June 3, 2009

1) For me it's d??j?? vu all over again. When I traded the Nikkei during the nineties, every market rally was capped by a predictable flood of new equity issuance by cash starved, undercapitalized Japanese banks. It sucked the life out of the market for a decade, confining it to a monotonous 14,000-20,000 range, until it finally dropped by half again after the dotcom bust. Sound familiar? This was while the Dow was going from 2,000 to 10,000. Now the tables are turned. Last month saw American banks soak the market with new equity on an unprecedented scale; Citibank (C) $58 billion, Bank of America (BAC) $25.9 billion, Morgan Stanley (MS) $6.8 billion, Goldman Sachs (GS) $5.8 billion, and JP Morgan (JPM) $5 billion. If the market edges higher, we will no doubt face more supply. I have no doubt that this will define the top end of a range in the Dow that we will have to live with for quite a long time. Volatilities will crash. Better to go trade China, Brazil, India, or any other country that has large cash surpluses and relatively healthy banks.

2) If you are wondering about those funny looking little cars in parking lots around the city, you better go to Scott Griffith, CEO of Zip Cars. The online membership-only car rental company makes available 6,000 Mini Coopers, Priuses (Priai?), Scions, BMW three series, and other small cars to its 300,000 members for rent at $9-$10 an hour, gas and insurance included. Once a reservation is made, the company emails the car to open up for the member to drive away. You can rent a car on your PDA while standing next to it (http://www.zipcar.com). The entire process is untouched by human hands. The privately held company says that 14 million potential customers in the US are a ten minute walk away from their cars, and that the global market for this service is 37 million.?? Zip Cars, which merged with Flexcar in 2007, sees increasing demand from economizing families looking to them for second cars. Vehicle choices are made by customers, and there has never been a request for a GM or a Chrysler.

3) Those fortunate few who took my advice to go long lumber futures can now go out and build a bonfire to celebrate. Since then, the homebuilder's favorite commodity has rocketed by 35% to $200. The biggest producers, Weyerhaeuser (WY), Rayonier (RYN), or Louisiana Pacific (LPX) have also done well. The last gap up was prompted by more mustard seeds that the housing market may have hit bottom. The enormous subsidies offered to first time buyers is also helping eat into inventories.?? After seeing similar Chinese inspired moves in copper, crude, and coal, this is further proof of the beginning of a much broader, long term bull market in commodities.

4) If you are interested in alternative history, as I am, you will be fascinated by a Barrons interview with Douglas Holtz-Eakin, John McCain's economic guru, and current president of an economic consulting firm.?? The new Republican president would have offered a smaller stimulus package, relied more on tax cuts, and let the big banks and car markers go under. Health care and education reform would have gone forward in a much diluted form. The gas tax may have been axed. What Holtz-Eakin doesn't say is that these policies would have produced a deeper, longer global recession, taken the Dow down to 4,000, the dollar up to parity with the euro, and 30 year Treasury yields down to 2%. I think it is also safe to assume that McCain's first choice for a Supreme Court appointment would not have been Sonya Sotomayor.

QUOTE OF THE DAY

'If you want to succeed, double your failure rate,' said Thomas Watson, the CEO who built IBM into a global force from the twenties to the fifties. He also said, ?I think there is a world market for maybe five computers.?