February 20, 2008

1) In the last bear market we had six false rallies of 5% over an 18 month period. Then the market was discounting both the dot com bust and 9/11. We are four months into this bear market and so far we have had two false rallies. The main driver has only been changing accounting standards. Actual defaults on sub prime loans are not enough to give this bear market legs. We need a completely new, out of the blue crisis if this bear market is going to be as long lived as the last one.

2) China is losing an average of $4 billion a month on its treasury holdings because of the weak dollar. The next big leg down in the dollar will be triggered by China's move to diversify away from the US currency as a reserve asset, possibly sometime after the Beijing Olympics. Euro could go to $1.60 on this.

3) Goldman Sachs has fallen from $250 to $170 and is now selling for seven times earnings and is getting tempting. This is the only major firm that made a profit off of the sub prime crisis.

4) Commercial real estate prices have dropped about 15% from last year's peak. They are not expected to drop further as long as income streams are maintained at current levels which they will as long as the recession remains a short one.

5) Natural Gas over $9 today, my home run recommendation of the month. It is up 20% from my entry point 4 weeks ago.

6) Harry Macklowe is selling the GM Building on 5th avenue in Manhattan which he bought in 2003 for $1.4 billion. A bidding war has broken out with three players coming in with bids over $3 billion, or more than $1,500 a square foot. While this is far in excess of the market for this type of property, it shows the degree to which trophy properties are commanding premiums to the market.

THOUGHT OF THE DAY

There is a massive flight to liquidity going on. Hedge funds are dumping every kind of bond, afraid that market will close and trap them, and pouring the cash into all commodities. Oil is being dragged up by gold, palladium, copper and the grains. This is all being financed by the Fed rate cuts, which in trying to deal with one bubble (Housing) they are merely creating another (Commodities).

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