April 8, 2009

Global Market Comments
April 8, 2009
Featured Trades: (PLD), (TBT), (PHM), (CTX)

1) I bumped into Jim Lehrer last night, the legendary anchor of 'The News Hour With Jim Lehrer' on PBS, as he breezed through the San Francisco Bay Area promoting his 22nd novel, 'Oh, Johnny'. The ex-Marine, whose first big story was covering the Kennedy assassination in Dallas, had some cogent observations on the current demise of the US newspaper industry.  Print media have traditionally been the originators of the news, the guys who went to the city council meeting and took copious, accurate, notes. For this, the paper got full page ads from the local car dealers and every other retail business. Now the car dealers are going under. The proliferation of new media, from radio to TV, the Internet, and smart phones means that the monetization of this content has moved downstream to be reaped by others. Talk radio, weekend news programs, comedy shows, even congressional debates, and yes, blogs (guilty), are feeding off of this news cornucopia for free. The originating newspaper maybe gets a penny of each dollar of revenue spawned by their stories. Newspapers now have no choice but to cut costs by firing journalists and moving online. Thomas Jefferson said that 'an informed electorate is essential for a democracy'. The big question is, when all the journalists are gone, where will the news come from? I have suspected all along that Truth, Accuracy, and Neutrality will be the big casualties of all of this. They will go the way of the full service gas station, free check in luggage on airlines, and home delivery of newspapers by teenage boys on bicycles.

2) Pulte Homes (PHM) is buying Centex (CTX) for $1.3 billion, net of all the debt they are acquiring in a stock only deal. Centex stock is up 33% on the news. This is a bold move in that it creates the nation's largest home builder.  I wonder how many finished, but unsold houses they are getting? And undeveloped land? A spate of takeovers like this, where the strong take over weak, overleveraged players, consolidating the industry, is a classic sign of a market bottom.

3)  If stocks sell off from here you should get a rally in Treasuries that will be ripe for selling into. There is no way that investors are being compensated for their risk with yields at these levels, especially with massive global government reflationary efforts guaranteed to bring a resurgence of inflation. I think the futures contract on the long bond will collapse from 127 now to inder 70 in three years, once hyperinflation hits. With the leverage offered by a futures contract, the returns will be huge. However, this is not a riskless trade. There have already been several rounds of stop loss buying by traders who jumped into this strategy too early, as unimaginable buying kicked in at 120, 125, 131, 136 and finally 141. In Japan the ten year bond eventually hit a low of 0.46%, making our ten year at 2.85% look incredibly expensive. That works out to a futures price of 200 or more. Of course we are not Japan. The Treasury has done more to repair things in 60 days than Japan did in 15 years, and Japan has still not adopted full mark to mark accounting. Some 19 years after their bubble burst, the country is still seeing subpar growth, and ten year yields have made it back up to only a measly 1.25%. There are also constant games going on in the bond futures markets like expiration plays, engineered short squeezes in the underlying, and bogus news leaks. PIMCO, the Newport Beach based Pacific Investment Management Company, the world's largest private bond investor, plays this market like a violin. Still, I think it's worth a shot. Take another look at the Power Shares Lehman 20 year plus ETF (TBT), which gives you a 200% short on the sector. This will be the last bubble we can short into for a long time.

TBT-3.png picture  by sbronte

4) Jeffrey Schwartz, for the former CEO of the global logistics and warehouse firm Prologis (PLD) is not looking for a quick recovery of the economy, and sees a lot more pain for his industry. The firm suffered a near death experience last year and was only able to extricate itself with the sale of some Asian assets.  Prologis is the world's largest developer of commercial warehouse space, and a leading manager of REIT's. The Denver based company employs 1,500, managing 2,898 properties, totaling 548 million square feet in 115 countries. It had been a highly leveraged call on the growth of international trade, which is now imploding with unprecedented speed. PLD's growth focus is still on China, where it has 38 million square feet of space, and land commitments to double that. It is investing $1 billion there over the next two years, counting on a government commitment to support the logistics sector. Investors certainly believe it. The stock has roared 57% in the last ten days. The company has announced that it is using the rally to issue new shares to wisely reduce its insanely high levels of debt. This will dilute existing shareholders by 50%, but hey, half of something is better than nothing, isn't it?

PLD.png picture by sbronte


'You can't swing a cat in the US without hitting a barrel of oil,' said Stephen Schork of the Schork Report, an energy newsletter.