July 28, 2008

Global Market Comments for July 28, 2008

1) Panic selling of stocks into the close as last week's short covering rally exhausts itself. Crude’s back up to $125 didn't help. Dow down 240.

2) Fortune Brands (FO) reported Q2 net earnings down 41%. This hybrid company saw their alcoholic beverage sales hold up OK (Jim Beam, Ronrico Rum, Canadian Club), but were pulled down by their housing exposure (Master Brand Cabinets, Moen, and Master Locks). Last November the company sold its wine operations, including Clos du Bois, to Constellation Brands (STZ). The stock is down this year from $90 to $52.

3) Mark Cuban is bidding $1.3 billion for the Chicago Cubs. This is 15% of the $8.5 billion that seller Sam Zell paid for the entire Cubs, Wrigley Stadium, Chicago Tribune package. Zell has to be in a world of hurt on this one.

4) Use the sell off in crude to get a good entry point into the Russian stock market, where energy accounts for 60% of the market capitalization. The Russian Trading System Index ($RTSI) is off 22% from its 2,500 high in only two months. Russian GDP is growing at an 8% rate while consumption is growing at a breakneck 11% rate. Wages have risen by 65% over the last four years. High end homebuilder RGI International (RGI.LN) is a good way to play this. The average Russian home has only 200 square meters (1,800 square feet) compared to 300 square meters for Western Europe, and rising standards of living means new homeowners can afford to trade up. But buy only when there is blood in the streets.

5) Merrill Lynch has cut its forecast for Lehman (LEH) which they expect to take another $2.5 billion in write offs in Q3. It is quite amusing watching the brokers competitively downgrade each others’ earnings outlooks.

6) If you strip out the problem children, the financials, Q2 2008 S&P 500 earnings will be up 10% YOY. More than 72% of companies are reporting sales increases. If you are not in headline dominating housing, automobiles, or financials, the economy is booming. Sometimes the best investment strategy is to simply turn off the TV.

7) If Obama wins the election, which now appears to be a certainty, there will be a rush to sell stocks towards year end and realize capital gains to beat the higher capital gains taxes that he is proposing.

8) The next big wave of defaults will be in prime option ARMS for trophy houses which have so far held up well. Many of these loans were taken out by high FICO score borrowers with teaser rates as low as 1%. With five year resets now hitting, the refinancing and the real estate market ain't there. I would look at more open houses on Sundays, but finding the real estate broker hanging from the bathroom shower head is a bit of a downer for my day off.