February 2, 2009

Global Market Comments

February 2, 2009
Featured Trades: (BX)

One month into the year, let's review where we are among major asset classes:

'¢ Stocks are down globally and falling. The Dow is down 10% year to date.

'¢ The long Treasury bond bubble has popped. Corporate bonds of all grades are on a tear.

'¢ There is a bull market in gold that is spreading into other precious metals.   Soft commodities like wheat and soybeans are bouncing along a bottom, but showing signs of recovery.

'¢ The dollar has a strong fight to safety bid. Carry trade unwinds are pushing the yen up. All other currencies are weak.

'¢ Real estate is going from bad to worse, with the crisis spreading from residential into commercial real estate. Rents are falling everywhere.

The markets are still in risk reduction mode. This Friday's nonfarm payroll could take unemployment up from 7.2% to 7.5%. Bankruptcies are spiraling upward. Corporate managements are in defensive mode. The consumer is hanging on to every nickel he has.

1) Swap spreads shows that interbank transactions are almost back to pre Lehman bust levels, and that credit markets are reviving. The question remains of how long this will take to filter down to increased bank lending to customers and the real economy.

2) Barron's ran an interesting article over the weekend arguing that private equity will be the next big shoe to fall in the financial crisis. The weekly paper opines that all of the investments made by KKR, Blackstone Group, Carlyle, and Europe's 3i over the last three years are now worthless. To add insult to injury, one PE firm, Blackstone Group (BX), stuffed investors with its own stock at the absolute top of the market 18 months ago, and it is now down 90%. Leveraged buyouts account for a large part of their portfolios, and these tend to be loaded with junk debt which can't be rolled over. The list of bad bets starts with Chrysler and goes on to include Clear Channel Communication, Hilton, Harrahs, and many others. Deferred accounting practices have enabled managers to keep these losses under wraps, but a newly invigorated SEC may shed daylight soon. The offshore listed PE funds are trading at an average 72% discount to published net asset values, suggesting that not a few investors are looking askance at asset valuations. Even vaunted Harvard University, a big player in the sector, has tried to quietly unload some PE funds, to no avail. The end result of all of this will be that bond investors are soon going to become equity investors in a lot of money losing, and possible worthless companies. Headlines may not be far off, and big layoffs are a sure thing.

Blackstone.png picture  by sbronte

4) I spent a shivering Saturday morning lined up for Recreational Equipment Inc.'s (REI) monthly members' only used equipment sale. This time, outdoor enthusiasts were joined by the newly jobless and homeless, who were hoping to pick up deeply discounted equipment so they could live out of their cars. They were not disappointed. I picked up a pair of Asolo heavy mountaineering boots, list price $280, with tax, for $5! I guess the size 13's have not been flying out the door. It does not bode well for our economy when retailers are selling boots for the value of their laces.


'This is the time when fortunes are made', said Sir Richard Branson, CEO of the Virgin Group, at the Davos Economic Forum. During the eighties, Sir Richard lived on a canal boat around the corner from me in the Little Venice section of London. We flew together to Moscow once on his Virgin Air, and he graciously allowed me to take the flight controls of the Boeing 767. Again, it's been a full life.