December 3, 2008

Global Market Comments for December 3, 2008
Featured trades: (DRYS) (BDI), (FCX)

1) The ISM non manufacturer's index for November came in at 37.3, down from 44.4. This number is so solidly recessionary, it is almost unbelievable.

2) The stock market looks like the North Atlantic just after the Titanic went down. Dead bodies are floating everywhere, equipped with useless life jackets. I poked one with an oar today, and guess what turned over, but the scavenger ravaged face of Dry Ships, Inc. (DRYS), the Greek dry bulk carrier which has seen its stock drown since June. It has fallen 97% from $120 to $3. In June, it was chartering ships for $200,000/day. Today it chartered one to Cargill for $1,000 (no, there are not three zeros missing from this number). This will not cover the cost of the coffee for the crew. It seems that capital intensive industries, like shipping, don't do very well when global credit markets shut down. The industry is now facing a five year deluge of new ships ordered during the commodities frenzy. This, on top of a complete vaporization of its business, due to the near shut down of iron ore imports by China.  Another indication of the tsunami that has hit this sector has been the complete collapse of the Baltic Dry Index ($BDI) from 12,000 to only 684. Like so many other companies now, DRYS is a huge buy here, as long as it doesn't go bankrupt next year. Women and children first?

Drys.png picture by sbronte

3) Despite the 11 wide releases this past weekend, the movie industry could be facing tough times in 2009. Movie makers earned $10 billion this year from ticket sales, and another $25 billion from DVD sales. But the number of consumers willing to fork out $30 for a blue ray disk, and another $200 for a machine to run it, will certainly decline. A Screen Actor's Guild slated for January will also cut into new releases. Optimists point out that fans flocked in droves to theaters during the Great Depression. But that was when tickets sold for five cents!

4) One big target in the Treasury's desperate reflationary program is the 30 mortgage fixed interest rate, which has stayed stubbornly high, despite 3 ¼% in Fed rate cuts in 16 months. It is doing this through massive buying of long dated instruments. Mortgage rates are being dragged down, kicking and screaming all the way, by sinking long bond rates, which hit new 50 year lows yesterday. Expect the 30 year rate to drop 100 basis points to 4.5% and help put a floor under the housing market. This is where monthly mortgage payments become competitive with rents. Mortgage Bankers Association figures say the strategy is working. In the last week of November a sudden 50 bp drop in rates to 5.50% caused new applications to soar to double the previous record. Hold off on that refi!

5) Leading copper producer and former hedge fund darling, Freeport McMoran (FCX), suspended its dividend today, knocking the stock down 20%. Shriveling demand from China has cut the price of the red metal from $4.10 to $1.50 in a heartbeat. China shut down its economy for the Olympics, but lost the directions on how to restart. Boom to bust in four months, and this is going on everywhere. This is a huge buy on the rebound.

FreeportMcMoran-1.png picture by sbronte