February 13, 2009

Global Market Comments for February 13, 2009
Featured Trades: (ABX), FCX), (GOLD)

1) We learned yesterday that not only does the Obama administration watch the stock market carefully, it also has a technical analyst on board. We were exactly at a crucial support point on the charts when the Treasury leaked the home mortgage subsidy plan, triggering a ferocious 300 point short covering rally in the Dow. A couple of points lower, and a deluge of stop loss sales would have been triggered, taking the market down 500. The message from the Feds is that if you want to play on the short side here, do so at your own peril. Suddenly, running a hedge fund has become harder, as if we didn't have enough on our plate already.

2) If you have been regularly reading my letter you should by now have sacks of gold American Eagles stacked up against the walls, your portfolio is brimming with gold mining stocks like Barrick (ABX), Freeport McMoran (FCX), and Rangold Resources (GOLD), and your safety deposit box is groaning from the weight of the gold bars it is holding. The barbaric relic is now up 20% since I recommended it in December, and you are no doubt wondering how to spend your new found fortune. Gold has since become the trade of the first quarter, with the open interest on call options on the Street Tracks Gold Shares ETF (GLD) exploding from 445,000 to 1.1 million in just the past few weeks. Options implied volatilities are suggesting that gold could hit $1,115/ounce by June. Oops, you forgot to buy the yellow metal? Use $50 pullbacks to get long. Investors will continue to pour into the sector, since it is one of the few things the government can't create more of with a printing press.

GLD.png picture by sbronte

3) New Hampshire's Republican Senator Judd Greg withdrew his nomination for Commerce Secretary, the second such to go down in flames. The bribes he must have gotten not to switch sides had to be enormous. Why is the administration having difficulty filling this position at the height of the worst financial crisis in 70 years? Who wouldn't want to take the job of social director on the Titanic?

4) Noted economist David Hale sees Obama's stimulus package and bank bailout paving the way for a US led a global economic recovery from this summer. The plans will act as an insurance policy against a worsening of conditions, and may be worth 3% of GDP growth. The spending is necessarily back ended because of the time delay needed by large projects. It is spread out over the following years:

2009-$170 billion
2010-$356 billion
2011-$174 billion
2012-$48 billion
2013-$25 billion
2014-$24 billion
2015-$11 billion

Q1 GDP could fall by as much as 6% as a huge inventory liquidation ensues. The new TALF will make available $1 trillion to private investors cheaply to buy CDO's backed by credit card, student loans, and home mortgages. It is significant enough to have a major impact on prices, although the market has not digested this yet. The program will preclude any further major bank failures and lead to a rally in bank shares, although many small banks will still go under. The collapse of the global auto industry, with sales falling from 50 million annually to 39.5 million in a year, has been especially damaging for export economies. Japan will see -11% GDP this year, the worst since WWII, followed by -6% for Germany, and -4% for the UK. What to buy now? Gold, which could see new highs this year. What a surprise! Net, net, it is a pretty upbeat, but realistic analysis.


'The rate of profit is always highest in the countries that are going fastest to ruin,' said Adam Smith in The Wealth of Nations on the dangers of 'overtrading.'