December 8, 2008

Global Market Comments for December 8, 2008
Featured trades: (HYG), ($WTIC)

1) The November nonfarm payroll came in at a breathtaking 533,000, almost double the worst case forecast, goosing the unemployment rate up to 6.7%, a 15 year high. The September figure was revised down from minus -283,000 to a gut wrenching minus -403,000, meaning that the economy has lost -936,000 jobs since the Lehman bankruptcy. There are 4.09 million people now collecting federal unemployment checks, a 26 year high. Services took the biggest hit. It is clear that a lot of seasonal Christmas hiring never happened. This figure is consistent with the minus -8.5% GDP rate this quarter alone! It is now looking more like a 1974 type recession than a 1982 type recession. Brace yourself. December will be worse.

2) There is a huge 'crowding out' problem developing in the bond market for next year. A record $650 billion in investment grade paper has to be rolled over, followed by another $50 billion in non investment grade bonds. The problem is that the credit crisis has closed the market for new issues, and the earliest it can reopen is sometime next year. At the very least, interest rates are going to be a lot higher. The market has already severely punished next year's biggest private borrowers, especially highly leveraged REIT's, which are expecting an avalanche of retail tenant bankruptcies next year. In the meantime the Federal government, which is expected to tap the markets for up to $2 trillion next year, is having no problem borrowing whatsoever. The 10 year Treasury hit yet another 50 year low yield yesterday of 2.54%, and the 30 year hit a staggeringly low yield of 3.04%.

3) All 11,000 plus mutual funds tracked by Morningstar are down on the year, a first.

4) After losing 200,000 jobs after the dot com bust, Silicon Valley could get hurt even worse this time. Hewlett Packard (HPQ) has already announced 24,000 layoffs, Sun Microsystems (JAVA) 6,000, and Ebay (EBAY) and Yahoo (YHOO) 1,000 each. Google (GOOG) is rumored to be readying the axe for 3,000.  In the past, new start ups absorbed a lot of these. That won't happen this time because of the complete vaporization of the venture capital market.

5) After their unprecedented collapse this year, corporate bonds, with their senior claims, now offer investors a far more attractive risk/reward ratio than the underlying equities. A great way to play for the possibility that these bonds may outperform equities in the first leg of any recovery is the ETF iShares iBoxx High Yield Corporate Bond Fund (HYG). It has fallen from $103 to $62 in the past year.

6) Now that crude ($WTIC) has bounced off  $40, and rumors are flying about a glut of products, analysts are wondering how much further Texas Tea can fall. The contango situation is the most severe in the 30 year history of the futures contract. This means that you can buy a barrel for $44 today and sell it for one year delivery at $61, storing it in the interim. Normally arbitrageurs step in here to do exactly that, but now they can't obtain financing, and can't find any empty storage if they did. Merrill Lynch put out a report saying that crude could hit $25. Will it hit the 2002 low of $17.85, the 1998 low of $10.35, or the Great Depression low of ten cents? In every case crude fell to the value of the barrel holding it. Has anyone noticed that the value of the government's Strategic Petroleum Reserve (SPR) has plunged by $75 billion since June? That is almost one bail out's worth.  I am lowering my forecast low for retail gasoline in 2009 from $1.29 to 99 cents! Buy that Hummer while it is still cheap:).

QUOTE OF THE DAY

'Beware a 12 division strategy for a 10 division army.' Former Army Chief of Staff Eric Shinseki, fired by President Bush for opposition to his Iraq strategy, and just appointed by Obama as head of the Dept. of Veteran's Affairs.

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