1) Volatility alert! Volatility alert! The ADP employment report showed 491,000 in job losses for April. Whoopee! We are only losing 16,000 jobs a day instead of 20,000! But the consensus for the Friday's nonfarm payroll is -650,000. The divergence is sure to boost market volatility, either pushing the market up or down big. Winner to be announced at 8:30 am on Friday, East coast time.

2) The other shoe is dropping in the commercial real estate market. Sector delinquencies on securitized loans have jumped from 0.5% last fall to 2.45% in April, the most rapid acceleration in history. Foreclosures are spreading, knocking valuations of properties down as much as 70%, wiping out the equity investors, the mezzanine debt holds, and a good chunk of the primary debt owners. The General Growth Properties (GGWPQ) bankruptcy last month, the largest on record, is further clouding the picture. The firm is trying to bring remote special purpose entities normally immune to these proceedings into the general bankruptcy. If the judge rules in their favor, it will shake the foundations of the whole industry, and send lenders into a long hibernation. Whatever the result, the commercial real estate industry that rises from the ashes years down the road will be unrecognizable. Watch the shares of Bank of America (BAC) and Wells Fargo (WFC), two of the biggest lenders in the sector. Is it any wonder that BAC disclosed today that they need another $35 billion in capital, on top of the $40 billion in TARP money they have already taken, and that WFC needs and additional $15 billion?

3) The real estate tracking firm Zillow.com estimates that 30% of all US homes are now underwater on their mortgages, equivalent to 27 million homes. There is a 'shadow inventory' of a further 30 million homeowners who want to sell their houses on the any improvement in prices. Newly tightened lending criteria have permanently knocked another 10 million potential buyers from the market. Some five million of the nation's 90 million houses are either for sale, in foreclosure, or held in bank inventories. I have a question. With 72 million on the sell side, who is going to power the much heralded rebound in prices? It could be a veeery long wait. I realize there is a lot of double counting here, but you get my meaning. It all bodes for an 'L' shaped recovery in the real estate market, which means no recovery. Keep that rental. No principal risk, no property taxes, and just a phone call unclogs the toilet.

4) Chinese Internet 'B to B' firm Alibaba.com (1688.HK) is the place you go to make those T-shirts, cell phones, computer parts, and pretty much anything which you then sell to the rest of the world. The company is one of the Middle Kingdom's spectacular growth stories, with users growing from 5 million to 8 million in the last three quarters, including 1.2 million in the US. In Q1 the company dropped fees and managed to pull in another 50,000 users. It believes that the recent quarter was the bottom of this economic cycle and that we are now in an upturn, with the fastest growth seen in Brazil and India (hint, hint). Given that their business gives them a unique peak into future business flows, it is a call you should take seriously. You should also look at the Hong King listed stock, which has risen 75% to $10.50 since February. With $1 billion on the balance sheet, it is also the most cash rich Internet firm in China.

1) San Francisco Bay looks like Normandy on D-Day today, invaded by a flotilla of cruise ships diverted by the swine flu from Mexican destinations. Two ships from Carnival (CUK) and one from Royal Caribbean (RCC) are docked at piers normally occupied by garbage scows and tugboats. Operators of a total of 28 ships have asked the Port of San Francisco for emergency landing rights, disgorging 1,000 to 2,000 free spending passengers each on the City by the Bay. Those who booked holidays looking forward to 90 degree temperatures, tacos, and tequila grumbled when they were delivered bone chilling fog, Dungeness crab, and Napa wine. Good luck getting a seat on a cable car this weekend. In the meantime, the government is going through great pains to convince us that you can't catch the bug from pigs. You can get heart disease, diabetes, obesity, and hardening of the arteries from pork, but definitely not the flu. Take a look at Smithfield Foods (SFD), which has dropped 30% since the pandemic fears hit.

2) March pending home sales jumped a surprising 3.2%, according to the National Association of Realtors, prompting another tidal wave of calls that we have hit bottom in the real estate market. Obama's $8,000 tax credit for first time purchasers ($14,000 in California), record low mortgage rates, a feeding frenzy by sharks and flippers, and the lowest prices in a decade were the cause.?? Contracted purchases were up 3.9% in the West (California) and down 5.7% in the Northeast (Michigan). I think we are anything but out of the woods. Several state and federal moratoriums on foreclosures are about to expire, unleashing another onslaught of foreclosures and short sales on the market. While inventories are shrinking for the moment because of the near shut down on new home construction, unemployment induced delinquencies are still soaring. At this stage of the economic cycle, you can count on seeing a raft of contradictory data. I'm afraid that I'm a glass half empty guy on this one. With all of the reasons to buy listed above, where are the multiple offers and the bidding wars? Continue to rent.

