Global Market Comments for September 4, 2008
1) Today the global recession came home to roost, knocking stocks down 350 points. If shares can't go up on a $43 drop in crude, then they can only go down. Bond yields soared, taking the ten year to 3.60%, giving you a real return of negative -1.00%. It?s all a flight to safety, nothing rational.
2) Q2 productivity growth came in at a rip roaring 4.3%. Since wage growth has been flat for the last decade, American workers are producing more goods for less money.?? It also explains why standards of living are rising rapidly in China at the expense of a falling of standard of living here.
4) No matter who wins the election, capital spending on defense is about to jump. Much of the military's equipment is destroyed, worn out, or just plain old after seven years of non stop fighting. National Guard armories have been cleaned out of usable equipment. Many items are overdue for generational upgrades.???? Foreign demand for cutting edge American planes, tanks, and missiles is also rising, with US brokered arms deals up 45% to $34 billion last year. Newly enriched sheikdoms are spending petrodollars on trophy aircraft like the F/A-18 Hornet fighter. And Israel has a permanently long shopping list. Obama is thought to favor more transport aircraft like the C-17 Globemaster III transport and new ships, while McCain, the ex pilot, prefers advanced missiles. Buy Rockwell Collins (COL), Lockheed Martin (LMT), and Raytheon (RTN).
5) John Chambers of Cisco Systems says business is flat in the US, but is still growing in Asia and Europe. He expects his business to recover in H1 2009. Visual networking will be the next big thing on the Internet, creating massive demand for his company's routers. Virtualization, or the placing of processing, programming, storage offsite, will also be a big deal. This is why I think that technology will be the next leader in the stock market. The stocks in this sector like CSCO and Intel (INTC), are selling at once in a lifetime valuations.
6) The president of BMW, on the other hand, believes that sales will be poor until H1 2010. What sales they are seeing are away from larger eight cylinder engines, towards smaller six and four cylinder engines. Looking at the government's economic data releases will never give you any insight into the length of this recession. Only listening to business in the front line trenches will.
10) Boeing (BA) may be hit with a strike in the next 48 hours, which will lead to further delays in the fuel efficient 787 Dreamliner. If this craters the stock, buy it, because the company's order backlog is the longest in its history.
Global Market Comments for September 3, 2008
1) The dollar spiked up to the $1.43 handle against the euro as billions poured out of the soon to be lower yielding euro and pound and into the soon to be higher yielding greenback. Since we have had no significant pull backs from the major break of $1.55, this is increasingly taking on the character of a multi year trend reversal. Trillions of dollars of commercial hedges are going to have to be unwound. Parity, or $1 to ???1 is not out of the question. But the buck has got to cool when it hits the $1.30s.
2) British Chancellor of the Exchequer Alistair Darling says the UK economy is in the worst shape in 60 years. The German business climate index is at a three year low and consumer sentiment shrunk to a five year low. Sell Poland, which is to Germany as Canada is to the US.
3) There is a real estate melt down of Biblical proportions going on in Incline Village, Nevada, a major West Coast hedge fund center (and also where Michael Corleone had his half ??brother Fredo dispatched in Godfather III.)The toney hamlet nestled on the shores of Lake Tahoe has 550 homes for sale out of a population of 10,000, 70% of which are priced at over $1 million. Palatial spec homes on Lakeshore Blvd., the local millionaire's row, have every imaginable amenity (radiant floor heating in the driveway?) and are still being marked down $1 million a quarter. If you think we are anywhere close to a bottom in the housing market, talk to one of the shell shocked agents there, that is if you can talk one back from the ledge.
4) 75% of Americans own computers compared to 9% of Chinese and 5% of Indians. Guess where the future growth in profits will be. Buy Lenovo (LNVGY) and Acer (ACID), along with Intel (INTC), Dell (DELL), and Hewlett Packard (HPQ) for their global sales presence.
5) Foreclosures on US commercial loans are taking off at an unprecedented rate. Expect the securities backing these loans to tank further. Banks will pare back new lending to the sector in typical 'closing the barn door after the horses have bolted' fashion.
6) Natural gas (NG) hit a new low for the move of $7.00, and the crude ratio hit a shocking 15.5 times versus the historical 9-10 times. When NG recovers you want to watch Golar LNG Ltd. (GLNG), which has been unfairly knocked down 40% because of an inaccurate association with natural gas, even though it is only involved in the long distance transportation of LNG.
