Global Market Comments for January 27, 2009 Featured Trades: (CAT), (CCTYQ) 1) The performance of heavy equipment maker Caterpillar (CAT) is one of the best leading global economic indicators out there. Poor earnings have taken the stock behind the woodshed for a severe whipping, taking down from $85 to $32. So when CEO Jim Owens says that 2009 will be the company's worst year since WWII, with sales plummeting from $51 billion to $40 billion, traders in all markets take note. Owens believes that global confidence is shot, prompting them to freeze or cancel capital projects with the speed of a mouse click. But Caterpillar believes that the worse 2009 is, the better 2010 will be. He is a strong believer of the FIFO theory, that since the US was first into recession, it will be the first out. In a year, stabilized credit markets will spark an explosion in restarted capital projects. This will take hold just as stimulus infrastructure projects in most major countries break ground. Business should recover sharply. 4) With the US consumer on life support, China watchers are competitively ratcheting down their forecasts for growth this year. I thought I was the uber bear, expecting real GDP of only 5%, versus a consensus of 8%, and an actual rate of 13% a year ago. Now I find that I am being underbid by analysts predicting only a 2% growth rate for the Middle Kingdom. Layoffs, bankruptcies, and a real estate crash are accelerating there, and it is clear that the country is facing its worst economic crisis since Deng Xiaoping adopted capitalist ways in 1978. This scares people, because in the last crisis during the Cultural revolution of the sixties and seventies (I was there), 50 million died. Not good for commodities. 5) High end discretionary retailers are at the epicenter of the consumer spending meltdown, with jewelry taking the biggest hit. Sales are down 30-70% and with the peak Christmas selling season now behind us, companies will have to cross an eleven month desert until the next cash inflow. Until then, they will have to live off of credit lines for working capital. While these were abundant a year ago, they are not to be found now. Friedman's Jewelers is in liquidation, Shanes Company is in chapter 11, and Zales is on life support. The disease is metastasizing to all types of discretionary spending as the Great Emptying of America's malls accelerate. The liquidation of Circuit City Group (CCTYQ) is the writing on the wall. Can wine sales be far behind?

SCARY THOUGHT OF THE DAY

Just in case you didn't have enough reasons to lie awake at night tossing and turning, here is another one. There is a hulking great 800 pound gorilla sitting on the floor of the New York Stock Exchange right now. Past stock market crashes in the thirties and the seventies produced market price earnings multiples of seven. Today it is 11. Does this mean that the Dow has one last 40% down leg left in it before we bottom out? That would take us to a 5,500 Dow, or a 570 S&P 500. Maybe the old PE benchmarks have been rendered meaningless by zero interest rates. Maybe so many single digit stock prices and trough earnings are skewing the numbers. Or, maybe nothing makes any difference anymore, and everything is just driven by the sentiments of attention deprived traders on steroids. But if I am right, look for a few more weeks of Obamaphoria supported stock prices, followed by a long, frightening plunge in the down elevator. The tipoff this is coming is all the discussion about ex-Merrill Lynch CEO John Thain's $35,000 commode, and Citicorp's new $50 million private jet. These people aren't talking about how wonderful stocks are right now.

Global Market Comments for January 26, 2009 Featured Trades: (GOOG), (AOL), (MSFT), (YHOO), (T), (VZ), (W), (DBA), (FNM) 1) It was the weekend of the big layoff, with 70,000 getting pink slips globally. Key infrastructure and emerging market player Caterpillar chopped 20,000, followed by Intel, Pfizer, Home Depot, Microsoft, and yes, even Apple. You can count on these headline grabbing cost cutting measures to appear daily for the foreseeable future. Keep in mind, this is always a deep lagging indicator. 2) In a rare piece of good news, existing home sales rose a surprising 6.5% in December to 4.74 million. Median prices are still falling, down 15.3% to $174,499. Some 40% of these sales were in California, where a feeding frenzy took place in foreclosure auctions. Every time we see an uptick in these numbers, the real estate industry screams 'bottom'. Don't bet on it.?? I think the numbers were skewed by a yearend rush to close deals before Fannie Mae (FNM) conforming loan limits were cut by $104,000 to $625,000. 3) It looks like the grains may be coming into play again, after a six month hiatus.?? Drastically lower prices have forced farmers to cut plantings of soft red winter wheat by 26%, to 8.29 million acres. An unusually harsh winter, and poor snow cover will reduce yields further. The credit crisis is preventing famers from getting loans for seed, fertilizer, and equipment, much like occurred during the Great Depression. Buy wheat futures (W) at $6.30/bushel, down from last year's top of $12.60. Or buy the Multigrain and Agriculture ETF (DBA) at $25, down from $42. Investors are looking for any alternatives to paper assets, and this is a great one. People would rather eat than buy stocks or bonds. 4) Google announced Q4 revenues of $4.2 billion, with click income jumping 18%. The company is moving from strength to strength, impressively growing its share of the advertising pie, while the rest of the industry is shrinking. AOL (AOL), Microsoft (MSFT), and Yahoo (YHOO) combined can't touch them. GOOG is the only place where advertisers can get a positive return on investment in this environment. The company only hired 99 new staff last quarter, a new low, allowing more profits to fall straight to the bottom line. The company is repricing options for 14,000 staff, moving strike prices lower, to maintain loyalty for what is probably the most talented work force out there. The online giant appears to be the only truly recession proof company, and is a screaming buy at $300. 5) Rumors are flying that Ebay (EBAY) is looking to dump Skype, which it vastly overpaid for at $2.6 billion three years ago. The online marketplace has been unable to profitably integrate the Internet telephone provider into its core business. Potential buyers are thought to be Google (GOOG), AT&T (T), and Verizon (VZ). Be prepared for a big write down at EBAY.

