December 2, 2008

Global Market Comments for December 2, 2008
Featured trades: (POT), (MOS), (AGU), ($NIKKEI), (GM)

1) It's official. We are in a recession. And the great news is that we have been in a recession since December, 2007, as I suspected all along. This means that we are 13 months into a postwar recession that averages 14 months. To match the longest postwar recession we would have to go 24 months, or until November, 2009. Proof that we are closer to the end than the beginning. This was all worth 270 points for the Dow.

2) Renee Haugerud of Galtere International Funds, one of the top performing hedge funds this year, says that commodities are only resting now, and will lead the charge in any recovery. The world is now seeing a tectonic shift away from paper assets towards hard assets that has only just started, and has at least six more years to go. Equities peaked last year and bonds are peaking now. Long commodities/short equities should be a core strategy for every hedge fund manager going forward. A tip off for this was the massive rally in commodities linked equities we saw last week. I think she is dead on right. Watch the Ags, energies, and metals, as well as the Ag names Potash (POT), Mosaic (MOS), and Agrium (AGU).

3) By 1982, after a vicious 15 year bear market, equities had become the most hated asset class. Households had cut stocks to only 4% of assets. By 2000, equities were loved passionately, rebounding to 60%. We have now had eight years of subpar stock markets, and analysts are wondering how sparse the allocation will go this time.

4) Nobody knows better how to deal with a prolonged depression than the Japanese. After 18 years of restructuring, companies there may be in the best position to withstand the current deflationary onslaught. Land is carried on the books at ancient acquisition costs, and securities holdings are severely depressed, but all market to market. Since there has been little new investment for a decade, plant and equipment has been largely written off. With the Nikkei 225 at ¥7,883, down 80% from its 1990 peak of ¥39,000, this adds up to a market selling at a severe discount to book value. You effectively get the management, R&D, distribution, and brands of these companies for free. When cash accounts for half of your market cap, you are in great shape to withstand a downturn.

5) General Motors (GM) reported November car sales down a mind numbing 41%, far worse than even the most draconian forecasts. Even Toyota was down 33%. This, on the day when GM goes back to Washington to panhandle for more money. The saddest thing is, they will probably get it. A more productive use of this money would be for congress to disburse it only in one dollar bills, then pile it up in Detroit and set fire to it. That way the frozen city would at least get some free heating.


'The limit should not be the amount of money we commit to a recovery, but the number of ideas we come up with.' Paul Krugman, winner of the 2008 Nobel Prize for economics. Among Krugman's ideas for how to spend immediately: $350 billion for national infrastructure, extended jobless claims, and direct aid to the states on the edge of bankruptcy in order to provide services.