April 14, 2008

Market Comments for April 14, 2008

1) Retail sales were up 0.2% in March, better than expected. Don't pop the champagne corks yet. Most of the increase was due to higher fuel sales due to higher prices. The market was on hold today due to the imminent release this week of earnings by Intel, IBM, Ebay, Google, and Merrill Lynch.

2) The Wachovia Bank bail out was announced today. Not as draconian as WAMU's, the stock still fell 10%, and pulled down the rest of the financials.

3) The average salary on Wall Street is $387,000. Wall Street accounts for 15% of the jobs in New York City, but 35% of the reported income.

4) Another lagging indicator for the economy: breast augmentations, which are used by the youngest, least earning, and most recession sensitive consumers in the market, are down. Botox treatments and hair replacement, which are used by the high earning, recession immune consumers are still increasing. It is a lagging indicator because these operations are typically booked three months in advance. There were 2.2 million breast augmentations last year.

5) Blockbuster has made a takeover bid for Circuit City at a 30% premium to Friday's close. The company has been decimated by competition from best of breed Best Buy, and the stock has fallen from $20 to $4 in the past year. Carl Icahn is a 10% owner of Circuit City as a takeover target.

6) REIT's are trading at levels indicating a further 10% fall in real estate prices. Real Estate prices have already fallen by 15%, so that indicates a top to bottom fall of 25%, which is normal for a recession. Thus, the recession is fully discounted by REIT's. Cash flows are holding up well because there has not been the degree of overbuilding seen in past recessions. They are also not facing the credit crunch of other industries since their debt has long maturities and their cost of money has fallen. It is, however, a bad time to negotiate a debt roll over.


Copper could soon have a major melt up as occurred with wheat in January. Chile accounts for 40% of the world's copper supply and much of the electric power there is hydroelectric. A severe draught will soon lead to power cut backs that will force mine closures. Something similar happened in South Africa recently which caused the precious metals to spike upward. I recommended a buy of copper earlier this year at $3/pound. It is now $3.90 and close to breaking out to an all time high.