December 2008

December 4, 2008

Global Market Comments for December 4, 2008
Featured trades: (VIX), ($GOLD), ($SPX), (BAC), (DD), (T)

1) The relentless drumbeat of layoffs continues. United at SFO 500, DuPont (DD) 2,500, AT & T (T) 1,200, and Bank of America 30,000! Many of the BAC cuts will be at its newly acquired Merrill Lynch subsidiary. If the Big Three auto makers go under, add another two million to these figures. Overnight the ECB cut interest rates by 0.75% to 2.50%.

2) Historically, recessions end right after the government announces them. The most powerful leading indicator, the stock market, understands this and enters a bull market soon after. Employers, the most pitiful lagging indicator, start hiring about two years later.

3) It looks like the Volatility Index (VIX) is heading into a new, permanently higher range. When the VIX was at 15%, it created a daily Dow range of 1%, or 140 points. At 60% it creates a 4% daily range, or 350 points. Fasten your seat belts!

4) Hawaii has adopted the Better Place exchangeable battery program for cars you were so interested in. The state is an ideal location for such a program because the island limits most car trips to less than 40 low speed miles. Gas is expensive there, because it all must be imported from the West Coast. It will cost $1 billion to build the initial recharging network, and fleets are expected to be the initial users.

5) Famed short seller Bill Fleckenstein, author of Greenspan's Bubbles: The Age of Ignorance at the Federal Reserve, has made a killing in this year's melt down. Bill is such a serious short seller that he keeps a seven foot tall stuffed bear in his office wearing a 'Dow 10,000' hat. Bill has just covered his stock shorts because the government has created just too much liquidity to justify the risk. And maybe he looked at the chart of the S&P 500 below. He is, however, keeping a core long in gold because the current massive reflationary campaign will eventually come back to bite in the form of much higher inflation.

December 4, 2008

Diary

Global Market Comments for December 4, 2008
Featured trades: (VIX), ($GOLD), ($SPX), (BAC), (DD), (T)

1) The relentless drumbeat of layoffs continues. United at SFO 500, DuPont (DD) 2,500, AT & T (T) 1,200, and Bank of America 30,000! Many of the BAC cuts will be at its newly acquired Merrill Lynch subsidiary. If the Big Three auto makers go under, add another two million to these figures. Overnight the ECB cut interest rates by 0.75% to 2.50%.

2) Historically, recessions end right after the government announces them. The most powerful leading indicator, the stock market, understands this and enters a bull market soon after. Employers, the most pitiful lagging indicator, start hiring about two years later.

3) It looks like the Volatility Index (VIX) is heading into a new, permanently higher range. When the VIX was at 15%, it created a daily Dow range of 1%, or 140 points. At 60% it creates a 4% daily range, or 350 points. Fasten your seat belts!

4) Hawaii has adopted the Better Place exchangeable battery program for cars you were so interested in. The state is an ideal location for such a program because the island limits most car trips to less than 40 low speed miles. Gas is expensive there, because it all must be imported from the West Coast. It will cost $1 billion to build the initial recharging network, and fleets are expected to be the initial users.

5) Famed short seller Bill Fleckenstein, author of Greenspan's Bubbles: The Age of Ignorance at the Federal Reserve, has made a killing in this year's melt down. Bill is such a serious short seller that he keeps a seven foot tall stuffed bear in his office wearing a 'Dow 10,000' hat. Bill has just covered his stock shorts because the government has created just too much liquidity to justify the risk. And maybe he looked at the chart of the S&P 500 below. He is, however, keeping a core long in gold because the current massive reflationary campaign will eventually come back to bite in the form of much higher inflation.

December 3, 2008

Diary

Global Market Comments for December 3, 2008
Featured trades: (DRYS) (BDI), (FCX)

1) The ISM non manufacturer's index for November came in at 37.3, down from 44.4. This number is so solidly recessionary, it is almost unbelievable.

