November 11, 2008

Global Market Comments for November 11, 2008
Highlighted stocks: (WPPGY), (FNM), (JPM), (GM)

1) Once again, buying the dips and selling the rips works. If you sold the S&P mini 830 puts on Friday at $20 and bought them back yesterday at $5, you could then resell them again today for $20. This time they only have seven trading days to expiration. Not that I want to do this, now that the S&P has broken its support at 900. But it does show you the opportunity out there. It seems that the maximum reward/ risk trades out there are to add risk on Friday and take it off on Monday because all the disasters are happening on weekends.

2) Martin Sorrell, CEO of WPP Group (WPPGY), the world's largest advertising agency, sees 2009 as a tough year. Internet advertising will have a growth recession much like China has growth recession, increasingly only 10%. Cable TV will be up small, magazines will be flat, and TV networks and print newspapers will be down big. The profit margin of the newspaper industry has dropped from 30% to 15% in the last ten years and may turn negative this year. More evidence of the migration of traditional business to online.

3) Ultra bear Professor Nouriel Roubini of New York University, who has been dead on right about this year's economic collapse, sees the recession lasting until early 2010. He sees the maximum drop in GDP of only 5%. Now you have a bottom to trade against. He represents the worst case scenario. By the way, he also sees crude going to $200 in the next up cycle.

4) Fannie Mae (FNM) announced that the temporary increase in their conforming loan limits to $729,000 will expire at the end of the year and the new limit in 2009 will fall back to only $625,000. This will hit the housing markets in California and Florida hard, which were heavily dependent of government financing at the higher limits to move excess inventories. There is a chance that the next stimulus package could bump the FNM loan limit back up again. After all, the four states worst hit by the housing crisis all went for Obama: California, Nevada, Florida, and New York, which together chipped in 118 of the 270 electoral votes he needed to win.

5) I spoke to JP Morgan Chase (JPM) today who says that contrary to press accounts the loan business is booming. Banks do better lending on double the volume of houses at half the 2005 price. JPM is also very active in lending to buyers at foreclosure auctions. This does not apply to jumbo loans over $625,000 where borrowers have to pay interest rates 2.5% over conforming loans. Jumbo rates these days are around 8.5%. You can get an FHA 30 fixed conforming loan today for $729,000 at 6.5% with only 3% down, a FICO score of 580, and a debt service/income ratio of 50%. An annual income of $95,000 would support this.

6) General Motors (GM) fell under $3 today, the lowest since 1943, and taking the market cap down to only $1.7 billion. The market has already reached a verdict on what is going to happen to this company. Watch out for the second derivative effects.