July 22, 2009

Global Market Comments
July 22, 2009

Featured Trades: (SPX)

1) Let me tell you that I, and the rest of the hedge fund industry, are highly suspicious of the global stock market rally that has ensued over the past week. Companies lowered earnings expectations so far they were easy to beat, and could be achieved by laying off a few more workers. The question this raises is how the economy moves forward with skyrocketing unemployment. Now that we have double topped in the S&P 500 at 956, even the bulls are saying we only have another 4% to go. This on a day when we are all wondering if commercial real estate loans will be the stick that breaks the back of the banking industry. Mike Mayo, a banking analyst with Clayon Securities, says that the industry may have to write off a quarter of its $7 trillion loan book over the next three years, levels greater than seen during the Great Depression. While banks are making a lot of money trading, they are losing it even faster in loan losses. It's like trying to fill a barrel with water that has been perforated with a shotgun blast. If you are playing from the long side here, keep one foot in the exit, and a finger right on your mouse.

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2) One can't help but be overwhelmed by a sense of history walking by the Las Vegas Strip's City Center; unquestionably one of the worst commercial real estate disasters ever. The glitzy, ultra modern, Cesar Pelli designed, 63 acre complex occupies the quarter mile between the Bellagio and the Monte Carlo Hotels and will become one of the wonders of the world if it is ever finished. Nearly completed are the Mandarin Oriental, Aria, Veer, Harmon, and Vdara Hotels, offering 4,000 rooms and 2,600 condos. They will be adorned by two casinos, a convention center, a new theater for the Cirque du Soleil, an enormous shopping mall, and parking for 7,500. The finished project will employ 12,000. But strikes and overruns sent costs soaring to $8.5 billion, and the project is now hopelessly behind schedule. I saw a total of one worker in a cherry picker working on the building with a screwdriver. The other guy going up in an elevator turned out to be a lender contemplating a jump off the top. Kirk Kerkorian wanted to build the ultimate Sin City destination resort when his MGM-Mirage partnered with Dubai World, years ago. The relationship has soured, with Dubai World filing suit against its partner for negligence and mismanagement, which it later withdrew. The bigger question is who is going to stay in these rooms? Those who financed trips to Las Vegas with home equity loans or subprime credit cards definitely are not coming back. If the project files for bankruptcy, it will leave a gigantic eyesore at the heart of the tourist area, and will become a monument to excess, in a city of excesses. Unfortunately, what happens in Vegas doesn't always stay in Vegas, as a financial collapse would send shivers through the industry globally.

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3) I picked up a copy of Peter Schiff's latest book, The Little Book of Bull Moves in Bear Markets, which outlines his investment thesis for the next decade.  First, let me tell you that I am really glad that I stocked up on 9 mm ammo and survival gear, the vegetable garden is well underway, and I already stored lots of canned food and fresh water because of the frequent earthquakes we have here in San Francisco. After all, a complete breakdown of civilization can happen at any time. I'm not so sure about the corn flake hoarding he suggested. Don't they go stale? I'm kind of old to learn a new language, but my son tells me that learning Mandarin is easy, if you already speak Japanese. These are the pearls of wisdom Peter bestowed upon readers to prepare for the coming economic and financial collapse, which will make the Sack of Rome look like a tea party. I was much more sympathetic to his investment strategy, which is similar to my own. A collapsing dollar, minimal GDP growth for a decade, and soaring commodity prices mean you should get all of your assets out of the US. American real estate in all its forms will be a black hole. Your available funds should be invested in the safe haven of foreign stock, bond, and currency ETF's, rounded out with healthy dollops of gold, silver, copper, and oil. Hyperinflation will be the order of the day. Retirees unable to live on fixed incomes will be forced to move to Costa Rica to make ends meet. Only a decade of frugal living, high savings, and small government will get the US out of this funk. We have been living beyond our means for decades, and it is now time to pay the piper. Peter wrote the book early in last year's presidential election, and he is positively apoplectic now that Obama is in the Oval Office. Make that two decades of ruin. For Peter's take on Obama's health care plan in all its eloquence, take a look at his Money Morning piece today . For those who are wholly invested in the US, the book is a refreshing splash of cold water on their faces.

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The guys who ran the trains didn't get to run the airlines. It just doesn't happen,' said Martin Wolff, a contributor to Vanity Fair, about the impossibility of newspapers moving to profitable online business models.

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