April 2, 2009

Global Market Comments for April 2, 2009
Featured Trades: (LITHIUM), (SQM), (AMTD), (SCHW), (SWIM)

1) See? All it takes was a little accounting rule change, and Great Depression II will go away. At least that's what the stock market thought today, surging 300 points and blasting through 8,000 in the Dow, up 26% from its March 9 low. The only problem with this is that it was an absence of market to market rules that allowed Japan to lose a decade of economic growth. Investors and auditors will always assume the worst about asset valuations, unless proven otherwise. That's what happened in Japan. Once the kneejerk short covering finishes, look out below, at least for the banks.

INDU.png picture by sbronte

2) If we do move from a carbon to a lithium based economy, what are the implications? Will we all become mellow? Politicians, industrialists, and environmentalists who see battery powered vehicles as the wave of the future are overlooking the fact that 50% of the world reserves of lithium are found in impoverished, landlocked Bolivia. This is a country that until now was best known for killing off famous foreigners (Che Guevara, Butch Cassidy and the Sundance Kid), and being the source of a new form a venereal disease. Lithium ion batteries are four times more efficient than the current generation of nickel cadmium batteries, and are essential for electric cars to finally become economically viable. But now that the country finally has something the world wants, nationalism is rearing its ugly head. Local politicians see their country as the Saudi Arabia of the highly corrosive, toxic, reactive metal, and are already discussing ways to restrict access. Will La Paz become the headquarters of OLEC, the Organization of Lithium Exporting Countries? The only other supplies are to be found in Chile, Argentina, Australia, China, and Nevada.  Will American oil company executives be programming their cell phones with the 591 country code? Should the US invade to insure supplies? Iraq worked didn't it? The best way for opportunistic investors to play this is to buy Sociedad Quimica Y Minera (SQM), Chile's largest producer of lithium.

3) The real estate disaster once known as Las Vegas, where 27,000 homes are for sale, continues to probe new lows. Hotel vacancy rates have hit 20%, and you can now get a four day weekend at a top hotel there, including flights from San Francisco, for $150! Construction has halted on the $5 billion Echelon Resorts for lack of financing, leaving a major eyesore on the city's skyline. MGM Mirage's massive City Center complex continues, butting is being sued by its partner Dubai, and is teetering on the edge of bankruptcy.  Sitting pretty is the Palms, which is just being completed, and pre sold all of its condos two years ago when the market fever was still alive. While 10% of the buyers have walked away from their deposits, the owners are converting these to luxury hotel rooms.

4) Online brokerage houses are perfectly positioned to sift through the wreckage of their industry and pick up a bigger market share. One of the few safe havens in the financial sector, they dodged the bullet because they are pure fee collectors, don't have proprietary trading desks, don't take risk, and didn't use leverage to invest dubious high yield paper to artificially boost earnings. This approach is highlighted  by TD Ameritrade's (AMTD) takeover of competitor Thinkorswim Group (SWIM) for $600 million. The move gives AMTD access to a first class online trading platform in options and an expanded customer base. Another good pick in this area is Charles Schwab (SCHW). Certainly the market thinks so, with the stock up 48% since March 9.

sSCWAB.png  picture by sbronte

5) After last year's carnage, you can expect the remnants of the hedge fund industry to split in two. One group will inherit large, illiquid fixed income positions, like convertible bonds and subprime CDO's, and evolve into private equity funds, which they should have been all along. The rest will retreat to trading large liquid global positions that did well during the nineties, offering investors quarterly redemptions they now demand. Fees will fall across the board. This is how hedge funds will cope with a new world that is transitioning from excess capital to a capital shortage.

6) High economic growth rates and a soaring stock market during the eighties were driven by the enormous productivity gains made possible by the personal computer. The nineties boom was driven by the miracle of the Internet. A big chunk of the growth this decade sprang from artificial and ephemeral real estate gains, which have since gone, poof! There is nothing to replace it until we invent something new. Make energy a national defense issue. After all, the PC (or the microprocessor that drove it) and the Net (or Darpanet, as it was then known) were both the stepchildren of taxpayer funded defense research. Launching a Manhattan Project for alternative energy and transportation could well give us the next decade's economic driver we are searching for. The building of a cleantech industry and a smart transmission grid could deliver the millions of jobs the new president has been promising. That would move the engine of US growth out of poorly managed Detroit, foreign crude dependent Houston, and Heaven help us, bureaucratic and connection ridden Washington, to entrepreneurial Silicon Valley. It certainly would be a better use of money than rescuing bad stock and bond investments. Obama says that energy is a priority, but will he make it the top priority? He needs to take the great leap to make us a carbon free economy. I hope someone close is telling him this.


'It's tough to make predictions, especially about the future,' said former New York Yankees baseball coach Yogi Berra.