February 18, 2009

Global Market Comments for February 18, 2009
Featured Trades: (NAT)

1) Obama's mortgage bailout package is out, and the market didn't care, hitting new six year lows. After wading through pages of arcane, mind scrambling detail, it appears that $75 billion will be made available to distressed homeowners to cut mortgage payments to 31% of their income. It allows cram downs, where bankruptcy judges can reset loan principal amounts. The plan only applies to conforming loans of $625,000 or less, which account for 50% of the $12 trillion in debt outstanding. This means that only 4-5 million homeowners will qualify, who own less than 7% of the US housing stock. Homeowners with jumbo loans in CA, NV, NY, AZ, and FL, who are now seeing default rates of 9%, need not apply. At best, the plan is merely a 'feel good,' political measure that will do nothing to halt the downward spiral in home prices.

2) An increasing number of companies are claiming that the current financial crisis entitles them to trigger 'force majeure' clauses to get out of contracts. Hoosier Energy successfully did so to get a stay on $120 million in loan repayments to John Hancock. Now Dow Chemical is attempting the same to void their $15.4 billion takeover of Rohm & Haas, as is Donald Trump in getting out of a $40 million loan guarantee for a condo tower in Chicago financed by Deutsche Bank. At the very least, the threat of litigation is forcing counterparties to the table to reconsider terms.

3) George Soros, who is now approaching 80, is about to publish another book entitled The Crash of 2008 and What It Means. Conditions are now worse than during the Great Depression, when total credit peaked at 160% of GNP. It was at 365% a year ago, and may reach 500% before we turn a corner. Obama's fiscal stimulus package is great, but is just a down payment. A new mortgage system has to be built out of the ashes of the old, where originators have to absorb the first 10% of any ensuing loss. The banking system needs to be recapitalized, with bad assets diverted into a government financed 'side pocket', much like the large, illiquid hedge funds are doing. The government needs to use taxation to guarantee a $70 floor for oil prices to spur an alternative energy industry. The international financial system needs to be remade through the creation of new, American sponsored 'Standard Drawing Rights' (SDR's) which the IMF can use to support weaker emerging economies. It is all well thought out. This summary will save you from having to wade through George's normally dry, turgid prose.

4) With 50 million barrels of crude in storage at sea, tanker companies have the buffer they need to weather the first globally synchronized recession. As long has crude for delivery in a year trades at a $10-$15 premium to the spot price, known as contango, this fleet will grow. Slow steaming, or cutting cruise speeds from 15 to 13.5 knots to reduce fuel consumption, is having the effect of taking another 35 million tons of tanker capacity off the market. With a 10% yield, Nordic American Tanker Shipping (NAT) is now the highest dividend paying stock listed on the NYSE, and gives you a pretty safe way to play this anomaly. The stock has no debt, $500 million in unused credit lines, and a bargain PE multiple of 9 X.

NordicAmerican-1.png picture by sbronte

5) Some 20% of US electricity comes from nuclear power. Half of that is powered by fuel made out of reprocessed Russian nuclear weapons which we bought from the old Soviet Union. I didn't know that. Talk about pounding swords into plow shares!

6) Here are the top internet search terms for December. Amazingly, 0.6% of all Internet traffic was looking for Santa.
Rank     Search Term     Volume
1.     santa tracker     0.04%
2.     obama shirtless     0.03%
3.     norad santa tracker     0.02%
4.     track santa     0.02%
5.     after christmas sales     0.01%
6.     eartha kitt     0.01%
7.     michael jackson     0.01%
8.     mnemonics     0.01%
9.     www.itunes.com     0.01%
10.     itunes.com     0.01%