Global Market Comments for October 24, 2008
STRATEGY CALL OF THE DECADE

We are building up to a textbook capitulation in global stock markets, and I believe that equities will hit multigenerational valuation lows sometime in the next ten days. The extremely rare limit down move in the S&P Index futures at the opening today, driving the VIX to another new record high of 89.5%, shows us that the end is near. More than 11,000 contracts, or $2.7 billion worth of stock equivalent, were for sale at market at the opening. Many people did not expect the stock market to open at all today, but in fact the Dow closed down only 316. Use the opportunity to load up on a portfolio of equities which you can put away for the rest of your life. There is no way to know when or where the final low will come, so put scale in bids at throw away levels well below the market. When the rally comes it will be vicious and you won't be able to buy stock. Focus on liquid, cash flow positive, best of breed names that will lead the charge upward like IBM (IBM), Intel (INTC), Cisco Systems (CSCO), General Electric (GE), Goldman Sachs (GS), Boeing (BA), Caterpillar (CAT), Microsoft (MSFT), US Steel (X), Exxon Mobile (XOM), and Walmart (WMT). You can also load up on long dated calls on the S&P 500 and NASDAQ.

1) American traders were stunned to find the world down 10% overnight. Hong Kong hit 12,600, down 60% from the year's high, and this is for an economy with a long term growth rate of 10% a year. Gold fell as low as $663, down from $1,050 in the spring. A massive unwind of the carry trade pushed the yen up 5% to ??92. Any buying of anything gets run over by a stampede of hedge fund selling, which has been ordered by lenders to cut positions and reduce leverage. The market is now fixated by two dates: October 31 when mutual funds close their books for the year, and November 15, the deadline for annual hedge fund redemption notifications. The last Monday in October is historically the most likely day to put in a low for the year.

2) PNC Financial (PNC) buys National City (NCC) with Treasury financing for $5.2 billion in stock, making it the 5^th largest bank in the country. The strong are eating the weak at fire sale prices. Expect more to come.

3) OPEC announced production cuts of 1.5 million barrels/day when 4 million was needed, driving prices down $4 to $63. This guarantees a glut early next year which may drive prices down to $50. Then they will cut production by 4 million?? barrels. Expect local gasoline price to drop below $2 before this sell off is over. US motorists drove 15 billion fewer miles than a year ago, a record drop, saving 12 million barrels of crude (24 super tankers full) for that month alone. Can you believe that crude has fallen by $85 since July?

4) LIBOR has dropped 10 consecutive days. The commercial paper market reopens next week. The medicine is on the way as long as the patient doesn't die first. The futures market is pricing in a likelihood of a 75 basis point cut in rates in November. The ECB may cut rates as early as Monday.

Global Market Comments for October 23, 2008

1) The blame game for the financial crisis on capitol hill continued in earnest, with everyone from the SEC's Christopher Cox, to former Fed governor Allan Greenspan pointing fingers. Greenspan was 'shocked' that his own 40 year old models blew up. Sounds like one of Claude Rains? lines from the movie 'Casablanca'. In the meantime the real economy plunges into the abyss, with weekly jobless figures leaping 15,000 to 478,000. Brokerage houses are making sure their upper floor windows are locked, and brokers are no longer allowed to wear laces with their shoes.

2) Alternative energy plans are now under the twin threats of lower crude prices and a lock up in the credit markets, according to Roy Kuga, vice president of PG&E.?? Of the $65 billion in US power generation capital investment for this year, $30 billion is slated to go into alternative sources. But the cost of alternative construction has doubled in four years. Most wind turbine manufacturers have backlogs stretching out to 2010. California now sees 11% of its power generated from alternative sources, with geothermal accounting for half of that. The goal is to take the total up to 20% by the of end 2010 and 33% by 2020. The main impediment is getting permits to build facilities on Federal land, which are always opposed locally. The Feds own 42% of the land in California. This explains why California has gone from the world leader in wind technology in the early eighties, to just an also ran today.

3) After suffering through the bust of the Great Japanese Housing Bubble and the Lost Decade, the surviving Japanese banks became the world?s most conservatively run financial institutions. They entered this crisis with very modest leverage ratios of 10:1, no sub prime debts, and $600 billion in cash reserves. This wad is now being put to work on a spending spree in the US, with Mitsubishi UFJ Bank's $9 billion investment for 20% of Morgan Stanley only the latest example. Japanese banks have made a total of $57 billion in foreign acquisitions so far this year.

4) What is the worst managed surviving company in the US? Yahoo (YHOO) turned down a $44 billion bid from Microsoft in February for the sole purpose of preserving existing management. It is now worth only $12 billion. Raider Carl Icahn alone has lost $700 million on this play. Is management so good that it is worth a $32 billion premium? Shareholders don?t think so. YHOO just announced a lay off of 1,400, and the best people are leaving in droves for their own start ups. In the meantime, Microsoft is using their unspent cash mountain to buy back their own stock. Expect the lawsuits to fly.

It turns out that after all long, short, and rehedged positions were netted out, the Lehman credit default swaps only cost the financial community $5.5 billion, vs. an initial headline number of $400 billion. This shows you how misleading the headline numbers for derivatives can be. The true problem is only a fraction of the feared amount, and this is being reflected in prices. The $63 trillion number you often hear about as the size of all outstanding derivatives, is a phantom.

Global Market Comments for October 22, 2008

1) Today global deflation trumped the continuing decline in LIBOR, knocking the Dow down 700 at one point. There was a five cent move in the euro today down to $1.27 as global funds poured into Treasuries. It turns out that a global recession is great for the dollar because it dramatically shrinks the trade and current account surplus. The drop in crude alone since July has cut our payments abroad from $700 billion to $400 billion/year, and that swing immediately hits the foreign currency market. The Euro is now gunning for the $1.22 level, where it will have given up exactly half of its appreciation from 2001-2008. All this in only four months! In an extreme, overshooting move we could see parity against the dollar of $1:???1, and we live in an age of extremes. The next big down leg in the long term dollar bear megatrend will start next year at first hint of a recovery in the US economy. Then we could go to $2.00/euro.