Global Market Comments for September 3, 2008
1) The dollar spiked up to the $1.43 handle against the euro as billions poured out of the soon to be lower yielding euro and pound and into the soon to be higher yielding greenback. Since we have had no significant pull backs from the major break of $1.55, this is increasingly taking on the character of a multi year trend reversal. Trillions of dollars of commercial hedges are going to have to be unwound. Parity, or $1 to ???1 is not out of the question. But the buck has got to cool when it hits the $1.30s.
2) British Chancellor of the Exchequer Alistair Darling says the UK economy is in the worst shape in 60 years. The German business climate index is at a three year low and consumer sentiment shrunk to a five year low. Sell Poland, which is to Germany as Canada is to the US.
3) There is a real estate melt down of Biblical proportions going on in Incline Village, Nevada, a major West Coast hedge fund center (and also where Michael Corleone had his half ??brother Fredo dispatched in Godfather III.)The toney hamlet nestled on the shores of Lake Tahoe has 550 homes for sale out of a population of 10,000, 70% of which are priced at over $1 million. Palatial spec homes on Lakeshore Blvd., the local millionaire's row, have every imaginable amenity (radiant floor heating in the driveway?) and are still being marked down $1 million a quarter. If you think we are anywhere close to a bottom in the housing market, talk to one of the shell shocked agents there, that is if you can talk one back from the ledge.
4) 75% of Americans own computers compared to 9% of Chinese and 5% of Indians. Guess where the future growth in profits will be. Buy Lenovo (LNVGY) and Acer (ACID), along with Intel (INTC), Dell (DELL), and Hewlett Packard (HPQ) for their global sales presence.
5) Foreclosures on US commercial loans are taking off at an unprecedented rate. Expect the securities backing these loans to tank further. Banks will pare back new lending to the sector in typical 'closing the barn door after the horses have bolted' fashion.
6) Natural gas (NG) hit a new low for the move of $7.00, and the crude ratio hit a shocking 15.5 times versus the historical 9-10 times. When NG recovers you want to watch Golar LNG Ltd. (GLNG), which has been unfairly knocked down 40% because of an inaccurate association with natural gas, even though it is only involved in the long distance transportation of LNG.
Global Market Comments for September 2, 2008
1) Hurricane Gustav pulled its punch, so crude (USO) crashed $13 from the Friday high to the $105 handle. The market was discounting another Katrina and got a damp squib instead. Natural gas (NG) collapsed 74 cents to $7.20. They don't call this contract the widow maker for nothing. Expect to hear about more hedge funds going under, married to their longs. Please see last week's call not to buy this dip. The ninety dollar handle for crude may be only one weak storm away. Don't expect pump prices to fall much because 2.6 million barrels/day of refining capacity is still offline.
2) Stocks loved the crude fall, for a few hours anyway, rallying 200 points, then falling 300. The fact that these rallies have no shelf life is telling you a lot. To see the Dow up only 500 points from the July bottom on a $43 drop in the price of crude is disheartening, to say the least. The bond market isn't buying it for a nanosecond, with prices approaching new highs for the year. United Airlines (UAUA) rocketed with the other airlines, up 50% intraday, and has risen from $2.50 to a high of $16, up 600% in ten weeks. Please see my June recommendation to buy the airlines as a cheap undated put on crude. This trade is now gone.
3) I come back from vacation to find out that if McCain wins the election and then dies, the finger on the nuclear launch button will belong to the recent alpha female, lifetime NRA member mayor of Wasilla, Alaska, population 5,469. McCain just tossed out the inexperience issue he could use against Obama, along with the ever important pro caribou constituency. Check out her Miss Alaska photos. They're hot! The rest of the world must think we've gone mad. You're good at filling in small town pot holes? Great, please run the country for us. I guess anyone is an improvement over what we've got. The market sold off big on the news. I'm going back to the mountains and becoming a survivalist.
4) There were massive outright sellers of Lehman (LEH) puts last week, something few have had the guts to do so far. Someone is betting that Dick Fuld can pull off a ?Hail Mary? before the earnings are due out later this month.
5) The dollar broke to a new high for the year to the $1.44/euro handle. It is becoming increasingly clear that the next moves in interest rates will be up in the US and down in Europe, with the UK leading the charge to the downside. Even the Australian central bank has cut interest rates for the first time in seven years. That makes sterling the best short out there. The move has been so massive, and so rapid, that multinationals are being forced to cover large scale hedges because of margin calls, adding fuel to the fire. Look for the euro going to the mid $1.30s and the pound at $1.50 at a minimum.
