October 16, 2009

Global Market Comments
October 16, 2009

Featured Trades: (RESIDENTIAL REAL ESTATE), (ETF?s), (CALIFORNIA WINE MARKET)

1) I can honestly say that I have worked for the worst boss on the planet, Rupert Murdoch, when I free lanced for his flagship newspaper, The Australian. No matter what I wrote about Japan?s trade down under in sugar, wheat, coal, iron ore, steel, or uranium, it was always ?bloody awful,? even though I was usually accurate, timely and right (and cheap). His visits to Tokyo were a total nightmare, and since I was the only one in the organization then who spoke Japanese, the chore to escort him always fell to me. I can tell you that the grandfatherly Rupert you see today is a cheap, watered down Chinese imitation of the tyrant who terrorized us 30 years ago. When good people were fired, which was often, they were overwhelmed by an immense sense of relief. That rant aside, his newly acquired toy, the Wall Street Journal, still occasionally publishes some useful information. The October 5 issue ran a survey of websites for Exchange Traded Funds, the most popular and rapidly growing investment vehicle to come out so far this century.? ETF?s make possible narrow, rifle shot bets on specific, markets, sectors, currencies, and commodities in both long and short, and leveraged or non leveraged formats. They are the perfect securities for a guy like me who is constantly trolling the world for opportunities. Morningstar (click here)? is the most comprehensive, handing out star ratings, as it does with mutual funds. Tom Lydon?s ever helpful ETF Trends (click here) , offers a paid subscription service, which publishes 8-10 specific ETF recommendations a day, based on his own investment strategy, which is somewhat similar to my own. For a free ETF data base and directory you can go to the ETF Guide (click here) . To check out the WSJ piece in its entirety, please click here .

 

2) Since I have been pelted daily with predictions that residential real estate has bottomed for the last two years, like hail in a Midwestern summer thun derstorm, I feel a public duty to tell you that is just not the case. Now that the state and federal moratoriums are off, foreclosures are accelerating. There are over a million Option ARM and Alt-A loan resets about to hit the fan. Since many owners will not see positive equity in their homes in their lifetimes, banks are seeing more walk aways and keys mailed in, often with tearful letters attached. The run up in mortgage rates from 4.5% to 5.5% has yet to hit the market. Some 18 million homeowners divert 50% of their incomes to pay for housing, double the 25% that is considered healthy, and many of them are losing jobs at a record rate. While the volume of units sold has rebounded, the action is dominated by speculators, flippers, and bottom feeders bidding for properties at 10-40 cents on the dollar, not exactly a sign of health. I like to visit the plethora of open houses in my neighborhood, but always find the dead broker hanging from the showerhead a bit of a downer for a Sunday afternoon. Call me when Ozzie & Harriet Nelson come back to the market. I listened to industry insiders call the bottom of the Japanese real estate market for 15 years, until they finally died, and the market is still a fraction of its 1990 high. I think we are closer to the bottom than the top in terms of price, but closer to the top than the bottom in terms of time. You can take that to the bank.

 

3) One of the great things about living in Northern California is the proximity to Napa Valley, one of the world?s preeminent wine making regions. But as children frolicked in huge tubs of merlot at the annual fall grape stomping ritual, nothing but sour grapes could be heard among the vineyard owners huddled in small furtive groups.? The California? market has crashed, with premium Napa Valley cabernet fetching only half the $4,000/ton achieved only two years ago. The weather hasn?t helped, with alternating hot and cold spells shrinking the harvest by 10%-20%.? The glassy winged sharpshooter pest is an ever present risk, and there are still some holdouts of the phylloxera plague that forced most grapevine roots to be torn up two decades ago. Plunging prices and shrinking volumes do not make a great business model. Napa had its own version of the subprime boom, with nouveau riche pouring in to buy starter vineyards brandishing vanity labels-no experience required. Today foreclosures on these trophy properties are rampant, and you can buy them for a dime a dozen. CALPERS, the California State Pension Fund?s $200 million investment in the sector is starting to smell like a three day old bottle of Thunderbird, not fit for use as salad dressing. The new age of frugality has consumers migrating en masse to the low end of the market, leaving high priced labels like Opus One and Grgich Hills (made famous by the cute movie Bottle Shock) stranded in the marketplace. Central Valley winemaker and low end mass marketer, Charles Shaw, known locally and unaffectionately as ?Two Buck Chuck,? is making a fortune buying bulk wine at bankruptcy auctions for 50 cents a gallon, bottling it at his Napa plant, and knocking it out as low end supermarket wine with the Napa appellation for, well, $2. It?s a great time to expand your portfolio to investment grade wine. At least you can drink your mistakes.