2) Global lending capacity is shrinking at a tremendous rate. Banks are deleveraging as quickly as they can, while others are going under. Healthy banks are using the Federal bail out money not to lend, but to deleverage, as they normally would at this point in the economic cycle. Big money center banks are going to take over weak regional banks and use the new deposit bases to deleverage further, leaving the government to pick up the tab in the form of loss carry forwards from write downs on newly acquired bad loan and securities portfolios. The number of banks in the US is about to take a quantum leap down. The global asset base is going to have to shrink to meet the new smaller loan capacity. Although virtually all commodities and emerging stock and bond markets have halved in the past three months, and industrialized stock markets have been cut in half in the past year, the loan capacity to asset gap is still probably in the $5-$10 trillion range. Where is most of the remaining fat? In real estate, which still has further to fall.

3) Asian markets got slammed last night as fears of a hard landing in China accelerate. Stock indexes were down 3-7%. China could slow from a 12% to a 5% growth rate as their foreign markets dry up. If growth falls under 5% you will have another revolution in the Middle Kingdom. Copper, an important leading economic indicator, crashed 9% today down to $1.83. The Baltic Dry Index ($BDI) hit a new low of 1,292, down 89% from its 12,000 high.

4) Dr. Allen Sinai of Decision Economics says that 20 of the world's top 47 economies accounting for 75% of world GDP are now at or in recession. This is the most coordinated, simultaneous global postwar recession in history, and it will be the longest, stretching well into 2010.

Global Market Comments for October 21, 2008

1) More light at the end of the credit tunnel. Three month T-bill yields made it back from 0.25% up to 1.27% vs., a normal range around 1.75%. LIBOR has dropped for seven consecutive days, pointing to a slow thaw of European lending. Now that most major banks have been nationalized, the interbank loan market is essentially an all government affair. The VIX has dropped from 81% to 53% in just three days, but is still at record levels.

2) It turns out that hedge funds were major sellers of credit default swaps on Lehman bonds. They had to absorb the bulk of the $350 billion payout which is due today. That explains why the best quality names like Chesapeake Energy (CHK), US Steel (X), Google (GOOG), and Freeport-McMoran (FCX), all hedge fund favorites, had the biggest falls, while the dross held up relatively well.

3) Hollywood is making a sequel to the classic film 'Wall Street'. It will focus on the evil machinations of 'greed is good' Gordon Gekko, once he is released from prison. He has to be either a hedge fund manager, a short seller, or a sub prime mortgage broker in the new film, or perhaps all three.

4) Several China experts have opined that the real Q3 GDP figure wasn't 9%, but was really 8% or even below 5%. The government publishes inflated figures to stifle criticism of its economic policies. Gee, do you think they do that here too?

5) Traders were stunned on learning that Kirk Kerkorian is selling his 6.09% stake in Ford Motors (F), which he purchased for around $7.50/share, and is now trading at just above $2. The only reason to sell here is if you think Ford is going to zero, or if you are going to die soon. The always combative Kerkorian, with a net worth at the beginning of the year of $18 billion, is 91. His response to all of this? ?I lived a year too long.? At least his sense of humor hasn?t withered.

6) Richard Del Bello of Conifer Securities, a prime broker and hedge fund hot house, predicts the number of hedge funds is about to see a dramatic decline, but then see a resurgence in 2010. Bonus deprived staff are bailing from existing funds to set up their own shops. Now is the best time in history to set up a new hedge fund.

JOKE OF THE DAY

The collapse of the US stock market is expected to trigger a massive restructuring of corporate America. Some of the mergers being mooted: FedEx and UPS amalgamate to create FedUp, and Victoria's Secret and Smith & Wesson combine to form Titty Titty Bang Bang.

Global Market Comments for October 20, 2008

1) China's third quarter GDP slowed by 12% to 9%, the slowest since 2003. Copper imports, a reliable leading indicator, have almost completely halted. Stocks rose 413 to 9,265. The November S&P 500 1,000 calls I strongly recommended at $22 last week hit $60 today.

2) US job creation for the past eight years was nearly zero, while the Federal deficit doubled from $5 to $10 trillion. That is $10,000,000,000,000. ??Since January 900,000 jobs have been lost, raising the unemployment rate by 1.2%. It is the worst record since the Great Depression.

3) The route in the bond market over the past two weeks has been mind boggling, as investors considering the inflationary impact of the bail out. The 30 year Treasury plunged from 124 to 112, while spreads on junks bonds have widened to a precipitous 1,500 basis points. Investment grade 'Baa' paper is yielding 9.5%. This is despite seeing the most deflationary, rapid and bond friendly collapse in commodity prices in history. Such is the price of running the global printing presses 24 hours a day. Please recall my recommendation for a core short in the 30 year Treasury bond.

4) There is a futures market where you can bet on the outcome of the election. Right now Obama is ahead on McCain by 84% to 16%. I am a buyer at 84%.

5) Another screaming buy here is the Russian stock market (RTS), which has dropped 74% from 2,500 to 667 since in three months. Half of the index is in energy stocks. It is a way to buy crude through the back door at $20/barrel.

QUOTE OF THE DAY

'If you want to live like a republican you should vote democratic because they are best at managing the economy', Bill Clinton.

JOKE OF THE DAY

What is the difference between a big hedge fund manager and a pigeon? A pigeon can still put a deposit down on a new Ferrari!