, when she was only 62, she graciously invested her time and energy to nurture a scraggly, young, and nearly starving writer in Tokyo. When I worked in her office during the summers I noticed that her bottom desk drawer was always well stocked with gin, vodka, and white wine, even though she was a teetotaler. It was 'to keep my writers out of the pubs', she said. The writers said it was how she kept her sources loose lipped. The wine was always the perfect temperature because The Economist never bothered to heat its offices at 25 St. James's Street. Her estate went to a foundation to help young financial journalists. A giant of financial journalism passes.
Global Market Comments for November 7, 2008
1) The dreaded October non farm payroll came in at minus -240,000, much worse than expected. The unemployment rate soared from 6.1% to 6.5%, a 14 year high. These figures included the Boeing strike and the full brunt of the credit freeze. We have lost 1.2 million jobs in the first ten months of this year. Despite this depressing news the market managed a 248 rally, a classic case of buy the rumor and sell the news. This renders the Q3 GDP figure of -0.3% meaningless. It was probably more like -3.0%.?? I believe that we are currently enduring two extremely sharp down back to back quarters of?? minus 7-8%?? GDP combined, which is getting us uncomfortably close to the legal definition of a depression of -10%. I believe we will see a gradual recovery next year. There is so much liquidity flooding the system I can't see otherwise.
2) More fascinating data about the car industry. Car production peaked at 17 million units/year two years ago. It is now at a run rate of 11 million units/year. This is the lowest absolute rate since 1980, and the lowest population adjusted rate since 1945 when the government lifted its wartime ban on civilian auto production.
3) General Motors (GM) announced a Q3 loss of $4.2 billion. The cash burn was $6.9 billion, or $2.3 billion/month, more than double the worst case scenario. The company called off its merger with Chrysler. Fasten your seat belt. November car sales could be as bad or worse than the cataclysmic October numbers.
4) I saw an interesting interview with Kenneth Lewis, CEO of Charlotte, North Carolina based Bank of America (BAC), which after the purchase of US Trust, MBNA, Countrywide Financial, and Merrill Lynch, is now the largest bank in the country, with nearly $3 trillion is assets. The current holding company is descended from the North Carolina National bank and Nationsbank. One out of every two Americans is now a BAC customer in some way of another. The company pulled out of sup prime lending in 2001 because it didn't like the risks, and shut down its in house hedge fund at the end of 2007. It just received a $25 billion capital injection from the Treasury which it didn't need which will expand its lending capacity by $250 billion. It will lend this money, not use it for more acquisitions, because new lending is now extremely profitable, and because of moral suasion from the government.
TRADE IDEA
The 1,100 point sell off in the Dow over the last two days, the worst since 1987, has taken the VIX back up from 54% to 64%. As long as the sun doesn't explode and incinerate the solar system I don't believe the market is going to a new low before the next options expiration on November 21. Use volatility spikes to go short the November S&P mini 830 puts for $20, taking in $100,000 in premium on 100 contracts.
QUOTE OF THE DAY
When asked what kind of dog he was going to get president elect Obama said 'I might get a shelter dog, and as you know, most shelter dogs are mutts, like me.'