August 26, 2008

Global Market Comments for August 26, 2008

1) Crude pops $6 and natural gas leaps 42 cents to $8.25 as hurricane Gustav turns towards the oil and gas producing facilities in the Gulf of Mexico. One mathematical model has a category four hurricane hitting New Orleans in 3-4 days.

2) The S&P case-Shiller home price index for June fell 15.4% YOY. San Francisco came in at -23.7% YOY. Even though homebuilders have cut back construction dramatically, foreclosures keep dumping more properties on the market, driving prices down.

3) The ten year return on the S&P 500 has been a meager 3%. Add in dividends and it rises to 23%.

4) The top 1% of taxpayers in the US earn 20% of the income, but pay 40% of the taxes. Obama plans to raise the capital gains tax from 15% back to the Reagan level of 28%.

5) Since gas prices spiked people are driving less and driving slower, causing the accident rate to drop precipitously. Highway deaths are now running at an annualized rate of 33,000, the lowest since 1961. Car insurance rates will fall. US crude consumption has declined by one million barrels/day in the past year which is equivalent to 42% of our yearly imports from the Persian Gulf.

6) Natural gas (NG) hit my short term target of $7.75, down 42% from its $13.50 high two months ago. If you think this is an unusual move just look at a six year chart for NG. It is the third such move. Welcome to the natural gas market, where the ante is a pair of balls of steel. Stand aside for now. Storage is now above the five year moving average. If there are no more hurricanes after Gustav this season, and crude visits the eighties, you could see NG break below $7. Worse, the crude/NG ratio is now at an all time high of 14.7.

7) The commercial real estate debt market will be pushed closer to the brink on September 1. That is when an interest payment is due to Deutsch Bank on a $225 million loan to Riverton, a 1,232 apartment complex in Harlem. The owners used aggressive financing to overpay for a complex in 2005 where 93% of the units were subject to New York rent control. With market values now half of what they paid, the owners may find it expedient just to default and walk away from the project. The move could trigger a panic in the market for the securities backing similarly leveraged commercial deals, shut the window on new developments, and open the next chapter of the credit crisis. Terms have already dramatically tightened. In the past year commercial loan to value has dropped from 95% to 65%, spreads have widened from 75 basis points over Treasuries to 300 bp, and the volume of deals fallen from $3 billion in 2007 to only $1.5 billion so far this year.

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