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.

Global Market Comments for September 8, 2008

1) Hank Paulson promised a bazooka and delivered a pea shooter. The Treasury used the Bear model once again, making Fannie Mae (FNM) and Freddie Mac (FRE) bond holders whole, while wiping out the equity owners. Trillions of dollars in debt, largely owned by China, Japan, Russia and other foreigners are now obligations of the US government. Traders who worked late on Friday got a huge pay off. On the initial news of the bail out FNM jumped 50% to $8, giving you the easiest short sale of the year. It traded down to $0.60 on Monday. Three regional banks had more than one third of their capital tied up in FNM preferred, which has been completely wiped out. We used to scare foreigners by threatening to nuke them back to the Stone Age. Now we threaten to default on our debt they hold. It doesn't have the same impact. Stocks opened up 350 points, and closed up only 260, because traders figure the government has shot its wad. Bad, really bad.

2) In 2000 the Case-Shiller National Home Price Index pegged the value of the average American home at $200,000. It hit $460,000 in 2006 and is back down to only $370,000. To reach the long term historical trend in home prices, homes have to fall another $110,000, or?? another 24% down from the top, to $260,000.?? Today's government bail out only lowered 30 year mortgages by 12 basis points. The $16 trillion housing market is just too big for the government to bail out. Bottom line: house prices are still going down and more banks will fail.

3) A month ago I recommended the 9% yielding SPDR Lehman High Yield bond fund ETF (JNK). It is up big today, since it is a major holder of?? FNM and FRE debt, which has just been converted into Treasuries. Everything else it owns will be up too.

4) The cream of the crop of energy linked equities, which are profitable down to $20/barrel for crude, outrageously profitable at $50/barrel, and have multi year order backlogs, are getting down to attractive levels. Joy Global (JOYG), the leading producer of coal mining equipment, has collapsed from $90 to $49. Potash Corp. Saskatchewan (POT) is a Canadian producer of fertilizer that has been eviscerated from $240 to $145. Transocean (RIG) is the top builder of offshore oil rigs, and is down from $165 to $115. Companies that have the highest marginal cost of crude needed to stay profitable, like new deep offshore ($95) and Canadian tar sands ($80) are starting to sweat bullets

5) OPEC meets this week, so expect some attempt to defend the $100 level in crude, at least verbally, from hotheads like Libya, Iran, and Venezuela. It always comes down to what the Saudi's do, not say. Crude hit a new low today of $104.70.

Global Market Comments for September 5, 2008

1) The August unemployment rate rocketed from 5.7% to 6.1%, a five year high. The monthly non farm payroll rose an unexpected 84,000. Traders were out there from the get go, selling stocks with both hands, taking the Dow down 150 points. Bond yields are flirting with all time lows. Blood is flowing in the streets once again as the stock indexes approach new lows. This is bound to feed into the election. Short McCain.

2) Suntech Power (STP), the largest solar module manufacturer in the world, seems to be the one solar energy company that is best poised to get its margins under control, crucial in the face of steeply falling oil prices. The Chinese firm has already dropped from $90 to $33. In China, farmers are jumping from the first century to the 21^st, converting from ox power to solar, in one go.

3) The unique thing about this housing downturn is the huge number of new homes that were bought by speculators with no money down, never lived in, and then foreclosed. This enormous new inventory is collecting dust, for sale at big discounts, and hammering the public homebuilders. Hovnanian (HOV) just announced a Q2 loss of $202 million. The stock has plunged from $45 to $4.50. Eli Broad, billionaire retired founder of Kaufman & Broad, believes that the market won't recover for another 2-3 years.

4) According to Dr. Levitsky of hallowed Cornell University, intensive mental activity, like mathematical calculations, Scrabble playing, or stock picking, can burn off excess calories. The bad news is that it is only about 20 calories/day, the equivalent of one M&M.

5) Regional airports are getting pummeled by the airline crisis, with departures at Oakland airport down 19% YOY. Carriers are either consolidating down to the single largest airport in an area, like SFO, or just plain going bust and walking away from substantial bills and leases. Many smaller local airports are now no longer served by any airlines after communities spent millions to upgrade and service them.

6) The US consumes 25% of the world's energy, but owns only 3%. This is a problem.

7) Of the 3.3% in GDP growth seen in Q2 2008, 3.1% came from international trade.