Global Market Comments for January 23, 2009 Special Gold Issue Featured Trades: ($GOLD) 1) Last year, South Africa suffered its steepest decline in gold production since 1901, falling 14%, to a mere 232 tons. It now ranks only third in global production of the yellow metal, after China and the US. Severe electricity rationing, a shortage of skilled workers, and more stringent mine safety regulations have been blamed. Choked off credit has frozen the development of new capital intensive deep mines, as it has for everybody else. Rising production costs have driven the global break even cost of new gold production up to $500 an ounce. In the meantime, the financial crisis has driven flight to safety demand for gold bars and coins to all time highs. Last year, the US Treasury ran out of one ounce $50 American Gold Eagle coins, now worth about $878. Competitive devaluations by almost every central bank, except Japan, mean that currencies are not performing as the hedge that many had hoped. It all has the makings of a serious gold shortage for the future. Could the downturn we have seen over the past ten months be just a blip in the eight year bull market? When the last hedge fund is forced to sell its last leveraged long position, watch out above! 2) If the share prices of the top five listed banks went to zero, it would take only 331 points off of the Dow, because it is a price averaged index. There is nothing left for hedge funds to short. Oh, how the mighty have fallen! 3) Philipp Hildebrand, vice chairman of the Swiss National Bank, indicated that Switzerland will pursue a Fed style zero interest rate policy to head off a depression. It plans to flood the Swiss monetary system with liquidity, and even buy corporate bonds to this end. The Swiss franc went into free fall. Long time Swiss economic observers were stunned. 4) Car theft has fallen nationally because the thieves can't sell their hot vehicles. Go short chop shops. 6) The official US government poverty level was set at three times the annual cost of food in 1963 during the Kennedy administration, where it has remained ever since. Today that works out to $21,200 for a family of four. Expect this figure to rise during the new administration.

QUOTE OF THE DAY

'The euro won't survive its first recession,' said Milton Friedman, when the currency was created a decade ago.

INTERESTING FACT OF THE DAY

Almost all of the gold ever mined in history is still in circulation, and would fill about two Olympic sized swimming pools. That includes ores found by the ancient Egyptians, the coins traded in Solomon's temple, those minted by the original King Croesus, and all those bars of Nazi gold stamped with German eagles I used to see in the vaults at Swiss Banks Corp. Only gold shipwrecked at the bottom of the ocean in Spanish galleons, or gold rush era steamers, or gold vaporized by atomic bomb blasts is no longer available.

