Global Market Comments for July 31, 2008

1) Q2 GDP came in at 1.9%, miles away from a recessionary reading. Domestic weakness is being more than offset by international, energy and commodity profits. If you don't have income from any of these areas then you are toast. Weekly jobless claims soared again by 48,000 to 448,000, the highest since April, 2003. If this is not confusing then you are not paying attention.

2) The five biggest shorts in the market in terms of market capitalization are Big Lots (BIG) 46%, Zions Bankcorp (ZION) 29%, MBIA (MBI) 29%, General Motors (GM) 28%, and Sears (SHLD) 28%. If they don't go bankrupt these will all be great buys on the short cover.

3) The baby boom is back! US births in 2007 surpassed 4 million for the first time since 1954. The difference is that the US population then was 163 million vs. 304 million now.

4) According to The Economist magazine's 'Big Mac' index, a lighthearted attempt at measuring global purchasing power parity (PPP), the world's most overvalued currencies are from Norway, Sweden, and Switzerland. The most undervalued currencies are from Hong Kong, Russia, and Thailand. The heart attack on a plate costs $7.88 in Norway vs. $1.71 in Hong Kong. A $5.34 Big Mac in the euro zone suggests their currency is seriously overvalued there too.The US at $4 is in the middle of the range.

5) It looks like the real estate market is headed towards a dreaded 'L' bottom. So far The Case Shiller 20 market index has dropped from 210 to 160, or 24% since 2005. The average postwar real estate pull back in the index is 33%, or back to 2002 levels. But in past real estate busts we had a functioning financial system. This time we don't. Since 2000 Wall Street has taken down 85% of all home mortgages. They are currently taking none. They can't because industry capital has dropped by half in the past year. They are distress selling mortgages, not buying them. As home prices fall, forced selling accelerates because the refis aren't there, driving prices still lower in a downward death spiral. ?Aspirational value? is a term you hear a lot about these days. Some sectors of the loan market, like sub prime and Alt-A have ceased to exist. This all argues for at least another 10% drop in home prices over the next year (more in California, Nevada, and Florida), and then five years of bouncing sideways along the bottom. This could be real estate's lost decade.

6) The City of San Francisco is going to require companies with more than 20 employees to help subsidize mass transit.

7) American Express (AXP) is cutting credit card limits in sections of the country with the biggest real estate falls, like California and Florida, to reduce delinquency rates.

Global Market Comments for July 30, 2008

1) Panic buying of crude is back. Weekly gasoline inventories showed a shocking decline of 3.5 million barrels, so crude soared $7 to $127. The $120 level was a perfect bear trap. Goldman Sachs put out a report that current demand destruction is temporary and that crude will hit $149 by year end. I don?t buy it.

2) The credit crunch hit its one year anniversary today. Last July 30 was when the two Bear Stearns hedge funds were declared effectively worthless.

3) The SEC extended its short selling ban on 19 banks until August 12. It says that it needs time to evaluate the impact of the ban so it can propose broader short selling restrictions. A stay of execution. The Fed also extended the emergency discount window access until January 1, saying that the financial system is still 'too fragile'.

4) According to Malcolm Gladwell in 'Blink', only 2% of US males are over 6'2', but 30% of Fortune 500 CEO's surpass this height.

5) The market is still digesting the Merrill (MER) refi. By pricing their CDO's at 22 cents on the dollar it suggests that $220 billion in such securities were sold by the whole industry for $1 trillion. It was the grossest overpricing in history. What a selling job! This is why I distrust anything Wall Street is trying to sell.

6) The next giant rumored to fall is AIG Group (AIG), which after huge asset sales still has a scrotum tightening asset to equity leverage ratio. By this, I mean a highly dilutive distress recapitalization at ruinous terms. You can play these for a trade, but don't leave your screen to go to the bathroom.

7) Chesapeake Energy's (CHK) Aubrey McClendon argues that new technology has made possible enormous gas field discoveries over the last four years which will solve our energy crisis. These include gas shale fields in Barnet, TX (where I was active as a driller), Hainesville, AL, Fayetteville, AK, Marcellus, PA, and Woodford, OK.?? McClendon (of 'Swift Boat Veterans for Truth' fame) has bought several hundred million dollars worth of his own stock, which soared from $30 to $80 earlier this year.

8) New mortgage applications fell 14.1% last week to the lowest level since December, 2001.

Global Market Comments for July 29, 2008

1) As crude dies, stocks fly. Oil down to $120.50, a new two month low. Alert! Alert! Regular gas at a bargain $3.99/gallon seen in the East bay! For $1 I'll tell you where.

2) Merrill Lynch (MER) is raising a staggering $8.5 billion in new equity. The more they say they don't need capital the more they raise. Existing shareholders will be diluted by a hefty 20%, except for those recent private placement investors with anti dilution clauses. The money will go to help cover their loss incurred in selling $30 billion face value in mortgage backed obligations for a mere $6.7 billion. This sets a benchmark value for sub prime debt at 22 cents on the dollar. It makes you wonder how dire their capital position really was yesterday. The stock has imploded, from $90 to $22 in the past year. All eyes are now on Lehman (LEH), the next shoe to fall.

3) The S&P Case-Shiller real estate price index for June was down -15.8% YOY and is still falling. Las Vegas (-28.4%) and Miami (-28.3%) showed the biggest losses. San Francisco was down -22.9%. Charlotte, Dallas, and Denver all showed monthly gains. Prices are now at summer, 2004 levels.

