December 19, 2008

Global Market Comments for December 19, 2008
Featured trades: (UAUA), (LUV), ($XJY)

1) Detroit gets $17.4 billion in life support, and the markets go to sleep. It's a Band-Aid over a stab wound through the heart. Industry analysts figure the real cost of a desperately needed ground up remake of Detroit is closer to $125 billion. Toyota announced its first loss in its 71 year history. The Bank of Japan cut interest rates to 0.1% to stem the furious inflow of capital by panicky Japanese banks dumping foreign investments, which has driven the yen ($XJY) up to a decade long high of ¥87.

2) Crude at $33! Who would have thought it possible? With gasoline on its way to 99 cents a gallon, it's back to gridlock as usual in the San Francisco Bay Area. The morning back up at the Bay Bridge extends to an hour again, and there are never any parking spaces at the BART station. Hummer drivers are no longer wearing their disguises. A lease on a Prius has gone for $550/month in July to only $200/month. United Airlines (UAUA) is now considered a model of management savvy, while those irresponsible dopes at Southwest Airlines (LUV) recklessly hedged three years worth of fuel consumption at $51/ barrel. That's the way the markets are right now; hero one moment, goat the next.

3) If you think the 77% collapse in crude is a big move, look at it in Euros and the yen. Texas tea denominated in Euros has plunged 79% since July, and a staggering 87% against the yen. Crude has dropped from €238/barrel to €45/barrel, and from ¥16,600/barrel to ¥2,870/barrel.

4) The Federal Reserve says that the net worth of Americans has shriveled by $7 trillion in the past year. According to, a residential real estate website, the value of US housing stock alone has dropped by $1.9 trillion in the first three quarters of 2008. One out of seven mortgages is now under water.

5) With the Fed now committed to unlimited buying of Fannie Mae and Freddie Mac long dated paper, interest rates on conventional 30 years mortgages have suddenly hit an all time low of 5.17%, and are almost certain to drop below 4% quickly. This is consistent with the Japanese experience, which saw mortgages drop to 3.5% with the discount rate at zero at the bottom of the Japanese deflation in the late nineties. The no brainer for consumers here is to refinance and lock in 30 year fixed rates when we hit the 3% handle, if they can, because we will see 12% mortgage rates after inflation rears its ugly head.

6) New York's serendipitous governor David Paterson is struggling with the decision of who to appoint to fill Hillary Clinton's vacated Senate seat. President John F. Kennedy's daughter Caroline Kennedy is the emotional favorite, but is too inexperienced. New York State Attorney General Andrew Cuomo has paid his dues, but doesn't inspire the masses. Want to hear an outlier? Put underemployed Bill Clinton back to work! Everything else bizarre has happened this year, so why not? You heard it here first.

7) Senior management at Credit Suisse was offered the choice of a fruit cake or an illiquid collateralized debt obligation derivative for a Christmas bonus. They ran out of fruit cakes in the first hour. Really!


'The depression is over,' said President Herbert Hoover in May, 1930. It still had eight more years to run.