Global Market Comments for January 22, 2009 Featured Trades: (MSFT) 1) Today was the day of the Microsoft shock, with disappointing earnings and a layoff of 5,000. Too bad their principal product, Vista, never worked. There was a slew of economic data today, all bad. Weekly jobless claims exploded upward by 62,000 to 589,000, taking continuing claims up to 4.6 million, a 26 year high. Lagging indicator economists are relentlessly ratcheting up their worse case unemployment forecasts from 8% to 9%, 10%, and 11% on up. Housing starts collapsed to 550,000, half the replacement rate, while permits fell 50% YOY to 549,000.?? Massive inventories continue to plague homebuilders. The median San Francisco Bay Area home price fell 43% YOY. That great sucking sound you hear is your home equity disappearing. 2) Weekly crude inventories showed a build of six million barrels, vastly greater than expected. Demand is collapsing faster than suppliers can cut it off. All storage facilities at the delivery point for west Texas Intermediate Crude are full, and buyers are agitating to take delivery elsewhere. At least 50 vessels are thought to be storing crude at sea, and countless others are slow steaming from the Middle East, hoping for a spot price revival in the meantime. Crude is the bellwether price to watch right now, and will be the first to turn on any improvement in the economy. 3) Now that we are basking in the afterglow of Obama's inauguration, it is time to face some harsh realities. There is very little the new president can do that has any immediate impact. Public works is an inherently slow process that will take even longer in a new era of greater transparency. Competitive open bidding, design, contracting, permits, zoning, and the marshalling of equipment and materials can take a year, even on a fast track basis. Shovel ready projects won't start hiring for six months. The best Obama can do is to fund immediate and massive grants to states and municipalities to prevent them from shutting down local services, throwing more people out of work. He can also fund and extend soon to dry up unemployment benefits. In the meantime, he can only make inspirational, forward looking speeches, and watch as the economic data continues to worsen at a dramatic pace. 4) Eastern Europe has the world's worst performing stock markets so far this year. After a year when investors thought things couldn't get worse, they did, with shares in Poland, the Czech Republic, and Hungary down 15%. Soaring current account deficits have knocked their currencies down another 12%. Companies from the old East Bloc are more leveraged than most, and those that borrowed in dollars or Swiss Francs are in especially bad shape. 5) John Colson, CEO of Houston based Quanta Services (PWR), a leading builder of energy infrastructure, sees wind rising from 1.5% to 15% of our power supply during the Obama administration, but no more. Wind can beat clean coal, natural gas, solar, and new nuclear on cost, but never old nuclear, dirty coal, and most recently crude. Rapidly developing technology is pushing us towards a rare, level playing field for several different power sources at once.

HISTORICAL FACT OF THE DAY

Casting about for ways to end the Great Depression, FDR met with Nobel Prize winning economist John Maynard Keynes in 1932. Decades later historians studied the notes of the meeting by the two men, neither of whom was impressed with the other. Keynes wrote 'he doesn't understand a single word I said.' FDR penned 'you can't get something for nothing.'

Global Market Comments for January 21, 2009 Featured Trades: ($BKX), (BAC), (WFC), (JPM), (PWR), (C) 1) The final numbers are in. The S&P 500 fell 42%, from 1,400 to 810, during the eight years of the Bush administration. The dollar fell 41% against the euro, from $0.92 to $1.30. A European investing in US stocks lost 59% of his capital, while a Japanese lost 56%. One can imagine how the Chinese feel about the $1.2 trillion of US bonds they bought, which have dropped in value by half.?? America became one of the greatest short plays of all time. It became the no brainer 'fall of the Roman Empire' trade. Is it now time to cover your shorts? 2) If you had any doubt about who is taking the big hit in this leg down, take a look at the Philadelphia Bank Index ($BKX), which has gone back into free fall since the beginning of the year. Even banks thought healthy only weeks ago are taking swan dives, with Bank of America (BAC) plunging 65%, Wells Fargo (WFC) shaving 56%, and JP Morgan (JPM) evaporating 45%, in just three weeks. We may see all major bank common owners effectively wiped out before this ends, as Citicorp (C) has already done. These classic widow and orphan stocks are some of the most widely held investments in the country, and the impact on pension fund and mutual fund holders will be huge. 3) Next time you hire a new fund manager, look carefully when you shake hands.?? Scientists in England have discovered that the most successful securities traders have a ring finger that is substantially longer than their index finger. And I can tell you from experience that this digital layout plays hell with yur typing akkuracy. Really! 4) FDR saw a 75% gain in the Dow during his first 100 days in office. Don't expect the same from Obama. The deck is too stacked against him. 5) FDIC chairman Sheila Bair is one of the few holdovers from the Bush administration, and the last one in his team that had any credibility. She is forcefully arguing in favor of an 'aggregator bank', or a 'bad bank', which will buy toxic assets from the banks. This is what the Resolution trust Corp. did during the S&L bailout, and it worked. This was what congress thought it was voting for with its passage of the TARP, before former Treasury Secretary Paulson perverted it into a selective, case by case, bail out of his past and future clients. Treasury bailed on asset purchases once it figured out what a can of worms it was getting into. Another alternative is to leave the troubled assets on bank balance sheets, but insure them all. There are hundreds of billions of dollars worth of private equity that will happily buy this paper once a real price is set. The problem is that no one will make a 10 cent bid, only to see half their equity wiped out by a follow up bid of only 5 cents. A government backed institution that creates a two may market for this stuff would solve that problem. By the way, the first steely nerved round of buyers of bad Japanese loans in the early nineties at 5 cents on the dollar made huge fortunes reselling them to the next line of distressed asset buyers at 20 and 30 cents. Expect the same thing to happen here. The pathfinders and pioneers will make the big bucks.