January 6, 2009

Global Market Comments for January 6, 2009
Featured Trades: ($TYX), (X), (NUE), (WMT), (MCD)

1) The markets are signaling that the credit crisis is over, and that it is now safe to come out of your bunker. The 30 year Treasury has collapsed ten points in the last week, taking yields from 2.60% back over 3.15%. Corporate bonds of every grade and maturity have rallied hard, narrowing spreads across the board. Other risk taking indicators are dramatically improving, with the yen backing off from ¥88 to ¥94, euro yen moving from ¥118 to ¥126, and the VIX breaking below 40% and staying there, down from 89%.  Crude is signaling a short recession, making it all the way back up to $50 today, 40% up from the lows. Now that we are in the New Year, the dynamic in the credit markets will flip from bankers not willing to lend, to borrowers not willing to borrow. This should greatly ease terms for those few hardy souls willing to play at the deep end of the recession. Expect your banker to pick up the check the next time you go out to lunch.

30chart-1.png picture by sbronte

2) The Warren Buffet of Germany, Adolph Merkle, committed suicide today by jumping in front of a train. He had suffered massive losses from the Porsche induced short squeeze of Volkswagen, which I outlined in detail a few months ago, and which made VW the world's most valuable company for a day. Expect this crisis to trigger more high profile suicides.

3) Upstream and downstream integrated US Steel (X) has been the whipping- boy-in-chief in the global commodity bust, its shares vaporizing from $200 to $20 in a mere four months. US steel production has plummeted from two million tons/week to only one million tons, and prices have more than halved, chopping revenues by 80%. But it is about to become a major beneficiary of the Obama reflationary program, in which the US joins China and India in the global infrastructure build out story. Congress is expected to add a 'Buy America' clause to any public works projects the new president hopes to target. In any case, X now produces the best quality steel in the world at the lowest prices. Another play here is more expensive mini mill operator Nucor (NUE), which can pull off a quicker restart with electric arc furnaces than a blast furnace operation like X. In the meantime, expect a continuing rapid industry consolidation until the government checks start hitting the bank.

X.png picture by sbronte

4) Traders are bracing themselves for the December nonfarm payroll, which is to be announced at 5:30 AM West Coast time. The number is expected to be in the 600,000-700,000 range, one of the worst numbers in history, and the unemployment rate is expected to leap above 7%.

5) Walmart (WMT) and McDonalds (MCD) were the only two Dow stocks up in 2008. It tells you a lot about where consumer buying is going these days. Supersize that?


'I think we're looking at a period of time going forward where the market will value simplicity,' says  Ken Griffin, CEO of Chicago based hedge fund Citadel, which took a 50% hit last year.