September 4, 2008

Global Market Comments for September 4, 2008

1) Today the global recession came home to roost, knocking stocks down 350 points. If shares can't go up on a $43 drop in crude, then they can only go down. Bond yields soared, taking the ten year to 3.60%, giving you a real return of negative -1.00%. It's all a flight to safety, nothing rational.
2) Q2 productivity growth came in at a rip roaring 4.3%. Since wage growth has been flat for the last decade, American workers are producing more goods for less money.  It also explains why standards of living are rising rapidly in China at the expense of a falling of standard of living here.

4) No matter who wins the election, capital spending on defense is about to jump. Much of the military's equipment is destroyed, worn out, or just plain old after seven years of non stop fighting. National Guard armories have been cleaned out of usable equipment. Many items are overdue for generational upgrades.   Foreign demand for cutting edge American planes, tanks, and missiles is also rising, with US brokered arms deals up 45% to $34 billion last year. Newly enriched sheikdoms are spending petrodollars on trophy aircraft like the F/A-18 Hornet fighter. And Israel has a permanently long shopping list. Obama is thought to favor more transport aircraft like the C-17 Globemaster III transport and new ships, while McCain, the ex pilot, prefers advanced missiles. Buy Rockwell Collins (COL), Lockheed Martin (LMT), and Raytheon (RTN).

5) John Chambers of Cisco Systems says business is flat in the US, but is still growing in Asia and Europe. He expects his business to recover in H1 2009. Visual networking will be the next big thing on the Internet, creating massive demand for his company's routers. Virtualization, or the placing of processing, programming, storage offsite, will also be a big deal. This is why I think that technology will be the next leader in the stock market. The stocks in this sector like CSCO and Intel (INTC), are selling at once in a lifetime valuations.

6) The president of BMW, on the other hand, believes that sales will be poor until H1 2010. What sales they are seeing are away from larger eight cylinder engines, towards smaller six and four cylinder engines. Looking at the government's economic data releases will never give you any insight into the length of this recession. Only listening to business in the front line trenches will.

10) Boeing (BA) may be hit with a strike in the next 48 hours, which will lead to further delays in the fuel efficient 787 Dreamliner. If this craters the stock, buy it, because the company's order backlog is the longest in its history.