December 16, 2008

Global Market Comments for December 16, 2008
Featured trades: (GM), (GS)

1) The Consumer Price Index fell by 1.7% in November, the biggest drop since records began in 1947. New housing starts plunged to an annual rate of only 625,000, an all time low. The replacement rate is 1.2 million units. This helped force the Fed to cut rates by 1% to zero, a historic low. Traders were stunned into momentary inaction, much the same way a stick of dynamite thrown into a pond paralyzes the fish. Even the most uber doves were not forecasting zero rates until sometime next year, after the economy worsened considerably, and all other options had been exhausted. The Dow rocketed 359 points. This guarantees that 2009 will be a healing year for the economy and all asset classes. Zero interest rates make it a whole new ball game.

2) Wall Street was also invigorated by the news that Goldman Sachs (GS) lost only $2.1 billion in Q4. The big hits were in credit products and real estate. It shrank its balance sheet by 18% to $885 billion, an urgent deleveraging. The company sees its best opportunities going forward in international business. It also plans to cherry pick through the smoking wreckage of the US regional banking system to make selective acquisitions to boost its deposit base, an important direction, now that it is a bank. The stock jumped 7% on the news, but is still selling at a 25% discount to book value. The cream of Wall Street used to work their whole lives to be able to buy this stock at book. Now the public can get it at a generous discount. Is the book real?

3) There are now 50 million barrels of crude in storage in tankers at sea, equivalent to 2 ½ days of total US consumption, and five days worth of imports. If OPEC doesn't cut production dramatically and soon, the price will hit $30/barrel. The problem is that non OPEC member Russia can't cut output without enraging Putin's political power base. Russia has to pump as much as it can to support the Ruble.

4) I'll tell you what GM's problem is. My dad was a religious lifetime GM customer, buying a new Oldsmobile every five years. Once he even flew to Detroit for a factory tour and drove his new prize home. Thirty years ago I told him he was doing GM no favors by buying their cars, and the only way to force them to improve a deteriorating product was to buy better made German and Japanese vehicles. This was right after the State of California had forced auto makers to install seatbelts on new cars. Airbags and ABS brake systems were still years away. His response, 'I didn't fight the Japs for four years so I could buy their cars.' (He was a Marine). GM's problem is that my Dad passed away seven years ago. Of the original 17 million WWII veterans, 1,500 a day are dying, and there are only 1.5 million left. All of them loved Detroit because it built great Jeeps, Sherman tanks, and half tracks. Their kids prefer German, Japanese, Italian, Korean, and soon, Chinese, and Indian vehicles. It is no coincidence that GM's problems really accelerated with the passing of the 'greatest generation.'

5) Stability is in imminent threat of breaking out all over. Spreads on the best quality junk bonds are finally starting to narrow. Commodities have seen a week of moderate trading. The metals have gone quiet. And we have seen two back to back moves in the Dow only in double digits for the first time in three months, as forced hedge fund selling abates. Part of this explained by the year end wind down. But it is also hinting at the financial market crisis is finally ending. Zero interest rates will be a big help.

6) The Madoff scandal will lead to the certain death of the Fund of Funds industry. This niche created feeder funds which at the peak raised one third of the $2 trillion of all hedge fund assets. They offered high net worth clients and institutions manager selection, due diligence, and performance monitoring in exchange for a 1% fee on top of the 2% and 20% management and performance fees charged by the end hedge funds. Up to half of all FOF money was thought to be invested with Madoff, which proves they were sleeping more than risk monitoring.  Apparently, good due diligence involved just a round of golf at a prestigious country club. On a good day this whole industry was a fee hungry rip off, and its disappearance will not be missed.