July 31, 2008

Global Market Comments for July 31, 2008

1) Q2 GDP came in at 1.9%, miles away from a recessionary reading. Domestic weakness is being more than offset by international, energy and commodity profits. If you don't have income from any of these areas then you are toast. Weekly jobless claims soared again by 48,000 to 448,000, the highest since April, 2003. If this is not confusing then you are not paying attention.

2) The five biggest shorts in the market in terms of market capitalization are Big Lots (BIG) 46%, Zions Bankcorp (ZION) 29%, MBIA (MBI) 29%, General Motors (GM) 28%, and Sears (SHLD) 28%. If they don't go bankrupt these will all be great buys on the short cover.

3) The baby boom is back! US births in 2007 surpassed 4 million for the first time since 1954. The difference is that the US population then was 163 million vs. 304 million now.

4) According to The Economist magazine's 'Big Mac' index, a lighthearted attempt at measuring global purchasing power parity (PPP), the world's most overvalued currencies are from Norway, Sweden, and Switzerland. The most undervalued currencies are from Hong Kong, Russia, and Thailand. The heart attack on a plate costs $7.88 in Norway vs. $1.71 in Hong Kong. A $5.34 Big Mac in the euro zone suggests their currency is seriously overvalued there too.The US at $4 is in the middle of the range.

5) It looks like the real estate market is headed towards a dreaded 'L' bottom. So far The Case Shiller 20 market index has dropped from 210 to 160, or 24% since 2005. The average postwar real estate pull back in the index is 33%, or back to 2002 levels. But in past real estate busts we had a functioning financial system. This time we don't. Since 2000 Wall Street has taken down 85% of all home mortgages. They are currently taking none. They can't because industry capital has dropped by half in the past year. They are distress selling mortgages, not buying them. As home prices fall, forced selling accelerates because the refis aren't there, driving prices still lower in a downward death spiral. "Aspirational value" is a term you hear a lot about these days. Some sectors of the loan market, like sub prime and Alt-A have ceased to exist. This all argues for at least another 10% drop in home prices over the next year (more in California, Nevada, and Florida), and then five years of bouncing sideways along the bottom. This could be real estate's lost decade.

6) The City of San Francisco is going to require companies with more than 20 employees to help subsidize mass transit.

7) American Express (AXP) is cutting credit card limits in sections of the country with the biggest real estate falls, like California and Florida, to reduce delinquency rates.