Global Market Comments for September 8, 2008
1) Hank Paulson promised a bazooka and delivered a pea shooter. The Treasury used the Bear model once again, making Fannie Mae (FNM) and Freddie Mac (FRE) bond holders whole, while wiping out the equity owners. Trillions of dollars in debt, largely owned by China, Japan, Russia and other foreigners are now obligations of the US government. Traders who worked late on Friday got a huge pay off. On the initial news of the bail out FNM jumped 50% to $8, giving you the easiest short sale of the year. It traded down to $0.60 on Monday. Three regional banks had more than one third of their capital tied up in FNM preferred, which has been completely wiped out. We used to scare foreigners by threatening to nuke them back to the Stone Age. Now we threaten to default on our debt they hold. It doesn't have the same impact. Stocks opened up 350 points, and closed up only 260, because traders figure the government has shot its wad. Bad, really bad.
2) In 2000 the Case-Shiller National Home Price Index pegged the value of the average American home at $200,000. It hit $460,000 in 2006 and is back down to only $370,000. To reach the long term historical trend in home prices, homes have to fall another $110,000, orÂ another 24% down from the top, to $260,000.Â Today's government bail out only lowered 30 year mortgages by 12 basis points. The $16 trillion housing market is just too big for the government to bail out. Bottom line: house prices are still going down and more banks will fail.
3) A month ago I recommended the 9% yielding SPDR Lehman High Yield bond fund ETF (JNK). It is up big today, since it is a major holder ofÂ FNM and FRE debt, which has just been converted into Treasuries. Everything else it owns will be up too.
4) The cream of the crop of energy linked equities, which are profitable down to $20/barrel for crude, outrageously profitable at $50/barrel, and have multi year order backlogs, are getting down to attractive levels. Joy Global (JOYG), the leading producer of coal mining equipment, has collapsed from $90 to $49. Potash Corp. Saskatchewan (POT) is a Canadian producer of fertilizer that has been eviscerated from $240 to $145. Transocean (RIG) is the top builder of offshore oil rigs, and is down from $165 to $115. Companies that have the highest marginal cost of crude needed to stay profitable, like new deep offshore ($95) and Canadian tar sands ($80) are starting to sweat bullets
5) OPEC meets this week, so expect some attempt to defend the $100 level in crude, at least verbally, from hotheads like Libya, Iran, and Venezuela. It always comes down to what the Saudi's do, not say. Crude hit a new low today of $104.70.