April 6, 2006
Featured Trades: (CHINA), (CRUDE), ($WTIC)
1) Deutsche Bank's former banking analyst Michael Mayo sucker punched the market today, putting out a report ominously entitled 'The Seven Deadly Sins of Banking' listing all 11 major banks as 'underperforms' or 'sells'.Â Talk about closing the gate after the horses have bolted. At one point the Dow was down 150. Mayo says that banks are carrying loans on their books at a wildly optimistic 98 cents on the dollar, and that real losses will exceed those seen in the Great Depression. We have only seen the tip of the iceberg of losses from credit cards, commercial real estate, and corporate loans. The report tells you how much the landscape has changed. New, independent research boutiques used to suck up to clients to garner fee business. Now they take them out behind the woodshed and beat them senseless. If true, you can forget about buying stocks. Instead you should be loading up on canned food, bottled water, and lots of ammo.
2) The Manhattan residential market is now in free fall, after holding up better than every major market in the country for years. Rents have fallen up to 25% since the Lehman bankruptcy in September, dragging down condominium and co-op prices almost as fast. Hardest hit have been units priced in the $1-$2 million range that appealed to up and coming Wall Street traders. This class of newly unemployed former owners is now fleeing the Big Apple en masse. The stratospheric end of the market, the mega mansions and penthouses with those fabulous Central Park views and live-in nanny suites in the $30 million on up range, are still holding up. With industry job losses this year expected to exceed 100,000, expect this downtrend to continue.
3) Will people pleeease stop incessantly talking about the possibility of China dropping the dollar as a reserve currency? What else are they going to use? Monopoly money? Taiwanese dollars? Collectable postage stamps? At nearly $2 trillion, the Middle Kingdom's reserves are so enormous that no other currency in the world could accommodate the switch, and no other security offers the necessary depth and liquidity but Treasury bills. Chinese attempts to buy anything in size causes its price to immediately skyrocket, such as we saw in the relatively Lilliputian commodity markets last year. And really, how like is it that China embarks on policies that quickly halve the earnings ofÂ the country's exporters, as well as its 30 year hoard of accumulated savings? The demise of the dollar has been predicted more often than the ditching of Microsoft's Windows as the global PC operating system, and is just as likely.Â Hate the greenback as much as you like, but there just isn't any other alternative. I have been hearing these arguments ever since the US went off the gold standard in 1973. First there was a perennial Arab threat to price crude in a basket of currencies. Gee, they never seem to complain when the buck is going up. Then there was the speculated emergence of the 'Yen Block', in the eighties, back when Japan was dominating international trade and the yen was bumping up against Â¥80 to the dollar. Remember the book 'Japan as Number One? Ha! Double Ha! Then we got all that European whining after the launch of the euro when the weak dollar was everyone's one way trade. Let's face it, Europeans hate using someone else's currency as the primary reserve instrument. Before the dollar, sterling was in widespread use and was equally despised. So rather than waste time discussing this issue anymore, let's talk about something more important, like which of those two flies over there will jump off the wall first.
4) Daniel Yergin of Cambridge Energy Partners says that crude prices will stay in a $40 to $60 range for the foreseeable future. The author of the Pulitzer Prize winning 'The Prize', the best business book I have ever read, believes the recent 26% rally in the stock market is what dragged crude up from $35 to $54. Another downdraft in stocks, or a realization that the recession will be longer than expected, could take crude back to $40 in a heartbeat. Inventories are at a 16 year high, with possibly 80 million barrels at sea, as demand has shrunk from 86 to 83.5 million barrels a day over the last two years.Â Spare capacity is now huge. Don't expect to break out of this range until a recovering economy eats into these supplies, and inflation makes its inevitable return. Then all commodities will roar, not just crude.
'You can observe a lot just by watching,' said baseball great Yogi Berra.