December 22, 2008

Global Market Comments for December 22, 2008
Featured trades: (SKS), (WMT), (TGT), (JWN)

1) Traders were expecting a Santa Rally today and got a Grinch instead, with a three digit decline in the Dow. Markets were buzzing about a piece on the front page of the Wall Street Journal today announcing the impending demise of the commercial real estate market. More than $160 billion in debt is coming due in 2009, and $530 billion in the next three years, and no secondary market for such debt currently exists. The TARP grows again.

2) Retailers are hunkering down to survival mode as the Christmas shopping ends, depriving them of their last opportunity to dispose of inventory at retail prices for the foreseeable future. In a market where the only thing that talks is price, big discounts this month are to be followed by even better buys next month. Saks Fifth Avenue (SKS) is already holding 70% off sales. There is a seismic shift going on, seeing shoppers flee in droves from high cost luxury products sold at Saks and Nordstrom (JWN), towards the bargain basement at Walmart (WMT) and Target (TGT). In fact, Walmart is the only Dow stock that is up this year. Store buyers have adopted a 'less is more' philosophy, giving ultimatums to suppliers to cut prices or else. Retailers are slashing credit lines on their own credit cards to dodge an explosion in uncollectable receivables. Brand consolidation is another common cost saving strategy. Despite the best managerial efforts, many companies are headed for the morgue. Any LBO with debt due in 2009 is toast. The International Council of Retailers expects 73,000 stores to close in the first half of 2009, laying off 600,000 workers. This is not a happy place to be right now.

3) Credit Suisse believes that there will be 6 million more foreclosures over the next four years. The $1 trillion subprime crisis is now behind us, with most resets completed by the end of this year. One Lehman pool floated two years ago saw 43% of these borrowers default. But there is another $1 trillion plus in Alt-A and option ARM loans still out there, and the resets on these don't peak until 2010. This means that residential real estate will be a black hole for at least another five years. The median price of a home in Northern California has dropped from $629,000 to $350,000 in the past year, an eight year low.  It's a great time to rent!

4) With more revelations of truly unbelievable losses over the weekend, it is clear that Bernie Madoff has done more damage to the State of Israel than 50 years of terrorist attacks by Hamas, Hezbollah, and the PLO combined.

5) The average life of a computer connected to the Internet, before it is destroyed by a virus, worm, or Trojan horse, without any security software at all, is 16 minutes.

6) Using the Black-Schoales options prices model, someone has calculated that the Treasury has earned an unrealized $8 billion profit in its newly acquired warrant and preferred holdings in US banks so far.

7) If 2008 was the year from Hell for hedge funds, 2009 will be worse for venture capital funds, which will see their most Darwinian year ever. Since there is neither M&A nor IPO's now, the exit for these investors is closed for the foreseeable future. All management attention is being focused in helping existing portfolios of companies survive with what they have by squeezing out marginal revenues and cutting expenses to the bone. What little new capital that is trickling in is from Asia, and that is going mostly into clean technology and life sciences. Information technology is now an orphan. Countless start ups starved of cash will go under, and most likely take several venture capital funds and management firms with them. Not good for Bay Area commercial real estate.


'Engles never flew on an airplane; Stalin never wore Dacron,' said the late Chinese premier Deng Xiaoping on launching his economic reforms 30 years ago.