December 12, 2008

Global Market Comments for December 12, 2008
Featured trades: ($RTSI), (GM), (F)

1) It looks like the Senate's unequivocal refusal to bail out the Big Three is forcing Paulson to redefine the TARP mission yet again. There are just too many parts suppliers in battle ground state Ohio to think otherwise, even though the bailout is diametrically opposed to administration ideology. It's worth $15 billion to punt the Issue to Obama, and assure the actual chapter 11 filings happen on his watch. The derivative effects of a bankruptcy are just too dire to contemplate. General Motors (GM) and Ford (F) equities and bonds were classic widow and orphan investments. If we learn nothing else from this, it's that unions make lousy co-investors.

2) Sharply lower energy prices drove the November PPI down 2.2%. Retail sales dropped  by 1.8%, the fifth down month in a row. The good news is that gas at my local station is down to $1.69/gallon. The bad news is that I had to trade my car for a 50 pound sack of beans and a couple of cases of Spam in order to eat this winter.

3) There are some fascinating things going on in global capital markets which are crucial to everything you do. Guess what the best performing stock market in the world has been since the Lehman bankruptcy? Shanghai, which has actually gone up since September 15. Then when terrorists hit Mumbai two weeks ago, slaughtering hundreds, everyone expected a total meltdown of the Indian market. Instead, it was up 2%. Today we have the big three threatening bankruptcy, the Senate refusing a bail out, and the uncovering of a $50 billion mutual fund fraud, and the Dow is up. What all of this is saying is that global equity markets are sold out, that no one has any stock left to sell, and that things have stopped getting worse. Throw bad news on a market, and if it doesn't go down, it will go up. That suggests that this, right here, this nanosecond, is the 'V' bottom for the economy. The economic data won't show this for another six months, but global stock markets are sensing this now, and will start to rally once we are into the New Year.

4) The collapse of crude has had a double whammy effect on Russia, knocking the wind out of both the stock market and the ruble. The RTS Index may stabilize around here at the 600 level, but the ruble could drop another 25% next year. The country has used up $200 billion of its $500 billion of reserves in just five months supporting the Russian currency to stave off a surge in imported inflation. So far the Russian consumer, the bedrock of Putin's political support, has not been affected because they don't borrow (only 4% of Russians have mortgages), and don't own stocks (70% of RTS trading is by foreign hedge funds, the rest by a handful of oligarchs). The income tax is only a flat 13%. Putin is cleverly using the crisis to buy back natural resource monopolies from heavily leveraged oligarchs on the cheap.  I think Russia will be a huge buy next year, along with the remaining BRIC's, which should be at the core of any long term portfolio.

5) This is truly the year from hell for big hedge funds, which will see assets fall 50% from $2 trillion to $1 trillion through a combination of market losses and redemptions. The mega hedge fund model is truly broken. Monster fees and hockey stick performance bonuses that ran up to 50% are headed for the scrap heap of history. Surviving funds are splitting into two parts. One will hold illiquid highly leveraged junk debt positions where redemptions have been frozen, and can only be unwound over a period of years, essentially becoming private equity funds. The remainder will go to smaller, nimble long/short trading strategies in large liquid markets like currencies, Treasuries, and large cap equities where the older funds sprang from. Dating back to the days when hedge funds were run out of garages, guest bedrooms, and attics, and $25 million was considered a lot of capital, I have to tell you that these developments are way, way overdue.