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, or?? another 24% down from the top, to $260,000.?? 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 of?? 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.

Global Market Comments for September 5, 2008

1) The August unemployment rate rocketed from 5.7% to 6.1%, a five year high. The monthly non farm payroll rose an unexpected 84,000. Traders were out there from the get go, selling stocks with both hands, taking the Dow down 150 points. Bond yields are flirting with all time lows. Blood is flowing in the streets once again as the stock indexes approach new lows. This is bound to feed into the election. Short McCain.

2) Suntech Power (STP), the largest solar module manufacturer in the world, seems to be the one solar energy company that is best poised to get its margins under control, crucial in the face of steeply falling oil prices. The Chinese firm has already dropped from $90 to $33. In China, farmers are jumping from the first century to the 21^st, converting from ox power to solar, in one go.

3) The unique thing about this housing downturn is the huge number of new homes that were bought by speculators with no money down, never lived in, and then foreclosed. This enormous new inventory is collecting dust, for sale at big discounts, and hammering the public homebuilders. Hovnanian (HOV) just announced a Q2 loss of $202 million. The stock has plunged from $45 to $4.50. Eli Broad, billionaire retired founder of Kaufman & Broad, believes that the market won't recover for another 2-3 years.

4) According to Dr. Levitsky of hallowed Cornell University, intensive mental activity, like mathematical calculations, Scrabble playing, or stock picking, can burn off excess calories. The bad news is that it is only about 20 calories/day, the equivalent of one M&M.

5) Regional airports are getting pummeled by the airline crisis, with departures at Oakland airport down 19% YOY. Carriers are either consolidating down to the single largest airport in an area, like SFO, or just plain going bust and walking away from substantial bills and leases. Many smaller local airports are now no longer served by any airlines after communities spent millions to upgrade and service them.

6) The US consumes 25% of the world's energy, but owns only 3%. This is a problem.

7) Of the 3.3% in GDP growth seen in Q2 2008, 3.1% came from international trade.

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.

Global Market Comments for September 3, 2008

1) The dollar spiked up to the $1.43 handle against the euro as billions poured out of the soon to be lower yielding euro and pound and into the soon to be higher yielding greenback. Since we have had no significant pull backs from the major break of $1.55, this is increasingly taking on the character of a multi year trend reversal. Trillions of dollars of commercial hedges are going to have to be unwound. Parity, or $1 to ???1 is not out of the question. But the buck has got to cool when it hits the $1.30s.

2) British Chancellor of the Exchequer Alistair Darling says the UK economy is in the worst shape in 60 years. The German business climate index is at a three year low and consumer sentiment shrunk to a five year low. Sell Poland, which is to Germany as Canada is to the US.

3) There is a real estate melt down of Biblical proportions going on in Incline Village, Nevada, a major West Coast hedge fund center (and also where Michael Corleone had his half ??brother Fredo dispatched in Godfather III.)The toney hamlet nestled on the shores of Lake Tahoe has 550 homes for sale out of a population of 10,000, 70% of which are priced at over $1 million. Palatial spec homes on Lakeshore Blvd., the local millionaire's row, have every imaginable amenity (radiant floor heating in the driveway?) and are still being marked down $1 million a quarter. If you think we are anywhere close to a bottom in the housing market, talk to one of the shell shocked agents there, that is if you can talk one back from the ledge.

4) 75% of Americans own computers compared to 9% of Chinese and 5% of Indians. Guess where the future growth in profits will be. Buy Lenovo (LNVGY) and Acer (ACID), along with Intel (INTC), Dell (DELL), and Hewlett Packard (HPQ) for their global sales presence.

5) Foreclosures on US commercial loans are taking off at an unprecedented rate. Expect the securities backing these loans to tank further. Banks will pare back new lending to the sector in typical 'closing the barn door after the horses have bolted' fashion.

6) Natural gas (NG) hit a new low for the move of $7.00, and the crude ratio hit a shocking 15.5 times versus the historical 9-10 times. When NG recovers you want to watch Golar LNG Ltd. (GLNG), which has been unfairly knocked down 40% because of an inaccurate association with natural gas, even though it is only involved in the long distance transportation of LNG.

Global Market Comments for September 2, 2008

1) Hurricane Gustav pulled its punch, so crude (USO) crashed $13 from the Friday high to the $105 handle. The market was discounting another Katrina and got a damp squib instead. Natural gas (NG) collapsed 74 cents to $7.20. They don't call this contract the widow maker for nothing. Expect to hear about more hedge funds going under, married to their longs. Please see last week's call not to buy this dip. The ninety dollar handle for crude may be only one weak storm away. Don't expect pump prices to fall much because 2.6 million barrels/day of refining capacity is still offline.

2) Stocks loved the crude fall, for a few hours anyway, rallying 200 points, then falling 300. The fact that these rallies have no shelf life is telling you a lot. To see the Dow up only 500 points from the July bottom on a $43 drop in the price of crude is disheartening, to say the least. The bond market isn't buying it for a nanosecond, with prices approaching new highs for the year. United Airlines (UAUA) rocketed with the other airlines, up 50% intraday, and has risen from $2.50 to a high of $16, up 600% in ten weeks. Please see my June recommendation to buy the airlines as a cheap undated put on crude. This trade is now gone.

3) I come back from vacation to find out that if McCain wins the election and then dies, the finger on the nuclear launch button will belong to the recent alpha female, lifetime NRA member mayor of Wasilla, Alaska, population 5,469. McCain just tossed out the inexperience issue he could use against Obama, along with the ever important pro caribou constituency. Check out her Miss Alaska photos. They're hot! The rest of the world must think we've gone mad. You're good at filling in small town pot holes? Great, please run the country for us. I guess anyone is an improvement over what we've got. The market sold off big on the news. I'm going back to the mountains and becoming a survivalist.

4) There were massive outright sellers of Lehman (LEH) puts last week, something few have had the guts to do so far. Someone is betting that Dick Fuld can pull off a ?Hail Mary? before the earnings are due out later this month.

5) The dollar broke to a new high for the year to the $1.44/euro handle. It is becoming increasingly clear that the next moves in interest rates will be up in the US and down in Europe, with the UK leading the charge to the downside. Even the Australian central bank has cut interest rates for the first time in seven years. That makes sterling the best short out there. The move has been so massive, and so rapid, that multinationals are being forced to cover large scale hedges because of margin calls, adding fuel to the fire. Look for the euro going to the mid $1.30s and the pound at $1.50 at a minimum.