Global Market Comments for September 2, 2008
1) Hurricane Gustav pulled its punch, so crude (USO) crashed $13 from the Friday high to the $105 handle. The market was discounting another Katrina and got a damp squib instead. Natural gas (NG) collapsed 74 cents to $7.20. They don't call this contract the widow maker for nothing. Expect to hear about more hedge funds going under, married to their longs. Please see last week's call not to buy this dip. The ninety dollar handle for crude may be only one weak storm away. Don't expect pump prices to fall much because 2.6 million barrels/day of refining capacity is still offline.
2) Stocks loved the crude fall, for a few hours anyway, rallying 200 points, then falling 300. The fact that these rallies have no shelf life is telling you a lot. To see the Dow up only 500 points from the July bottom on a $43 drop in the price of crude is disheartening, to say the least. The bond market isn't buying it for a nanosecond, with prices approaching new highs for the year. United Airlines (UAUA) rocketed with the other airlines, up 50% intraday, and has risen from $2.50 to a high of $16, up 600% in ten weeks. Please see my June recommendation to buy the airlines as a cheap undated put on crude. This trade is now gone.
3) I come back from vacation to find out that if McCain wins the election and then dies, the finger on the nuclear launch button will belong to the recent alpha female, lifetime NRA member mayor of Wasilla, Alaska, population 5,469. McCain just tossed out the inexperience issue he could use against Obama, along with the ever important pro caribou constituency. Check out her Miss Alaska photos. They're hot! The rest of the world must think we've gone mad. You're good at filling in small town pot holes? Great, please run the country for us. I guess anyone is an improvement over what we've got. The market sold off big on the news. I'm going back to the mountains and becoming a survivalist.
4) There were massive outright sellers of Lehman (LEH) puts last week, something few have had the guts to do so far. Someone is betting that Dick Fuld can pull off a ?Hail Mary? before the earnings are due out later this month.
5) The dollar broke to a new high for the year to the $1.44/euro handle. It is becoming increasingly clear that the next moves in interest rates will be up in the US and down in Europe, with the UK leading the charge to the downside. Even the Australian central bank has cut interest rates for the first time in seven years. That makes sterling the best short out there. The move has been so massive, and so rapid, that multinationals are being forced to cover large scale hedges because of margin calls, adding fuel to the fire. Look for the euro going to the mid $1.30s and the pound at $1.50 at a minimum.
Global Market Comments for August 28, 2008
1) Hurricane Gustav wavered, so crude fell $6 and natural gas plunged a mind blowing 10%, or 80 cents. Other commodities collapsed across the board and stocks took off.
2) Q2 GDP came in at a blistering 3.2%, almost double some forecasts. While the stimulus checks provided a minor assist, it was really all about the enormous boost being given the economy by international trade. Unfortunately, if you don't sell routers in India, ship food or commodities to China, or sell crude products anywhere, you were toast. When this market does recover there is no doubt it will be lead by companies earning half or more of their income from overseas. Think big tech: Microsoft (MSFT), Intel (INTC), Oracle (ORCL), Hewlett Packard (HP), and Cisco (CSCO), or just buy a technology ETF.
3) If you want to minimize the impact your vehicle has on the environment, buy a used Hummer. Building a new hybrid consumes the energy equivalent of 1,000 gallons of gasoline. The purchase of any used car uses no energy at all because it is already built. By the way, General Motors (GM) is close to selling its Hummer subsidiary to one of two Middle Eastern buyers. It only makes sense that the parties interested in buying the maker of the most inefficient fuel consuming vehicle on the planet would have unlimited access to gas at 25 cents a gallon.
4) It has been a great year for kings and queens (not the San Francisco kind). The richest monarch in the world, Thailand's King Bhumibol of Thailand has seen his wealth grow to $35 billion, according to Forbes magazine. His family has owned most of downtown Bangkok for the last 226 years. He is followed by the sheik of Abu Dhabi, the King of Saudi Arabia, and the Sultan of Brunei (whose San Francisco home I bought cheap when crude was at $8). Queen Elizabeth came in at a relatively impoverished 12th on the list with only $650 million.
5) Put the home builders' ETF (XLB) on your watch list. The chart may be making a double bottom at $12, down 75% from its 2005 high. I don't care if they make widgets; double bottoms down 75% always pique my interest. Is the wisdom of crowds working here (see James Surowiecki)?
6) With the 'official' inflation rate now at 4.5% and the 30 year yield at 4.5% the long bond futures contract (US) has to be a screaming short here at 118.75. If everything goes perfectly and there is no inflation, you break even on an inflation adjusted basis. If not, then the contract will drop by half over the next three years. Take the seven point rally over the last month as a gift and fill your boots on the short side.
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Global Market Comments for August 28, 2008
1) Hurricane Gustav wavered, so crude fell $6 and natural gas plunged a mind blowing 10%, or 80 cents. Other commodities collapsed across the board and stocks took off.
