January 29, 2009

Global Market Comments for January 29, 2009
Featured Trades: (GOLD), (AEM), (TBT), (HYG), (PHB), (NS)

1) December new home sales fell to a stunning 331,000, 100,000 less than the most dire forecasts.  Average monthly home sales for 2008 were the worst since 1982. Homebuilders are getting absolutely killed by competition from foreclosures. Every real estate indicator is in free fall, and in fact, seem to be accelerating. Expect house prices to continue their relentless downward march. Brace yourself for tomorrow, when the Q4 GDP to be announced may be the worst in 30 years.

2) One month into the new year, my best call clearly has been to buy the Lehman High Yield Bond Fund (TBT), which offers investors a 200% short bet that long Treasuries are going down. A move in the long bond futures contract from 142 to 126 has taken the TBT up 35%, from $35 to $47. My recommendation to buy corporate junk bonds has done similarly well, with the PowerShares Corporate High Yield Bond Fund (PHB), and the iShares iBoxx Fund (HYG) up large. Treasury/junk spreads are shrinking at a tremendous pace, indicating that a healing of the credit markets is underway, although the stock market and the real economy can't see it yet. In December, junk bonds were priced at levels anticipating a default ratio worse than seen during the Great Depression. This trade probably has more to run, but the easy money has been made. It does show that there are great money making opportunities out there, even while the newspaper headlines are awful.

TBT-1.png picture by sbronte

3) There is one sector of the business condominium market that is doing well, while the rest of the industry languishes. Demand remains healthy for medical condominiums being snapped up by doctors looking for an equity participation in their places of business. Medical condos in Manhattan in the 2,200 to 5,700 sq ft range are selling out at prices ranging from $1,075 to $1,350 /sq ft. This market caters to a trend of doctors moving from the old neighborhood small private 1,000 sq ft offices into larger 8,000 medical groups. This enables them to profit from economies of scale and to deal more efficiently with the byzantine new ways they are being reimbursed by providers. This is one area where financing is still easy to get because lenders see doctors as recession proof, offering constant cash flows and historically minimal default rates. People always get sick, don't they?

4) One way to play the current crude glut is to buy San Antonio, Texas based NuStar Energy (NS). A spinoff of Valero Energy's asphalt division, the company boasts 58.5 million barrels of storage facilities around the Gulf. The stock has already doubled since crude prices collapsed big time in October. The company has also been buying up asphalt production from other companies like CITCO, and may offer an additional infrastructure play, once Obama's $30 billion road rebuilding program starts in earnest. NuStar pays a hefty 8.6% dividend at an attractive PE multiple of 11 X.

NuStar.png picture by sbronte

5) The 170 room Pleasanton Sheraton, next door to the Stoneridge mall, has defaulted on its $12.2 million mortgage. Despite spending $3.5 million on renovations and upgrades last year, owners said that business travel to the Tri-Valley had 'virtually vanished.' The former Washington Mutual is emptying out 1,200 former employees from a nearby office complex, and remaining local firms like Chevron, AT&T, and Safeway have drastically cut back on travel to cut costs.


'With gas at $2 a gallon, I have fuel efficient cars parked as far as the eye can see', said Mike Jackson, CEO of AutoNation, the country's biggest car retailer.