4) US Steel (X) reported vastly better earnings than even the most optimistic forecasts as the steel shortage puts it in the driver's seat on pricing. Weakness in autos, which now accounts for only 15% of sales, is being more than offset by demand from China. 85% of the company's sales are in cold rolled steel. X is the winner here, because it alone among steel producers owns iron ore supplies. However, if commodity prices turn, look out belooooow!

5) The Conference Board's consumer confidence index for July rose from 51.0 to 51.9, the first rise since December. Given the huge decline seen in the previous month this is not much of a dead cat bounce. Job security is the main concern.

6) The SEC's short selling restrictions on banks expire tonight. If they don't renew them, or if there is any fiddling, waffling, or equivocation, expect the market to tank tomorrow.

QUOTE OF THE DAY

'Americans eventually do the right thing, after exhausting all other possibilities,' said Winston Churchill.

Global Market Comments for July 28, 2008

1) Panic selling of stocks into the close as last week's short covering rally exhausts itself. Crude?s back up to $125 didn't help. Dow down 240.

2) Fortune Brands (FO) reported Q2 net earnings down 41%. This hybrid company saw their alcoholic beverage sales hold up OK (Jim Beam, Ronrico Rum, Canadian Club), but were pulled down by their housing exposure (Master Brand Cabinets, Moen, and Master Locks). Last November the company sold its wine operations, including Clos du Bois, to Constellation Brands (STZ). The stock is down this year from $90 to $52.

3) Mark Cuban is bidding $1.3 billion for the Chicago Cubs. This is 15% of the $8.5 billion that seller Sam Zell paid for the entire Cubs, Wrigley Stadium, Chicago Tribune package. Zell has to be in a world of hurt on this one.

4) Use the sell off in crude to get a good entry point into the Russian stock market, where energy accounts for 60% of the market capitalization. The Russian Trading System Index ($RTSI) is off 22% from its 2,500 high in only two months. Russian GDP is growing at an 8% rate while consumption is growing at a breakneck 11% rate. Wages have risen by 65% over the last four years. High end homebuilder RGI International (RGI.LN) is a good way to play this. The average Russian home has only 200 square meters (1,800 square feet) compared to 300 square meters for Western Europe, and rising standards of living means new homeowners can afford to trade up. But buy only when there is blood in the streets.

5) Merrill Lynch has cut its forecast for Lehman (LEH) which they expect to take another $2.5 billion in write offs in Q3. It is quite amusing watching the brokers competitively downgrade each others? earnings outlooks.

6) If you strip out the problem children, the financials, Q2 2008 S&P 500 earnings will be up 10% YOY. More than 72% of companies are reporting sales increases. If you are not in headline dominating housing, automobiles, or financials, the economy is booming. Sometimes the best investment strategy is to simply turn off the TV.

7) If Obama wins the election, which now appears to be a certainty, there will be a rush to sell stocks towards year end and realize capital gains to beat the higher capital gains taxes that he is proposing.

8) The next big wave of defaults will be in prime option ARMS for trophy houses which have so far held up well. Many of these loans were taken out by high FICO score borrowers with teaser rates as low as 1%. With five year resets now hitting, the refinancing and the real estate market ain't there. I would look at more open houses on Sundays, but finding the real estate broker hanging from the bathroom shower head is a bit of a downer for my day off.

Global Market Comments for July 28, 2008

1) Panic selling of stocks into the close as last week's short covering rally exhausts itself. Crude?s back up to $125 didn't help. Dow down 240.

2) Fortune Brands (FO) reported Q2 net earnings down 41%. This hybrid company saw their alcoholic beverage sales hold up OK (Jim Beam, Ronrico Rum, Canadian Club), but were pulled down by their housing exposure (Master Brand Cabinets, Moen, and Master Locks). Last November the company sold its wine operations, including Clos du Bois, to Constellation Brands (STZ). The stock is down this year from $90 to $52.

3) Mark Cuban is bidding $1.3 billion for the Chicago Cubs. This is 15% of the $8.5 billion that seller Sam Zell paid for the entire Cubs, Wrigley Stadium, Chicago Tribune package. Zell has to be in a world of hurt on this one.

4) Use the sell off in crude to get a good entry point into the Russian stock market, where energy accounts for 60% of the market capitalization. The Russian Trading System Index ($RTSI) is off 22% from its 2,500 high in only two months. Russian GDP is growing at an 8% rate while consumption is growing at a breakneck 11% rate. Wages have risen by 65% over the last four years. High end homebuilder RGI International (RGI.LN) is a good way to play this. The average Russian home has only 200 square meters (1,800 square feet) compared to 300 square meters for Western Europe, and rising standards of living means new homeowners can afford to trade up. But buy only when there is blood in the streets.

5) Merrill Lynch has cut its forecast for Lehman (LEH) which they expect to take another $2.5 billion in write offs in Q3. It is quite amusing watching the brokers competitively downgrade each others? earnings outlooks.

6) If you strip out the problem children, the financials, Q2 2008 S&P 500 earnings will be up 10% YOY. More than 72% of companies are reporting sales increases. If you are not in headline dominating housing, automobiles, or financials, the economy is booming. Sometimes the best investment strategy is to simply turn off the TV.

7) If Obama wins the election, which now appears to be a certainty, there will be a rush to sell stocks towards year end and realize capital gains to beat the higher capital gains taxes that he is proposing.

8) The next big wave of defaults will be in prime option ARMS for trophy houses which have so far held up well. Many of these loans were taken out by high FICO score borrowers with teaser rates as low as 1%. With five year resets now hitting, the refinancing and the real estate market ain't there. I would look at more open houses on Sundays, but finding the real estate broker hanging from the bathroom shower head is a bit of a downer for my day off.