Global Market Comments for August 4, 2008
1) Hurricane Edward showed up and the US threatened to close the Straights of Hormuz, but crude didn’t go up. Therefore, it had to go down, crashing $7 to $119. But the only way to make oil seem cheap at $119 is to start out at $148. Natural gas hit $8.60. Wow!
2) Florida based luxury homebuilder WCI Communities (WCI) filed for chapter 11 because of its inability to roll over $1.8 billion in debt. Carl Icahn tried to take over this company a year ago at $22/share after it had fallen from $40, but failed. Sometimes your best trades are the ones you don’t do. Expect more homebuilders to fail. Read the ‘ghost towns’ article in the Saturday WSJ.
3) The Fed meets tomorrow, so it can do nothing on interest rates.
4) June factory orders are up 1.7%, much better than expected
5) The storage business is booming as a tidal wave of foreclosures and evictions force people out of homes. Even renters are being tossed out as foreclosed owners fail to renew leases. There are now waiting lists at many locations. San Francisco facilities often have to evict individuals who try to live cheaply in their units with their furniture.
6) A group called ‘Recreate 68’, the same group that organized the Seattle World Trade Organization protests in 1999, is stockpiling feces in a Denver warehouse to throw at the Democratic convention. Police and health authorities are looking for the warehouse. No kidding.
7) The next credit crunch to occur will be in consumer finance. To protect against falling real estate prices, banks this year will cut existing consumer credit lines from $4.7 trillion to $2 trillion. The legendary spending habits of the American consumer will be cut off at the knees.
8) All of the new equity raised by banks and brokers this year is being used to plug holes, not fund new lending. When new equity is finally used to create new profits, the bottom will be put in financial stocks. This is a ways off. The new floor in expected write offs by the financial industry is increasingly being seen at $1 trillion, with the new ceiling at $2 trillion. This is $2 trillion that is no longer available to buy real estate. This drastic reduction in bank lending now virtually assures that the real estate sell off with be the worst since the great depression. Market declines of 40%-50% in Florida, California, and Nevada are increasingly being discussed.