January 15, 2009

Global Market Comments for January 15, 2009
Featured Trades: (BAC), (XEU)

1) By the time Bank of America (BAC) waded through the incredible opaque balance sheet of newly acquired Merrill Lynch, they had turned green around the gills. The toxic assets they stumbled on to put the Love Canal to shame. Only more TARP money on top of the $25 billion they have already taken can repair the damage. The news gave shareholders the willies, which dumped the stock 20% today. Implied volatility on the company's stock options leapt from 130% to 200% overnight. Did BAC buy a pig in a poke? Did they overpay at $50 billion? I'm sure Merrill shareholders are laughing all the way to the bank. Give former Merrill CEO John Thain a Nobel Prize for salesmanship. The only certainty in all of this is that BAC's 12% dividend is toast. But they are still the leper with the most fingers.


2) The 30 year fixed mortgage interest rates hit a new all time low of 4.96%. Looking at the tidal wave of government cash going into this sector, I think it could eventually go below 4%. It will soon be cheaper to buy than to rent.

3) The US trade deficit for November fell to a five year low of only $40 billion. Imports plummeted by 12%, while exports declined by 6%. Cashed starved Americans are just not buying anything anymore. Another major factor has been the $400 billion in the US bill for foreign oil, which is falling in both price and volume. It is the 'J-curve' effect in reverse. This has all been a driving force behind the strong dollar, and will continue for the foreseeable future.

4) Americans' new found thrift is happening at China's expense. Ten million workers have been laid off since the financial crisis began, and a wave of bankruptcies by retailers and small manufacturers going into the Chinese New Year (the year of the ox) is expected to toss more out on the street. Long term watchers of the Middle Kingdom worry that riots and civil strife is not far off.

5) European Central Bank President Jeane-Claude Trichet finally cut interest rates by 0.5%. The euro didn't care and dove to a one month low. Trichet is seriously behind the curve and the market smells blood.


6) I never ceased to be amazed by what the Internet throws at me. Take a look at this brilliant, professionally produced guerilla marketing effort by JC Penneys' jewelry department. It is a riot! It shows you the lengths to which companies are struggling to discover new advertising and business models. Husbands and boyfriends beware! Just paste this link to a new browser. It takes about five minutes to view.  http://bewareofthedoghouse.com/VideoPage.aspx.