2) The stock market looks like the North Atlantic just after the Titanic went down. Dead bodies are floating everywhere, equipped with useless life jackets. I poked one with an oar today, and guess what turned over, but the scavenger ravaged face of Dry Ships, Inc. (DRYS), the Greek dry bulk carrier which has seen its stock drown since June. It has fallen 97% from $120 to $3. In June, it was chartering ships for $200,000/day. Today it chartered one to Cargill for $1,000 (no, there are not three zeros missing from this number). This will not cover the cost of the coffee for the crew. It seems that capital intensive industries, like shipping, don't do very well when global credit markets shut down. The industry is now facing a five year deluge of new ships ordered during the commodities frenzy. This, on top of a complete vaporization of its business, due to the near shut down of iron ore imports by China.?? Another indication of the tsunami that has hit this sector has been the complete collapse of the Baltic Dry Index ($BDI) from 12,000 to only 684. Like so many other companies now, DRYS is a huge buy here, as long as it doesn't go bankrupt next year. Women and children first?

3) Despite the 11 wide releases this past weekend, the movie industry could be facing tough times in 2009. Movie makers earned $10 billion this year from ticket sales, and another $25 billion from DVD sales. But the number of consumers willing to fork out $30 for a blue ray disk, and another $200 for a machine to run it, will certainly decline. A Screen Actor's Guild slated for January will also cut into new releases. Optimists point out that fans flocked in droves to theaters during the Great Depression. But that was when tickets sold for five cents!

4) One big target in the Treasury's desperate reflationary program is the 30 mortgage fixed interest rate, which has stayed stubbornly high, despite 3 ??% in Fed rate cuts in 16 months. It is doing this through massive buying of long dated instruments. Mortgage rates are being dragged down, kicking and screaming all the way, by sinking long bond rates, which hit new 50 year lows yesterday. Expect the 30 year rate to drop 100 basis points to 4.5% and help put a floor under the housing market. This is where monthly mortgage payments become competitive with rents. Mortgage Bankers Association figures say the strategy is working. In the last week of November a sudden 50 bp drop in rates to 5.50% caused new applications to soar to double the previous record. Hold off on that refi!

5) Leading copper producer and former hedge fund darling, Freeport McMoran (FCX), suspended its dividend today, knocking the stock down 20%. Shriveling demand from China has cut the price of the red metal from $4.10 to $1.50 in a heartbeat. China shut down its economy for the Olympics, but lost the directions on how to restart. Boom to bust in four months, and this is going on everywhere. This is a huge buy on the rebound.

December 3, 2008

Diary

Global Market Comments for December 3, 2008
Featured trades: (DRYS) (BDI), (FCX)

1) The ISM non manufacturer's index for November came in at 37.3, down from 44.4. This number is so solidly recessionary, it is almost unbelievable.

2) The stock market looks like the North Atlantic just after the Titanic went down. Dead bodies are floating everywhere, equipped with useless life jackets. I poked one with an oar today, and guess what turned over, but the scavenger ravaged face of Dry Ships, Inc. (DRYS), the Greek dry bulk carrier which has seen its stock drown since June. It has fallen 97% from $120 to $3. In June, it was chartering ships for $200,000/day. Today it chartered one to Cargill for $1,000 (no, there are not three zeros missing from this number). This will not cover the cost of the coffee for the crew. It seems that capital intensive industries, like shipping, don't do very well when global credit markets shut down. The industry is now facing a five year deluge of new ships ordered during the commodities frenzy. This, on top of a complete vaporization of its business, due to the near shut down of iron ore imports by China.?? Another indication of the tsunami that has hit this sector has been the complete collapse of the Baltic Dry Index ($BDI) from 12,000 to only 684. Like so many other companies now, DRYS is a huge buy here, as long as it doesn't go bankrupt next year. Women and children first?

