May 26, 2009

Global Market Comments
May 26, 2009

Featured Trades: (TBT), (SPX)

1) Anyone who thinks that we have hit bottom in real estate should start smoking something else. The S&P Case-Shiller National Home Price Index fell 19.1% in Q1, the sharpest drop in history. Charlotte, NC did best, rising 0.3% while Detroit, where prices have fallen to 1995 levels, did the worst at -4.9%. San Francisco came in at -2.2%. Most disturbing is that the disease is metastasizing from the West coast and the Sunbelt to infect the entire nation. Home prices are now back to the 2000 level, meaning that we have given back the century to date. Foreclosures are accounting for up to 70% in some local markets, and while they are boosting sales volumes, they are also accelerating the downward march in prices. Today's data shows that the downward spiral is continuing, so most Americans are probably looking at another $100,000-$200,000 fall in home values. Not exactly a springboard for an economic recovery.

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2) One of my core positions, the PowerShares Lehman 20 Year 200% short ETF (TBT), a bet that benefits from falling long Treasury prices, hit a new high for the year today at $54.50. Long time readers of this column got into it in December at $35. The ripple effects of last week's US downgrade chatter is still feeding into prices, exacerbated by another huge slug of new issuance this week. Treasury futures got slammed, gapping down two points to 118 3/4, and are off a breathtaking 20% from the recent peak. I think the downgrade talk is premature, and the inflation rationale for this trade is still years off. The news about another North Korean nuclear test is just noise. But when a security is as accident prone as Treasury bonds, you never know which of the panoply of negative surprises is going to hit first. I think the bond bubble has popped, and that the TBT could eventually spike to $200.

TBT-7.png picture by sbronte

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3) Today is the 60th anniversary of the launch of the Intelligent Investor, by Benjamin Graham, the Bible for all fundamental analysts. So it behooves us to recognize that multiples for the S&P 500 have just leapt from 13.1 to 15.5 times in a mere two months, the sharpest and most rapid multiple expansion in history. Did I say multiple expansion? Have the fundamentals really gotten that good, that fast? I think not. If anything, we are enjoying the calm between two back to back hurricanes. You only have three days left to sell in May and go away.

intelligent_.jpg picture by  sbronte

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4) For readers in the Darien, CT neighborhood, I'd like to recommend a concert given by my friend David Gurwitz on June 11. The managing director of Charles Nenner Research is also a classically trained musician and composer. His own brand of music is so soothing, that it has been prescribed as therapy for stressed out traders, one of the country's few growth markets. You can listen to David's creations at http://www.youtube.com/watch?v=7kPhCr09-sA , which interestingly, has a large following in China. The funds raised will go to the Special Olympics.

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QUOTE OF THE DAY

'In the land of the blind, the one-eyed man is king', said Dutch philosopher Desiderius Erasmus, in his Adagia book of proverbs, published in 1500. Once required reading for all students, he also was the originator of such modern terms as 'golden handcuffs', 'crocodile tears', 'out of tune', and 'no sooner said than done'.

king.jpg picture by sbronte