November 26, 2008

Global Market Comments for November 26, 2008
Featured trades: (HCBK), (BRK/A), (WB)

1) The relentless drumbeat of dire economic data continues. October consumer spending was down 1%. Durable goods shrank by 6.2%, the lowest since 9/11. Sales of single family homes  collapsed, -5.3%, a 17 year low. Will the last person leaving the stock market please turn the lights out?

2) Tom Barrack, CEO of Colony Capital, with $39 billion in assets, dumped most of his commercial real estate portfolio at the market top in 2005. He sees the next big financial disaster occurring at the regional and community banks, which so far have been too small to attract the attention of regulators. The problem with real estate is that you usually don't know you have a default until a year after it started, because the information flow from tenant, to mall owner, to lender, is so slow. He now sees the best investment opportunities in The US, Europe, and Russia.

3) The only financial in the S&P 500 that has gone up this year has been New Jersey based Hudson City Bancorp.  (HCBK). The bank only lends money to local people it knows, and then keeps the loans on its books, neatly side stepping the valuation crisis plaguing the industry. It figures that you had to go to a museum of banking practices to find an institution that was prospering in this environment.

4) The Treasury's cash tsunami finally hit the mortgage market. The interest rate for 30 year, fixed rate mortgages has fallen from 5.62% to 5.30% in a week. You can count on them to drop a lot further.

5) Warren Buffet's Berkshire Hathaway (BRK/A) shares have dropped by 49%, from $148,000 to $76,000, in the past month. Investors fear that his fund will blow up because of a massive, ultra long dated, short put position he wrote, covering $37 billion of underlying stock index exposure. He made a bet that indexes would not fall more than 50% for 20 years. But the sage of Omaha was able to dictate terms that none of us could ever see. He is not required to put up any collateral as the put approaches the strike, even if Berkshire is downgraded. The put is European style, meaning that there is a one time only exercise date in 20 years. The S&P 500 has never fallen even 1% over any 20 year period. All the buyer, probably a large life insurance company, really got here was bragging rights. This has all driven BRK/A's stock price down to an enormous discount to underlying high grade assets, and makes the stock a screaming buy. A rare chance to tap into the Oracle of Omaha's mind on the cheap.

6) One novel theory I heard last week about stock market bottoms was that the Dow would drop to the value of one once of gold. It last traded there during the late 1970s, when the Dow and gold were both trading at $700. By 2000, the Dow was trading at 45 times an ounce of gold. If the Dow plunges to 5,000, and hyperinflation causes gold to rocket to $5,000/ounce, we might see parity again. But as much as I am a bull on inflation, I think this is a stretch, at best.

7) The number of people receiving food stamps surpassed 30 million for the first time. This is our modern equivalent to soup lines. Expect the numbers to rise dramatically.

8) The top ten executives at Wachovia Bank (WB) ran their bank into the ground, wiped out the shareholders, and then paid themselves $100 million in bonuses. I would have done it only for $50 million, and saved the shareholders $50 million. Really.