3) Despite the 11 wide releases this past weekend, the movie industry could be facing tough times in 2009. Movie makers earned $10 billion this year from ticket sales, and another $25 billion from DVD sales. But the number of consumers willing to fork out $30 for a blue ray disk, and another $200 for a machine to run it, will certainly decline. A Screen Actor's Guild slated for January will also cut into new releases. Optimists point out that fans flocked in droves to theaters during the Great Depression. But that was when tickets sold for five cents!

4) One big target in the Treasury's desperate reflationary program is the 30 mortgage fixed interest rate, which has stayed stubbornly high, despite 3 ??% in Fed rate cuts in 16 months. It is doing this through massive buying of long dated instruments. Mortgage rates are being dragged down, kicking and screaming all the way, by sinking long bond rates, which hit new 50 year lows yesterday. Expect the 30 year rate to drop 100 basis points to 4.5% and help put a floor under the housing market. This is where monthly mortgage payments become competitive with rents. Mortgage Bankers Association figures say the strategy is working. In the last week of November a sudden 50 bp drop in rates to 5.50% caused new applications to soar to double the previous record. Hold off on that refi!

5) Leading copper producer and former hedge fund darling, Freeport McMoran (FCX), suspended its dividend today, knocking the stock down 20%. Shriveling demand from China has cut the price of the red metal from $4.10 to $1.50 in a heartbeat. China shut down its economy for the Olympics, but lost the directions on how to restart. Boom to bust in four months, and this is going on everywhere. This is a huge buy on the rebound.

December 2, 2008

Diary

Global Market Comments for December 2, 2008
Featured trades: (POT), (MOS), (AGU), ($NIKKEI), (GM)

1) It's official. We are in a recession. And the great news is that we have been in a recession since December, 2007, as I suspected all along. This means that we are 13 months into a postwar recession that averages 14 months. To match the longest postwar recession we would have to go 24 months, or until November, 2009. Proof that we are closer to the end than the beginning. This was all worth 270 points for the Dow.

2) Renee Haugerud of Galtere International Funds, one of the top performing hedge funds this year, says that commodities are only resting now, and will lead the charge in any recovery. The world is now seeing a tectonic shift away from paper assets towards hard assets that has only just started, and has at least six more years to go. Equities peaked last year and bonds are peaking now. Long commodities/short equities should be a core strategy for every hedge fund manager going forward. A tip off for this was the massive rally in commodities linked equities we saw last week. I think she is dead on right. Watch the Ags, energies, and metals, as well as the Ag names Potash (POT), Mosaic (MOS), and Agrium (AGU).

3) By 1982, after a vicious 15 year bear market, equities had become the most hated asset class. Households had cut stocks to only 4% of assets. By 2000, equities were loved passionately, rebounding to 60%. We have now had eight years of subpar stock markets, and analysts are wondering how sparse the allocation will go this time.

4) Nobody knows better how to deal with a prolonged depression than the Japanese. After 18 years of restructuring, companies there may be in the best position to withstand the current deflationary onslaught. Land is carried on the books at ancient acquisition costs, and securities holdings are severely depressed, but all market to market. Since there has been little new investment for a decade, plant and equipment has been largely written off. With the Nikkei 225 at ??7,883, down 80% from its 1990 peak of ??39,000, this adds up to a market selling at a severe discount to book value. You effectively get the management, R&D, distribution, and brands of these companies for free. When cash accounts for half of your market cap, you are in great shape to withstand a downturn.

5) General Motors (GM) reported November car sales down a mind numbing 41%, far worse than even the most draconian forecasts. Even Toyota was down 33%. This, on the day when GM goes back to Washington to panhandle for more money. The saddest thing is, they will probably get it. A more productive use of this money would be for congress to disburse it only in one dollar bills, then pile it up in Detroit and set fire to it. That way the frozen city would at least get some free heating.

QUOTE OF THE DAY

'The limit should not be the amount of money we commit to a recovery, but the number of ideas we come up with.' Paul Krugman, winner of the 2008 Nobel Prize for economics. Among Krugman's ideas for how to spend immediately: $350 billion for national infrastructure, extended jobless claims, and direct aid to the states on the edge of bankruptcy in order to provide services.

