January 20, 2009

Global Market Comments for January 20, 2009
Inauguration Day
Featured Trades: (C),

1) We are now officially on Obama's watch. Like a young child crying out for attention, the stock market delivered its worst ever inauguration day performance, with the Dow down 332. Here's what he is facing:

1 collapsed financial system
2 wars
11 million unemployed
46 million without health care
66 million living on social security
$1.2 trillion budget deficit
$11 trillion Federal deficit
And one mother of a recession!

2) Obama is only the latest left handed president, and I am not only referring to his political persuasion. Of the last 12 presidents, half have been lefties, compared to 10% for the general population. This is more than just a statistical anomaly. What is it they have? Better people skills, organizational skills, a talent for public speaking, or the ability to listen? Who knows?

3) New York University economics professor Nouriel Roubini, who has been dead right on his dire economic forecasts, sees losses from the credit crisis reaching $3.6 trillion. He believes that banking systems of the US and Europe are effectively bankrupt, and with the big banks all down 20-30% today, the market thinks he is right. thinks the recession will pull commodities down another 20%. Just thought you'd like to know the worst case scenario.

4) Chrysler gave away 35% of its equity to Fiat over the weekend for access to the Italian car maker's European dealer network. No cash will change hands. Leave it to an Italian to buy the last ticket on the Titanic. What was Chrysler thinking? Do they believe it will be easier to get a bail out from Washington  if a third of their shares are owned in the Land of Columbus? In the meantime they are offering 0% financing for their 11 slowest selling models.

5) Cars.com reports that its Internet traffic data presages an upsurge in car buying. During the first week of January, visits to its site jumped 19% YOY.  Visits to its mobile device site, which are usually initiated from dealer's lots to compare prices and specs, were up 30% since December. Expect the data for the next six months to morph from all bad, to some good-some bad, giving a frustratingly contradictory picture of what is really happening in the economy.

6) As the crude February contract expired today, the contango ballooned to a mind boggling $27. While February 2009 was trading at $33, you could sell March 2010 for $60. This offers a non leveraged guaranteed return of 82% p.a. Even Morgan Stanley is now trying to acquire a tanker to make this play. Buy a used ULCC now, fill it with crude, and resell it a year forward, and you get to keep the ship for free, worth $65 million.

7) Citicorp (C) is planning to sell its Japanese brokerage subsidiary, Nikko Cordial, which it bought only a year ago for $17.7 billion. This is the remnant of Nikko Securities, the former second largest brokerage house in Japan, which went under during the nineties Japanese stock market crash. Citicorp's total market cap is now only $19 billion. Another fire sale of a crown jewel for a huge loss. Brokerage houses are not fetching a lot these days. The problem with C is that none of its businesses are making money now, except for the Smith Barney brokerage business, which it is selling to Morgan Stanley. Where is the future in this picture? That is what a C share price of under $3, and a dividend cut to a penny a share, is telling you today.

Citicorpdaily.png picture by sbronte


High economic growth rates and a soaring stock market during the eighties were driven by the enormous productivity gains made possible by the personal computer. The nineties boom was driven by the miracle of the Internet. A big chunk of the growth this decade sprang from artificial and ephemeral real estate gains, which have since gone, poof! There is nothing to replace it until we invent something new. Make energy a national defense issue. After all, the PC (or the microprocessor that drove it) and the Net (or Darpanet, as it was then known) were both the stepchildren of taxpayer funded defense research. Launching a Manhattan Project for alternative energy and transportation could well give us the next decade's driver we are searching for. The building of a cleantech industry and a smart transmission grid could deliver the millions of jobs the new president has been promising. That would move the engine of US growth out of poorly managed Detroit, foreign crude dependent Houston, and Heaven help us, bureaucratic and connection ridden Washington, to entrepreneurial Silicon Valley. It certainly would be a better use of money than rescuing bad stock and bond investments. Obama says that energy is a priority, but will he make it the top priority? He needs to take the great leap to make us a carbon free economy. I hope someone close is telling him this.