February 1, 2008

Market Comments for February 1, 2008

1) If you are a breathing, sentient being in the universe you have already been inundated with news of the Microsoft/Yahoo takeover. I will just make a couple of points:
a) This could spark a takeover boom in the technology area. Time Warner and AOL are already moving on potential Google takeover bids.
b) This in turn could lead to a takeover boom across all industries which will put a floor under the market. Prices are certainly cheap enough. They are calling it the free 'Gates put'.

2) The really big news today which was totally overshadowed by Microsoft, is that the Non-Farm payroll for December came in at -17,000. A 75,000 increase had been expected. This is the first down number in 4 years and the first statistical evidence that we are going into a recession. Expect economic data to look terrible for the next six months. The non-farm payroll is the single most important leading indicator for the stock market. Without the Microsoft news the market would have been down 500 on this.

3) At +500 the market had its best week in 5 years this week. My recommended sectors of  banks and home builders were up on average 30%. Washington Mutual rose 110% from $10 to $21.  January was the worst month in 17 years.

4) Overlooked by all of the news this week was the collapse in the dollar caused by the new lower interest rates. It will take a run at $1.50 to the Euro in the near future.

5) Stocks are their cheapest vs. bonds in 25 years. Bonds are at a multi-decade high here and are a strong short.

Trade of the Month

The purest play on the weak dollar is to go long gold. As long as US interest rates are falling and Europe is holding fast you can count on the greenback to go downhill. Skyrocketing American budget and current account deficits are also helping the glittery stuff. Hedge funds are pouring into gold as part of the general rush into commodities. Gold also has its own special classes of buyers. Standards of living are rising rapidly in China and India which have historic cultural affinities to gold as a store of wealth. And with economic conditions worsening in the US by the day, gold will increasingly catch a flight to safety bid. $1,000 an ounce is a chip shot from here and look for it to go high long term (I mean years.) The old inflation adjusted high for gold is $1,500 and it should have no problem getting there over time.

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