October 2009

Global Market Comments
October 2, 2009

Featured Trades: (MSFT), (BRK/A),
(ORCL), (WMT), (CVX), (MEXICO)

1) We are now six months and 22 days into the global stock market rally, and what a rally its been! The move off the bottom has been the largest in history, and Q3 was the best in 11 years. The crash took world stock market capitalization down from a peak of $63 trillion, down to $25 trillion, lopping off some $38 trillion in equity value. The US alone cut $11 trillion, plunging from $19 trillion to $8 trillion. This is wealth destruction of a truly Biblical proportions. Since March, the world has recovered $18 trillion, and the US $5 trillion, giving investors, portfolio managers, and brokers a definite spring in their step. If you like to track this kind of big macro data, visit my friends at the Bespoke Investment Group at http://bespokepremium.com/.? Keep that Kool-Ade coming, Ben!

2) Damn! I missed getting on the Forbes 400 list of the richest people in the world again. Microsoft?s (MSFT) bridge playing Bill Gates beat me out once more, coming in at $50 billion, down $7 billion from last year. He was followed by his bridge partner, Berkshire Hathaway?s (BRK/A) Omaha Oracle, Warren Buffet, at $40 billion, and Oracle?s (ORCL), Larry Ellison, at $27 billion, who miraculously saw no change in his net worth. Of the three, Bill?s MSFT shares were far and away the best performer, soaring some 82% from the $14.50 low to $26.50, its cash mountain intact and Yahoo free. The total for the 400 plunged by a staggering $300 billion, from $1.57 trillion to $1.27 trillion.?? Thanks to the market meltdown, the price of admission to the exclusive club has cratered from $1.3 billion to a only $950 million, mere pennies when you think about it. The biggest gainer was Beal Bank?s Andy Beal of Dallas, the noted high stakes poker player who astutely hoovered up distressed assets when everyone else was puking them out. Now there?s a man after my own heart. What?s the secret to becoming an American billionaire? Have a rich dad. Four out of the top ten were the children of Walmart?s (WMT) Sam Walton. Oh well. There?s always next year. Since I can?t be reborn as a Walmart offspring, I guess I?ll just have to work harder.

3) Armed with a pass from Chevron (CVX) CEO, Dave O?Reilly, I drove out to the company?s Richmond, California refinery to see how bad the crude storage situation really is. This is where tankers unload crude from Alaska?s Aleyaska Pipeline for refining into gasoline and other products. What do I find, but mile upon mile of full tank cars, the firm?s storage facilities already loaded to the gills. The industry?s central delivery facility at Cushing, Oklahoma is nearly full, the Strategic Petroleum Reserve is full, and if any more crude is imported, it will have to be stored in left over milk bottles. The filling of the last bit of storage in the US is no doubt what?s behind the stalling in the price of crude around $70 for the past four months, now that contango driven traders can less profitably buy spot, sell forward, and store in the interim. Owners are choking on the stuff. Investor buying of crude as the new reserve currency is what caused it to double this year, not demand by end users. I?m sorry, but I?m an old school hedge fund manager, and I?m from Missouri (philosophically).? If a company tells me something, I have to go out to the storage facility, mine, well, pit, warehouse, and see it for myself.

4) I get e-mails everyday from readers out there informing me of conditions in the real world.?? Dixie is an American active in the expat community in Guadalajara, Mexico, who says that restaurants are deserted, sales are ubiquitous, and the prices of everything are negotiable. Home prices are down 20% YOY, and this is in a land where lack of mortgages required most to pay cash. One antique store owner says conditions are the worst since 1994, when Mexico last suffered and economic crisis. Food prices are soaring, with the price of bananas doubling since June. Working Mexicans are in trouble, and the crime rate is soaring. Yu can analyze a Cray mainframe?s worth of economic data, and still not get the insights provided by one report from the field like this. Muchas Gracias, Dixie.

