November 14, 2008

Global Market Comments for November 14, 2008
Highlighted Trades: (SPY), (LSBRX), (COP), (WMT)

1) Yesterday we did a month's worth of trading in two hours. The VIX went from 60% to 70%, then back down to 57%. If you have any doubts about what this market is doing, take a look at this chart, which shows the S&P 500 trading in a clearly defined 815-1000 box.

2) Through a combination of market losses and redemptions, the value of hedge fund assets has dropped from $2 trillion to only $1 trillion this year. The bulk of these losses has been in highly leveraged long debt/short treasury strategies put on at ridiculously low spreads. The average hedge fund return year to date is -15.43%. A major shake out in this area has been long overdue.

3) In 1932 the P/E multiple for the S&P 500 bottomed at 5.6 times, giving you an earnings yield of 17.86%. In 1974 the bottom was at 7.9 times (12.66%), and in 1982 it bottomed at 6.6 times (15%). With the S&P at 815 yesterday it was at a 10 X multiple. But interest rates have never been at zero before. Adjusted for this, the 'real' P/E multiple is probably 7-8 times.

4) Triple 'B' rated corporate bonds are trading at the largest spreads over Treasuries since the 1930s and could well outperform stocks from here. This paper is now trading at 60-70 cents on the dollar yielding 10-12% per annum. Any return to normalcy by the credit markets could bring a quick 50% capital gain. One good way to play this would be the Loomis Sayles Bond Fund (LSBRX), which has dropped from $15 to $10 and currently carries a 9.8% yield.

5) The Great Depression is now hot. According to Barnes & Noble, sales of John Kenneth Galbraith's 1955 book, The Great Crash, skyrocketed last month. Netflix says that John Steinbeck's 1940 movie, 'The Grapes of Wrath' has been flying out the door. Wait for the 'Lindyhop' to become the rage dance next year.

6) October retail sales came in at -2.8%, the worst on record. This was not exactly a surprise.

7) A one penny drop in the retail price of gasoline leads to a $1 billion increase in US consumer spending power. The $1.30 tumble in the price of gas since July puts an extra $130 billion in consumers' pockets.

8) Warren Buffet has substantially increased has stake in Conoco Phillips (COP), which is down from $95 to $43. He is starting his buy of crude on the cheap. George Soros is increasing his holding in Walmart (WMT), which has pulled back from $64 to $47. Whale watching can be very instructive and profitable.


The December S&P mini 870 call I recommended yesterday at $40 traded as high as $80 this morning, giving you an overnight profit of $200,000 on a 100 lot. This shows you the kind of limited risk, high returns that are out there right now. When the market does a month's worth of movement in two hours you take the profit. You don't want to take weekend risk right now, and with implied volatilities sky high, the time decay could cost you a fortune. Take the money and run! No one ever got fired for taking a profit.