December 1, 2008

Global Market Comments for December 1, 2008
Featured trades: (WTIC)

1) The good news is that the Black Friday retail sales figures came in better than expected, up 7% according to some surveys. The bad news is that designer goods were sold at flea market prices, jumbo flat screen TV's were given away for half, and that all of the stores slashing prices were losing money big time. Friday offered the greatest sales promotions ever. What's worse, it appears that many consumers finished their Christmas shopping on Friday. China's purchasing managers index indicates that the economy there has ground to a complete halt. It didn't help that Oppenheimer's Meredith Whitney predicted that credit card companies would cut credit lines by $2 trillion over the next 18 months. With traders anticipating the worst non-farm payroll number in decades this Friday, more than minus -300,000, it was all enough to chop 700 of the Dow. Treasury bond yields tumbled to 50 year lows across the board.

2) Last week was the best for the stock market since 1932. Today was the worst December 1 since 1929, and I am afraid that this will not be the last comparison with 1929 we will make this month.

3) Obama's appointment of former Fed governor Paul Volker as head of his special economic team tells you more than it says. It means that the president elect understands that the biggest challenge to his administration during the 2012 election will be reigning in double digit inflation triggered by today's massive liquidity creation. Who better to do this than Volker, the last living Fed governor to break the back of high inflation in the US. Warning: He did this by wringing every last drop out of credit growth, and jacking up short interest rates to 18%.

4) The hotel industry is now facing a perfect storm.  Occupancy rates have fallen by 14 consecutive months, while supply is up 2.4%, well above its long term trend growth rate. Business travelers are down 2-3%, leisure travelers are down 6-7%, and international travelers have been knocked out of the box by the suddenly stronger dollar. What corporate business remains is seeing prices beaten down by customers desperate to cut their own costs. Only the convention business remains healthy, because bookings were made one to three years ago, back in the boom days. Hotel managers are trying to stop the bleeding by adding the innocuous little fees that I always hate, such as for mini bar restocking, baggage storage, early check ins, and late check outs.

5) The market is rife with stories of distress in the global crude markets, and a break below $50 is a gimme. OPEC has proven politically unable to make sufficient production cuts. Virtually all storage facilities are now full, and China has become a net exporter of gasoline for the first time. Shell just chartered a 311,000 ton tanker, the Front Crown, for $60,000/day to store crude it is unable to deliver. Because of the credit freeze, it now costs 17%/per annum to carry a long position in the futures market. Lat week whole gasoline futures crashed below $1, meaning the Bay Area retail prices may fall to $1.29/gallon by early next year!