QUOTE OF THE DAY

?I would never want to join a club that would want to have someone like me as a member,? said comedy legend Groucho Marx, who I met in 1974. What he said off-screen was even funnier than what he said onscreen. I laughed so hard my gut hurt for days afterward. And this was from an 84 year old!

Global Market Comments
October 1, 2009

Featured Trades: (IDX),
(INDONESIA), (FSLR), (STP), (YGE)

1) Was that nice for you, dear? Now that cash for clunkers has expired, new car sales have cratered. September is coming in at a 7 million unit run rate, lower than before the program started, and down 24% from already depressed YOY levels. It really makes you wonder what will happen when the other government stimulus programs run out. The $8,000 tax credit for first time home buyers ends November 30, and unless you have a deal in contract, the program is effectively over. That is thought to be behind the recent weakness in new home sales, the biggest beneficiaries of the program. Is this the beginning of the 'square root,' or the 'W.'

2)?? If you are looking for another emerging market to add to your list of?? things to buy on dips, then take a look at Indonesia. The world's largest Muslim country offers a combination that I love, a population with great demographics that is also a major energy and commodities exporter. The archipelago is the biggest country in Southeast Asia and a huge exporter of oil and LPG to Japan on long term contracts. (An old friend of mine torched their Borneo fields at the beginning of WWII, and spent four years in a Japanese prison camp for his troubles.) Other big exports include marvelous textiles, rubber, and increasingly rare tropical hardwoods. The global financial crisis only knocked their growth rate from 6.1% to 4.5%, and now it is back above 6%. No doubt, $63 billion of direct foreign investment into the country helped. A series of tax reforms promise to keep the train moving, cutting the top corporate rate from 30% in 2008 to 28% this year, and 25% next year. Wisdom Tree had the 'wisdom' to launch the country's first ETF (IDX) in January (what timing!), which became one of the best performers this year, rocketing over 300% from the lows to $60.?? Islamic inspired terrorism is still a lingering concern. I keep Indonesia in the category of highly volatile, high risk, high return frontier markets that you only want to buy on a big dip. Keep it on your radar.

3) I spent the evening speaking to Gao Jie, a Beijing civil judge who left the bench to join China's growing environmental movement when her kids came home from school one day coughing and wheezing. You only have to inhale in the capitol city these days to understand that they have a huge problem there. One of the dirty little secrets of international trade for the last three decades has been the offshoring of high polluting industries from the US and Europe to China, which then vociferously complain about the emerging country's toxic environment. 'Cancer villages' are now proliferating throughout the landscape. China gets 80% of its power from coal, compared to only 50% in the US. As a result, scientists figure that China became the world's largest emitter of CO2 in 2006. The central government is now asking the provinces to achieve both GDP and energy conservation goals. Government policy dictates that air conditioners only kick in at 79 degrees. It is also pushing headlong into alternative energy, with an eye to exporting low cost platforms to the US. It is no accident that two of the most competitive solar companies in the world, Suntech (STP) and Yingli Green Energy Holding (YGE), are Chinese (click here for my piece on the Chinese solar wars). China is also negotiating to have Phoenix based First Solar (FSLR) build the world's largest thin film solar power plant in Western China, which, it turns out, looks a lot like Arizona. The mammoth, 25 square mile facility will supply power to three million homes. China's problems give one an inkling of how we might have ended up if we hadn't passed the Environmental Protection Act. I first visited China during the Cultural Revolution, when they doused piles of bodies of those who died in the famine with kerosene and burned them, and anyone educated had to endure being paraded down a street in a dunce cap. I had to pinch myself after seeing a sophisticated and well educated woman like Gao Jie openly pursue her liberal goals, unfettered by a totalitarian regime.

QUOTE OF THE DAY

'What you read in most financial theory textbooks bears almost no resemblance to what you actually see on most trading floors,' said Benoit Mandelbrot, the French American mathematician who fathered the fractal geometry used in many risk analysis models.