3) Regular readers of this letter are well aware of my aggressive recommendations to buy emerging markets China and Taiwan. Now you have another reason to buy both. The Middle Kingdom's China Mobile (CHL), the world's largest cell phone company, bought 12% of Far Eastone Telecommunications (4904.Taiwan). Although a small deal, it represents the first ever direct investment by a mainland company in the rebellious former province. The move could trigger a takeover binge by big Chinese companies of their offshore cousins. It was only a few years ago Taiwanese businessmen were arrested for just visiting, let alone investing in China, which they have done in a major way for 30 years. The iShares MSCI Taiwan fund ETF (EWT) has popped by 32% since the announcement last week, and is now up a gob smacking 74% from the March lows. Having endured daily shelling from the mainland (at exactly 12:00 noon every day) while on the small Republic of China island of Quemoy, this is more than just a symbolic gesture for me. I guess if you can't beat them, buy them.

QUOTE OF THE DAY

'The best time to buy stocks is when business is lousy,' said Warren Buffet, CEO of Berkshire Hathaway (BRK/A) and the Sage of Omaha.

1) There is something wrong with this picture.?? The Chinese stock market is shouting at us that the bull market is back, while the price of crude is telling us in more surreptitious tones that this is a bear market rally that will fail. If we were in a true economic recovery, crude would have run back up to the $70-$90 range by now. Who is right? Certainly large scale Chinese buying of economically sensitive commodities like crude and copper has been the hallmark this seven week move in global equity markets, which have brought a welcome $7 trillion boost in valuations. But how much of the move has been mere short covering? What is the extent of the dead can bounce? Until a recovery in corporate earnings signals the 'all clear' we could be stuck in a trading range here, possibly until the end of the year, and maybe for years. 'Sell in May and go away' is looking better by the day. Sell a few short dated calls above the market against your long positions. Pass the sunscreen?

2) Here are a few statistics about SARS (severe acute respiratory syndrome), also known as 'yellow pneumonia', the last pandemic fear that jolted the markets. In 2003, some 800 died in 25 countries, with an economic impact of $40 billion on the world economy. Then, like now, the press heralded this as the next Spanish flu. Instead it petered out in a few months. The market nearest epicenter of the crisis in China's Guangdong province, the Hang Seng, fell 25% to 9,000. I doubt this bug is going to be anywhere near as severe.

3) IBM has made public an excellent report on the long term future of the financial industry, one of its largest customers. The survey of 2,750 firms concludes that the age of extreme risk taking and huge bonuses is over. The high returns of the past, which thrived on the opacity of financial products, are history. Their guess is that profit margins will drop from an average 26% to 14%. Lower margins will be more sustainable. Long term compensation will be linked to long term gains, not short term profits. The government is going to mandate capital and liquidity cushions. Product sophistication outstripped investors' ability to manage, or even understand inherent risks. Up to 88% of past profits came from off exchange, over the counter trades that never saw the light of day. The easy money will be commoditized as the business is moved on to listed exchanges. Large hedge funds with easily replicated strategies will be under extreme pressure. It's an insightful report with more than a ring of truth which you should get your hands on.

