April 29, 2009

Global Market Comments
April 29, 2009

Featured Trades: (JNK)

1) Q1 GDP came in at minus 6.1%, much worse than expected, hitting the economy's green shoots with a fatal dose of herbicide. There will no doubt be some at the Fed who are green around the gills over this one. There was a surprise fall in government spending, while consumer spending did better. With a good chunk of US industry either shut down or running on shortened hours, inventories are shrinking at a tremendous rate.  Still, the market decided to look at the glass that is half full, and leapt 168 points.

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2) I attended the FinovateStartup09 conference in San Francisco yesterday to get a sense of what technologies are headed our way in the financial sector. The techfest, which drew 350 attendees, was sponsored by the leading financial blog aggregator Seeking Alpha. The one liner is that I was awed, and a little frightened. It is safe to say that there is no corner of the financial industry that is not about to come under attack by disruptive, minimal overhead encumbered, Internet based business models. Peer to peer online banks, like LendingKarma, LendingClub, Pertuity, and People Capital, were in abundance, where borrowers and lending are brought together in a totally transparent fashion in amounts as small as $50. KaChing is a virtual investing environment that tracks 375,000 portfolios. Investors can hook any of these up to a real brokerage account, which then replicates the trades by any star managers. For $125, LowerMyAssessment.com will appraise your house and then file an appeal with state authorities to get your property taxes lowered. Secondmarket matches buyers and sellers of illiquid securities like CDO's, auction rate securities, bankruptcy claims, limited partnership interests, mortgage backed securities, and restricted stock. Valuecruncher allows researchers to go into the spreadsheets of analysts' company reports and change their underlying assumptions. I have to confess that I felt like a dummy after listening to eight hours of jargon like 'logic abuse', 'bolt on software', and 'man in the browser' worms. It is amazing how many entrepreneurs and their backers are taking the plunge with times so dire.

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3) High yield bonds, less politely known as 'junk', have seen a dramatic improvement in the past month, making it the best performing fixed income asset class this year. With junk default rates expected to skyrocket this year, and a huge backlog of new supply overhanging the market, investors have been staying away in droves. Last year yields shot up as high as 25%, implying improbable future default rates of over 75%. The actual Q1 default rate came in at only 7.0%, up from 1.5% a year earlier, and rating agency Moody's sees a worst case scenario of 14.6% this year. But a strong stock market and the opportunity cost of zero short term interest rates was enough to entice players off of the sidelines, who snapped up $7 billion in securities in April. The improvement in conditions is a welcome blast of fresh air to companies in debt heavy industries like REIT's, hotels, and property developers. At the end of 2008, I recommended the SPDR Lehman High Yield ETF (JNK) which has since jumped by 27%. Take a look. There are more gains to come.

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4) Another sign of the times. The New York Yankees announced that it is drastically slashing prices for its premium seats behind home plate at its new $1.5 billion stadium. The $2,500 seats were chopped down to $1,250 and the $1,000 seats were pared to $650.  Season ticket holders are being showered with new free seats. The team's legendary retired manager, Yogi Berra, who threw the season opening pitch in April, once said, 'When you come to a fork in the road, take it.'

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5) You would think that dentistry is a nice recession proof profession to hide out in, but you would be wrong. My dentist is a crotchety old 70 year old who delights in telling you an 'X' rated joke while giving you a root canal. It turns out that many people view dental care as the first luxury to cut when times are tough. Many patients have lost jobs and health care insurance and will only come in when something is broken or hurts, and then ask for big cash discounts. His new visits are off 70%. He's tried to make ends meet by cutting staff salaries by 20%, but it is not enough. So he will try to negotiate down his office rent when his lease comes due. It seems there is no corner of the economy that hasn't been affected by the recession.

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'Congratulations, you're going to Detroit', is not something you hear very often these days. That is what number one NFL draft pick and University of Georgia drop out Matthew Stafford was told when handed a six year, $41 million contract by the Detroit Lions.

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