March 6, 2009

Global Market Comments for March 6, 2009
Featured Trades: (GE), (C), (FXI),(BIDU), (SOHU), (NTES)

1) February nonfarm payroll came in at -651,000, taking the unemployment rate up to 8.1%, a 25 year high. The unemployment rate in California is now well over 10%. There were huge revisions up in the December and January figures. Remember when the market used to have a heart attack over a job loss of 100,000? Those were the days! More than 4.4 million workers have lost their jobs since December, 2007, taking the total unemployed to a record 12.5 million. It may be only a matter of months before we surpass the 1981 peak unemployment rate of 10.8%. These figures suggest that the current quarter GDP could be as low as -8%, the worst since the thirties.

2) Spreads on commercial real estate backed mortgage securities have absolutely blown out to the upside, with the lowest grade BBB- paper now yielding a staggering 45% over Treasuries. This is more than double the peak seen in the wake of the Lehman bankruptcy in September. It reflects just a few throw away bids by opportunistic hedge and vulture funds outside of a closed market, and equates to about 20 cents on the dollar. These are levels anticipating nothing less than a Great Depression II and the utter collapse of the commercial real estate market. The reasons, which you well know, have already been eloquently detailed in these pages: failing tenants, emptying malls, too much leverage, and no refinancing.  This is one of the reasons why General Electric (GE), which has heavy exposure in the sector, is trading at the $5 handle, down from $38. This is all happening when some of the most expensive and luxurious commercial space ever built, which broke ground three years ago, is about to swamp the market.

3) It now takes only four shares of Citigroup (C) to buy a cup of coffee at Starbucks. The stock market has hit twelve year lows only three times in the last 109 years. Remember, bottoms are made when things look terrible and are getting worse. I am not a big market timer, but this certainly qualifies as one of those times. If you assume that we are seeing the worst economic conditions this quarter since the Depression, then we are setting up for improving conditions in Q2, and the market will start to discount that. The short interest out there is enormous, and the trade is getting too easy. Even my cleaning lady is running a leveraged short on the S&P 500. Could the short bubble be the next one to pop? Watch for another furious 10%-20% bear market rally ensue in the next few days or weeks.

4) There is more speculation that China may lead any upturn in the global capital markets. China's holdings of US government bonds leapt by $250 billion last year, through capital appreciation alone, taking their current market value to roughly $1.25 trillion. To finance a domestic reflationary program, China need only sell some Treasuries, not print money, as the US must. This would involve converting a sizeable chunk of the Middle Kingdom's productive capacity away from US oriented exports to domestic consumption, particularly accelerated much needed infrastructure spending. This would be painful in the short term, to say the least, but is necessary for the long term. This would enable the Chinese stock market to lead the world out of the current morass. Buy the iShares FTSE/Xinhua China 25 ETF (FXI).

5) Clever traders are keeping a sharp eye out for things to buy for the next recovery, whenever that is. Look at the industry of the future in the country of the future, Chinese Internet shares, which are growing 15%-30% a year with strong cash flows. Baidu (BIDU), which is often referred to as the Google of China, saw its shares sell off 75% last year, but have rallied 75% from the December lows. Internet use in China is expected to increase from 250 million to 900 million over the next 5-10 years. The majority will access the net via cell phones, where gaming is the dominant application. Expect huge growth at the four horsemen of the Chinese internet sector, which also includes Netease (NTES), Sina (SINA), and (SOHU).

Baidu.png picture  by sbronte

6) A year ago GMAC financed 1,500 cars for Autonation, the country's biggest auto retailer.  Last month they financed only nine, despite much higher demand. This tells you where the real problem is.


"Pessimism is your friend, euphoria the enemy," said Warren Buffett in his 2009 letter to shareholders.