December 2, 2008

Diary

Global Market Comments for December 2, 2008
Featured trades: (POT), (MOS), (AGU), ($NIKKEI), (GM)

1) It's official. We are in a recession. And the great news is that we have been in a recession since December, 2007, as I suspected all along. This means that we are 13 months into a postwar recession that averages 14 months. To match the longest postwar recession we would have to go 24 months, or until November, 2009. Proof that we are closer to the end than the beginning. This was all worth 270 points for the Dow.

2) Renee Haugerud of Galtere International Funds, one of the top performing hedge funds this year, says that commodities are only resting now, and will lead the charge in any recovery. The world is now seeing a tectonic shift away from paper assets towards hard assets that has only just started, and has at least six more years to go. Equities peaked last year and bonds are peaking now. Long commodities/short equities should be a core strategy for every hedge fund manager going forward. A tip off for this was the massive rally in commodities linked equities we saw last week. I think she is dead on right. Watch the Ags, energies, and metals, as well as the Ag names Potash (POT), Mosaic (MOS), and Agrium (AGU).

3) By 1982, after a vicious 15 year bear market, equities had become the most hated asset class. Households had cut stocks to only 4% of assets. By 2000, equities were loved passionately, rebounding to 60%. We have now had eight years of subpar stock markets, and analysts are wondering how sparse the allocation will go this time.

4) Nobody knows better how to deal with a prolonged depression than the Japanese. After 18 years of restructuring, companies there may be in the best position to withstand the current deflationary onslaught. Land is carried on the books at ancient acquisition costs, and securities holdings are severely depressed, but all market to market. Since there has been little new investment for a decade, plant and equipment has been largely written off. With the Nikkei 225 at ??7,883, down 80% from its 1990 peak of ??39,000, this adds up to a market selling at a severe discount to book value. You effectively get the management, R&D, distribution, and brands of these companies for free. When cash accounts for half of your market cap, you are in great shape to withstand a downturn.

5) General Motors (GM) reported November car sales down a mind numbing 41%, far worse than even the most draconian forecasts. Even Toyota was down 33%. This, on the day when GM goes back to Washington to panhandle for more money. The saddest thing is, they will probably get it. A more productive use of this money would be for congress to disburse it only in one dollar bills, then pile it up in Detroit and set fire to it. That way the frozen city would at least get some free heating.

QUOTE OF THE DAY

'The limit should not be the amount of money we commit to a recovery, but the number of ideas we come up with.' Paul Krugman, winner of the 2008 Nobel Prize for economics. Among Krugman's ideas for how to spend immediately: $350 billion for national infrastructure, extended jobless claims, and direct aid to the states on the edge of bankruptcy in order to provide services.

December 1, 2008

Diary

Global Market Comments for December 1, 2008
Featured trades: (WTIC)

1) The good news is that the Black Friday retail sales figures came in better than expected, up 7% according to some surveys. The bad news is that designer goods were sold at flea market prices, jumbo flat screen TV's were given away for half, and that all of the stores slashing prices were losing money big time. Friday offered the greatest sales promotions ever. What's worse, it appears that many consumers finished their Christmas shopping on Friday. China's purchasing managers index indicates that the economy there has ground to a complete halt. It didn't help that Oppenheimer's Meredith Whitney predicted that credit card companies would cut credit lines by $2 trillion over the next 18 months. With traders anticipating the worst non-farm payroll number in decades this Friday, more than minus -300,000, it was all enough to chop 700 of the Dow. Treasury bond yields tumbled to 50 year lows across the board.

2) Last week was the best for the stock market since 1932. Today was the worst December 1 since 1929, and I am afraid that this will not be the last comparison with 1929 we will make this month.