4) With the lumber industry approaching its fifth year of what is nothing less than the Great Depression II, you'd think that this is the last place that futures traders would want to play. Prices for this commodity are driven primarily by housing starts, which have been in a death since 2006. No surprise then that lumber futures have plummeted from 70%, from $4.60 to $1.38 a contract, the lowest in 30 years. By the time you add up inventories of developers like Centex (CTX), Lennar (LEN), and Pulte (PHM), bank repossessions, and a gigantic overhang of anxious sellers desperately trying to get out of homes they can no longer afford, the number of houses for sale probably exceeds 5 million, or 8% of the total housing stock in the US, the most in 70 years. But the market thinks otherwise. The lumber industry has been downsized down to the bone through bankruptcies, mill closures, and distress inventory sales. So guess what happened in February when the trade never thought anyone would ever buy a stick of wood again? The Chinese showed up out of the blue as major buyers, triggering the ritual short covering rally, and chalking up two back to back limit up days in the futures market. Russia provided an assist by raising the tax on its lumber exports from 25% to 90%. Prices have recently settled at $1.85. I'm not by any means calling an end to the real estate crisis here, but lumber has suffered enough, and is a bargain. Smaller funds might consider using dips to accumulate longs. One futures contract get's you 110,000 board feet of 2' X 4' soft spruce, fir, and pine in mixed 8' to 20' lengths, worth $20,350, about two thirds of a rail car full. With a maintenance margin requirement of only $1,650, the contract gives you 12:1 leverage. It's a way to play the global demand for lumber without being held back by the continuing stress in American housing. If you don't need the leverage, look at the biggest producers, Weyerhaeuser (WY), Rayonier (RYN), or Louisiana Pacific (LPX) which have already had huge moves. After seeing similar Chinese moves in copper, crude, and coal, this could be further proof of the beginning of a much broader, long term bull market in commodities.

QUOTE OF THE DAY

When comparing working with Presidents Obama and Bush, House Speaker Nancy Pelosi said 'having a great intellect saves a lot of time.'

1) The big listed REIT's are grasping for a life raft, a life preserver, or a flotation device of any description they can get their hands on. Even Pamela Anderson will do! They have used this month's ferocious short covering rally to engage in some prodigious equity fund raising, nearly $4 billion in total. Only companies drowning in debt would be raising equity at these subterranean prices. Prologis (PLD) lifted $1.15 billion, followed by Chimera (CIM) $810 million, Kimco Realty (KIM) $747 million, Vornado (VNO) $645 million, and AMB Property (AMB) $576 million. I guess management isn't sleeping too well at night. Existing shareholders are being diluted up to the gills. But half an asset is better than nothing. Many bought commercial properties with cap rates as low as 3% at the top of the market, betting that rents inflated by an endless retail boom would drag them up to 7-8% over time. The opposite happened, and some properties now have negative yields in extreme cases, with massive debt, and irate tenants pounding on the table demanding lower lease rates. Bankers are taking their pound of flesh, rolling over short term debt with only the most draconian terms, merrily widening spreads, adding covenants, and chopping loans to value along the way. I wonder if this orgy of recapitalization is simply an effort to bail water out of a sinking craft, or a battening down of the hatches for the tidal wave that is about to hit them. Women and children first!

2) Interesting tidbit of the day. The number of people changing residence is at the lowest level since 1962. Unemployed are unable to move to healthier job markets because they can't sell houses that have negative equity. These conditions are playing hell with multinationals unable to move personnel around the world, or even within the country. A lucky few are renting out homes at a negative carry, and passing the bill to their companies as a cost of doing business. I have to admit that I was caught in this trap when Morgan Stanley (MS) transferred me from New York to London in 1984. The city was still recovering from its flirtation with bankruptcy, crime rates were sky high, and interest rates were backing off from an 18% peak. The market was dead. Fortunately, the firm took me out of my co-op at a decent profit, sat on the property for a year, and then sold it for a $100,000 hit, knowing I could make the money back for them with the right phone call. That was back when the firm was still private,?? had a Rolls Royce, cradle to grave benefits plan, and went to incredible lengths to keep key revenue producers happy. I wouldn't want to try that now.

3)?? Highlighting my bullish positions on the soft commodities is soybean's 20 cent push yesterday to $10.65/bushel, a six month high. Massive Chinese buying was again the culprit, with the Middle Kingdom lifting 404,000 tonnes from the US in the latest report. There is a real risk that American stockpiles will drop below 100,000 bushels by the summer, creating domestic shortages and bringing a return of the food inflation we saw last year. Better buy that tofu dinner now! Poor weather is expected to shrink the domestic Chinese grain crop this year by 8 million tonnes to 220 million tonnes, and there is little option for them, but to accelerate imports. In the meantime, the Buenos Aires Cereal Exchange has cut its forecast of that country's production by 19.9% to 37 million tonnes YOY. More demand and shrinking supplies can only mean one thing for prices, and the charts look very positive. Several big hedge funds have jumped in with long positions, boosting the open interest in the futures market. Never bet against a big trader that can eat their long positions. Pray for rain, my Argentina.

QUOTE OF THE DAY

'When you have a 100 year storm, all correlations go to one,' said Carter Worth, chief technical analyst at Oppenheimer Asset Management.