2) Q2 GDP came in at a blistering 3.2%, almost double some forecasts. While the stimulus checks provided a minor assist, it was really all about the enormous boost being given the economy by international trade. Unfortunately, if you don't sell routers in India, ship food or commodities to China, or sell crude products anywhere, you were toast. When this market does recover there is no doubt it will be lead by companies earning half or more of their income from overseas. Think big tech: Microsoft (MSFT), Intel (INTC), Oracle (ORCL), Hewlett Packard (HP), and Cisco (CSCO), or just buy a technology ETF.
3) If you want to minimize the impact your vehicle has on the environment, buy a used Hummer. Building a new hybrid consumes the energy equivalent of 1,000 gallons of gasoline. The purchase of any used car uses no energy at all because it is already built. By the way, General Motors (GM) is close to selling its Hummer subsidiary to one of two Middle Eastern buyers. It only makes sense that the parties interested in buying the maker of the most inefficient fuel consuming vehicle on the planet would have unlimited access to gas at 25 cents a gallon.
4) It has been a great year for kings and queens (not the San Francisco kind). The richest monarch in the world, Thailand's King Bhumibol of Thailand has seen his wealth grow to $35 billion, according to Forbes magazine. His family has owned most of downtown Bangkok for the last 226 years. He is followed by the sheik of Abu Dhabi, the King of Saudi Arabia, and the Sultan of Brunei (whose San Francisco home I bought cheap when crude was at $8). Queen Elizabeth came in at a relatively impoverished 12th on the list with only $650 million.
5) Put the home builders' ETF (XLB) on your watch list. The chart may be making a double bottom at $12, down 75% from its 2005 high. I don't care if they make widgets; double bottoms down 75% always pique my interest. Is the wisdom of crowds working here (see James Surowiecki)?
6) With the 'official' inflation rate now at 4.5% and the 30 year yield at 4.5% the long bond futures contract (US) has to be a screaming short here at 118.75. If everything goes perfectly and there is no inflation, you break even on an inflation adjusted basis. If not, then the contract will drop by half over the next three years. Take the seven point rally over the last month as a gift and fill your boots on the short side.
Global Market Comments for August 26, 2008
1) Crude pops $6 and natural gas leaps 42 cents to $8.25 as hurricane Gustav turns towards the oil and gas producing facilities in the Gulf of Mexico. One mathematical model has a category four hurricane hitting New Orleans in 3-4 days.
2) The S&P case-Shiller home price index for June fell 15.4% YOY. San Francisco came in at -23.7% YOY. Even though homebuilders have cut back construction dramatically, foreclosures keep dumping more properties on the market, driving prices down.
3) The ten year return on the S&P 500 has been a meager 3%. Add in dividends and it rises to 23%.
4) The top 1% of taxpayers in the US earn 20% of the income, but pay 40% of the taxes. Obama plans to raise the capital gains tax from 15% back to the Reagan level of 28%.
5) Since gas prices spiked people are driving less and driving slower, causing the accident rate to drop precipitously. Highway deaths are now running at an annualized rate of 33,000, the lowest since 1961. Car insurance rates will fall. US crude consumption has declined by one million barrels/day in the past year which is equivalent to 42% of our yearly imports from the Persian Gulf.
6) Natural gas (NG) hit my short term target of $7.75, down 42% from its $13.50 high two months ago. If you think this is an unusual move just look at a six year chart for NG. It is the third such move. Welcome to the natural gas market, where the ante is a pair of balls of steel. Stand aside for now. Storage is now above the five year moving average. If there are no more hurricanes after Gustav this season, and crude visits the eighties, you could see NG break below $7. Worse, the crude/NG ratio is now at an all time high of 14.7.
7) The commercial real estate debt market will be pushed closer to the brink on September 1. That is when an interest payment is due to Deutsch Bank on a $225 million loan to Riverton, a 1,232 apartment complex in Harlem. The owners used aggressive financing to overpay for a complex in 2005 where 93% of the units were subject to New York rent control. With market values now half of what they paid, the owners may find it expedient just to default and walk away from the project. The move could trigger a panic in the market for the securities backing similarly leveraged commercial deals, shut the window on new developments, and open the next chapter of the credit crisis. Terms have already dramatically tightened. In the past year commercial loan to value has dropped from 95% to 65%, spreads have widened from 75 basis points over Treasuries to 300 bp, and the volume of deals fallen from $3 billion in 2007 to only $1.5 billion so far this year.