3) Obama's appointment of former Fed governor Paul Volker as head of his special economic team tells you more than it says. It means that the president elect understands that the biggest challenge to his administration during the 2012 election will be reigning in double digit inflation triggered by today's massive liquidity creation. Who better to do this than Volker, the last living Fed governor to break the back of high inflation in the US. Warning: He did this by wringing every last drop out of credit growth, and jacking up short interest rates to 18%.

4) The hotel industry is now facing a perfect storm.?? Occupancy rates have fallen by 14 consecutive months, while supply is up 2.4%, well above its long term trend growth rate. Business travelers are down 2-3%, leisure travelers are down 6-7%, and international travelers have been knocked out of the box by the suddenly stronger dollar. What corporate business remains is seeing prices beaten down by customers desperate to cut their own costs. Only the convention business remains healthy, because bookings were made one to three years ago, back in the boom days. Hotel managers are trying to stop the bleeding by adding the innocuous little fees that I always hate, such as for mini bar restocking, baggage storage, early check ins, and late check outs.

5) The market is rife with stories of distress in the global crude markets, and a break below $50 is a gimme. OPEC has proven politically unable to make sufficient production cuts. Virtually all storage facilities are now full, and China has become a net exporter of gasoline for the first time. Shell just chartered a 311,000 ton tanker, the Front Crown, for $60,000/day to store crude it is unable to deliver. Because of the credit freeze, it now costs 17%/per annum to carry a long position in the futures market. Lat week whole gasoline futures crashed below $1, meaning the Bay Area retail prices may fall to $1.29/gallon by early next year!

December 1, 2008

Diary

Global Market Comments for December 1, 2008
Featured trades: (WTIC)

1) The good news is that the Black Friday retail sales figures came in better than expected, up 7% according to some surveys. The bad news is that designer goods were sold at flea market prices, jumbo flat screen TV's were given away for half, and that all of the stores slashing prices were losing money big time. Friday offered the greatest sales promotions ever. What's worse, it appears that many consumers finished their Christmas shopping on Friday. China's purchasing managers index indicates that the economy there has ground to a complete halt. It didn't help that Oppenheimer's Meredith Whitney predicted that credit card companies would cut credit lines by $2 trillion over the next 18 months. With traders anticipating the worst non-farm payroll number in decades this Friday, more than minus -300,000, it was all enough to chop 700 of the Dow. Treasury bond yields tumbled to 50 year lows across the board.

2) Last week was the best for the stock market since 1932. Today was the worst December 1 since 1929, and I am afraid that this will not be the last comparison with 1929 we will make this month.

3) Obama's appointment of former Fed governor Paul Volker as head of his special economic team tells you more than it says. It means that the president elect understands that the biggest challenge to his administration during the 2012 election will be reigning in double digit inflation triggered by today's massive liquidity creation. Who better to do this than Volker, the last living Fed governor to break the back of high inflation in the US. Warning: He did this by wringing every last drop out of credit growth, and jacking up short interest rates to 18%.

4) The hotel industry is now facing a perfect storm.?? Occupancy rates have fallen by 14 consecutive months, while supply is up 2.4%, well above its long term trend growth rate. Business travelers are down 2-3%, leisure travelers are down 6-7%, and international travelers have been knocked out of the box by the suddenly stronger dollar. What corporate business remains is seeing prices beaten down by customers desperate to cut their own costs. Only the convention business remains healthy, because bookings were made one to three years ago, back in the boom days. Hotel managers are trying to stop the bleeding by adding the innocuous little fees that I always hate, such as for mini bar restocking, baggage storage, early check ins, and late check outs.

5) The market is rife with stories of distress in the global crude markets, and a break below $50 is a gimme. OPEC has proven politically unable to make sufficient production cuts. Virtually all storage facilities are now full, and China has become a net exporter of gasoline for the first time. Shell just chartered a 311,000 ton tanker, the Front Crown, for $60,000/day to store crude it is unable to deliver. Because of the credit freeze, it now costs 17%/per annum to carry a long position in the futures market. Lat week whole gasoline futures crashed below $1, meaning the Bay Area retail prices may fall to $1.29/gallon by early next year!