April 2, 2008

Market Comments for April 2, 2008

1) A $7 dollar rise in crude to $105 from the Monday lows put the stock rally on hold. This despite a near record 7 million barrel weekly increase in crude stocks announced this morning. Go figure. The Fed also hinted that it may pause its interest rate cuts to give time for its existing measures to work.

2) Jumbo lender Thornberg Mortgage was effectively taken over for only $1.1 billion, down 95% in value from a year ago by a consortium of banks and private equity firms. This insures their presence in the market in any future recovery. They say they will resume lending in weeks.

3) RIM (RIMM) announced blockbuster Q4 earnings today. Over 4.4 million Blackberries were sold with 2.2 million new subscriptions. There are now more than 14 million Blackberry users. 50% of new sales paid for by employers. RIM uses 1/100th the bandwidth of I Phone.  RIM will soon bring out the Pearl 9000, its I Phone killer. Sneak previews have been very favorable. The stock has been a big out performer of Apple this year.

4) One good 'All Clear' signal will flash when the two year Treasury rate exceeds the Fed funds rate, indicating that the flight to safety is over. At the moment the two year is at 1.75%, 50 bp under the 2.25% Fed funds rate.

5) The severity of this recession is nowhere near the 2001-2002 recession. The last time the Fed funds rate was at 2.25% 1.3 million jobs had been lost. This time only 80,000 jobs have been lost. The incredible strength of the multinational, energy, and commodities sectors this time is taking up the slack.

6) Alcohol consumption in the US has been flat for the past ten years, so at least it won't go down in a recession. This makes it a classic defensive, counter cyclical play. The most profitable firms in this arena will be large multinationals benefiting from the rapid growth of alcohol consumption in the emerging economies and have the resources to deal with rising commodity prices. A good example of this is Diageo PLC (DEO) which owns 8 of the world's top 20 brands, including Guinness beer, Smirnoff vodka, Gordon's gin, Jose Cuervo tequila, and the Rosenblum, Chalone, and Sterling vineyards.

7) The U.S. residential real estate market has lost $3 trillion in value in the past 12 months. Foreclosure headlines and horror stories are going to become much worse from here, further scaring off buyers.


I drove through Las Vegas on my way back from my trip. The city has dozens of 'ghost town' neighborhoods on the edge of the desert with hundreds of completed but empty homes and condos built by every major listed homebuilder.  These are cookie cutter homes with 5 feet of spacing between them and no backyards. Tumbleweeds blow down empty streets. Beyond them were thousands of acres of land graded for streets and lots where development has been frozen. The accompanying strip malls, all tastefully done in Mediterranean hues with pleasant, but dusty and windblown outdoor sculptures, are also deserted.  It all looks like some sort of Rod Serling set. Anyone who believes the housing crisis will end soon hasn't been in the field. Maybe I should go to Stockton for a weekend?