Global Market Comments for August 26, 2008
1) Crude pops $6 and natural gas leaps 42 cents to $8.25 as hurricane Gustav turns towards the oil and gas producing facilities in the Gulf of Mexico. One mathematical model has a category four hurricane hitting New Orleans in 3-4 days.
2) The S&P case-Shiller home price index for June fell 15.4% YOY. San Francisco came in at -23.7% YOY. Even though homebuilders have cut back construction dramatically, foreclosures keep dumping more properties on the market, driving prices down.
3) The ten year return on the S&P 500 has been a meager 3%. Add in dividends and it rises to 23%.
4) The top 1% of taxpayers in the US earn 20% of the income, but pay 40% of the taxes. Obama plans to raise the capital gains tax from 15% back to the Reagan level of 28%.
5) Since gas prices spiked people are driving less and driving slower, causing the accident rate to drop precipitously. Highway deaths are now running at an annualized rate of 33,000, the lowest since 1961. Car insurance rates will fall. US crude consumption has declined by one million barrels/day in the past year which is equivalent to 42% of our yearly imports from the Persian Gulf.
6) Natural gas (NG) hit my short term target of $7.75, down 42% from its $13.50 high two months ago. If you think this is an unusual move just look at a six year chart for NG. It is the third such move. Welcome to the natural gas market, where the ante is a pair of balls of steel. Stand aside for now. Storage is now above the five year moving average. If there are no more hurricanes after Gustav this season, and crude visits the eighties, you could see NG break below $7. Worse, the crude/NG ratio is now at an all time high of 14.7.
7) The commercial real estate debt market will be pushed closer to the brink on September 1. That is when an interest payment is due to Deutsch Bank on a $225 million loan to Riverton, a 1,232 apartment complex in Harlem. The owners used aggressive financing to overpay for a complex in 2005 where 93% of the units were subject to New York rent control. With market values now half of what they paid, the owners may find it expedient just to default and walk away from the project. The move could trigger a panic in the market for the securities backing similarly leveraged commercial deals, shut the window on new developments, and open the next chapter of the credit crisis. Terms have already dramatically tightened. In the past year commercial loan to value has dropped from 95% to 65%, spreads have widened from 75 basis points over Treasuries to 300 bp, and the volume of deals fallen from $3 billion in 2007 to only $1.5 billion so far this year.
Global Market Comments for August 21, 2008
1) Crude (USO) spiked $10 to $122 when it realized that 1% of the world's production passes through a pipeline in Georgia where the Russian invasion shows no sign of ending soon. Tropical storm Fay also brought out fears of a Gulf hurricane back to the surface. Panic buying spread across a wide range of commodities contracts, from rice to gold to natural gas.
2) The tiny island nation of Singapore, which has never won a medal in the Olympics, has offered to pay a $735,000 bounty to anyone who brings home the gold. Malaysia is offering a $300,000 prize, Greece $220,000, and the Philippines $200,000. The US pays a relatively chintzy $25,000 to its medal winners. NBC thought it died and went to heaven when it rained during the women's volleyball gold medal final. Suddenly it became an Olympic wet T-shirt contest!
3) Weekly jobless claims moderated to 432,000, down 13,000. Just noise.
4) Last week the Treasury called Credit Suisse and asked them not to cut off short term credit lines to Lehman (LEH) to head off a run on the bank. The stock tanked down to $12.50, and the stock will soon be trading at a hat size. The Treasury doesn't do this for companies that are in the pink of health. What do they know? When did they know it? What are they not telling us?
5) You only want to buy when there is blood in the streets, and Russia's invasion of Georgia is presenting us with an opportunity to do so by the bucket load. Russia's recent seizure of assets owned by BP (BP) and Royal Dutch Shell (RDS-B) has also sent a shiver down investors' backs. But the rising Russian middle class story is still alive. The Market Vectors Russia ETF (RSX) is down 36% from its June high of $59. Lukoil (LUKOY), the country's most independent oil producer, is now selling for five times earnings compared to seven times for ExxonMobile (XOM) and Chevron (CVX) and ten ties for Petrobras (PBR). Companies enjoying government political protection include Gazprom (OGZPY) and savings bank Sberbank (SBRBF). The best non energy play is wireless operator Vimpelcom (VIP). Mechel Steel Group (MTL) is down a gut wrenching 70% on fears of a tax investigation. If you really want to go out on a limb there is JSC Bank of Georgia (BGEO).
6) Rim (RIMM) launched its next generation Blackberry Bold in Canada today. The 3G smart phone designed for high end business users is thinner, faster, carries a two megapixel camera, and can use a wide range of third party financial and market tracking software. Sign me up. The phone will only be available through AT&T in the US.