November 21, 2008

Global Market Comments for November 21, 2008
Featured trades: (GS), (GOOG)

1) The Cassandras had a field day yesterday after the decisive break of the 2002 low in the Dow at 7,700, hitting the lowest level since 1997. It seems they were competing with each other to see how dire their downside targets could get. 7,000, 6,000, 4,000, 2000? The market seems to be discounting a permanent cut in the US long term growth rate to an anemic, Euro style 2%/year, down from the torrid, artificial, debt fueled 5% rate seen earlier this decade. I think the final bottom may be dictated not by levels, but by time. The candidates? End 2008, when hedge fund and mutual fund redemptions finish. Tax loss selling to beat Obama guaranteed capital gains tax increases will also be done. After that, the next window will be the Obama inauguration on January 20, when the US officially no longer becomes leaderless, and the new president shows his true hand with new policies. A major tradable rally will almost certainly spring off of these two dates. A Fed interest rate cut of 50 basis points at its December meeting is now a sure thing.

2) At 3.7%, the S&P 500 dividend yield now tops the 30 year Treasury bond yield for the first time in 50 years. Stocks are back to 1950s valuation parameters, when the Great Crash was still a recent memory, and equities were considered too risky for most investors. The melt up in the Treasury futures bond markets were truly of Biblical proportions. The long bond ($USB) gapped up eight points in two hours to 130, the sharpest move in the 30 year history of the contract. The Merrill Lynch US High Yield Index surpassed 21%, the highest in history, and a move right off the top of the charts.

3) Pit bull Henry Waxman overthrew Michigan’s legendary John Dingel to become chairman of the House Energy and Commerce Committee in a palace coup. This is big, and shows you that these are not your father’s democrats. If there was one person who helped Detroit shirk from producing safe, well made, fuel efficient, clean burning affordable cars, it was John Dingle. The air cover he provided virtually assured that the US auto industry would eventually disappear up its own exhaust pipe. Shifting control of this key committee, from the main car producing state, to the largest car consuming state, hints at the new priorities of a harsher, more realistic Democratic Party. Kiss the Big Three goodbye.

4) According to MDA Dataquick, the October San Francisco Bay Area median home sales price was $375,000, down 45% YOY, and lowest since 2001. Foreclosures account for 45% of sales. The highest price fall was in Contra Costa County, down 49%, while the lowest was in Marin, down 13%. The greatest foreclosure rate was 68% in Solano County, and the lowest was in San Francisco at 10.6%. More losses are to come.

5) One of the lead stocks in this leg of the downturn has been Goldman Sachs (GS), whose shares have dropped 64% from $140 to $50 in the past month. The investment bank is staying mum, but the stock is acting like something ugly is going on behind the curtains. When Hank Paulson became Treasury secretary, his stock in GS, worth $900 million, was put in a blind trust where he couldn’t touch it. It is now worth only $180 million. If GS doesn’t reverse its slide soon, the Treasury secretary may be looking for a bail out for himself.

MEA CULPA OF THE DAY

I have to tell you that in all honesty, I don’t think I could have come through this dreadful week without losing money. It wasn’t that one thing blew up, it’s that everything blew up. I went into the week with a recommendation for just one small, limited risk bet that the S&P 500 would not drop more than 10% by Friday. I was short the November 780 puts which expired today. It just made it there. Having shorted the puts at $10 I would have stopped out at $20. But I almost certainly would have taken a hit on a short position in 30 year Treasury bonds as it powered its way up through my cost at 124, though a stop out at 125 for a loss of a point, and eventually to an unbelievable high of 130. All in just an hour! And how much would I have nibbled on my favorite stocks on the way down this week, like Goldman Sachs, as it went from $63 to $49, and Google (GOOG) on the way from $325 to $260? I have always worked with risking controlling hedges and tight stop losses, which always cost me a lot of money in bull markets, but left me still standing after bear markets. Trading the Japanese stock market from ??3,000 to ??39,000, and then back down to ??7,000, and the yen from ??360 to ??79, and then back to ??160, no other philosophy could evolve over a 35 year career. It’s all about risk control, something the major investment banks apparently forgot to do, and was one of the reasons I left Morgan Stanley 19 years ago.

November 21, 2008

Global Market Comments for November 21, 2008
Featured trades: (GS), (GOOG)

1) The Cassandras had a field day yesterday after the decisive break of the 2002 low in the Dow at 7,700, hitting the lowest level since 1997. It seems they were competing with each other to see how dire their downside targets could get. 7,000, 6,000, 4,000, 2000? The market seems to be discounting a permanent cut in the US long term growth rate to an anemic, Euro style 2%/year, down from the torrid, artificial, debt fueled 5% rate seen earlier this decade. I think the final bottom may be dictated not by levels, but by time. The candidates? End 2008, when hedge fund and mutual fund redemptions finish. Tax loss selling to beat Obama guaranteed capital gains tax increases will also be done. After that, the next window will be the Obama inauguration on January 20, when the US officially no longer becomes leaderless, and the new president shows his true hand with new policies. A major tradable rally will almost certainly spring off of these two dates. A Fed interest rate cut of 50 basis points at its December meeting is now a sure thing.

2) At 3.7%, the S&P 500 dividend yield now tops the 30 year Treasury bond yield for the first time in 50 years. Stocks are back to 1950s valuation parameters, when the Great Crash was still a recent memory, and equities were considered too risky for most investors. The melt up in the Treasury futures bond markets were truly of Biblical proportions. The long bond ($USB) gapped up eight points in two hours to 130, the sharpest move in the 30 year history of the contract. The Merrill Lynch US High Yield Index surpassed 21%, the highest in history, and a move right off the top of the charts.

3) Pit bull Henry Waxman overthrew Michigan’s legendary John Dingel to become chairman of the House Energy and Commerce Committee in a palace coup. This is big, and shows you that these are not your father’s democrats. If there was one person who helped Detroit shirk from producing safe, well made, fuel efficient, clean burning affordable cars, it was John Dingle. The air cover he provided virtually assured that the US auto industry would eventually disappear up its own exhaust pipe. Shifting control of this key committee, from the main car producing state, to the largest car consuming state, hints at the new priorities of a harsher, more realistic Democratic Party. Kiss the Big Three goodbye.

4) According to MDA Dataquick, the October San Francisco Bay Area median home sales price was $375,000, down 45% YOY, and lowest since 2001. Foreclosures account for 45% of sales. The highest price fall was in Contra Costa County, down 49%, while the lowest was in Marin, down 13%. The greatest foreclosure rate was 68% in Solano County, and the lowest was in San Francisco at 10.6%. More losses are to come.

5) One of the lead stocks in this leg of the downturn has been Goldman Sachs (GS), whose shares have dropped 64% from $140 to $50 in the past month. The investment bank is staying mum, but the stock is acting like something ugly is going on behind the curtains. When Hank Paulson became Treasury secretary, his stock in GS, worth $900 million, was put in a blind trust where he couldn’t touch it. It is now worth only $180 million. If GS doesn’t reverse its slide soon, the Treasury secretary may be looking for a bail out for himself.

MEA CULPA OF THE DAY

I have to tell you that in all honesty, I don’t think I could have come through this dreadful week without losing money. It wasn’t that one thing blew up, it’s that everything blew up. I went into the week with a recommendation for just one small, limited risk bet that the S&P 500 would not drop more than 10% by Friday. I was short the November 780 puts which expired today. It just made it there. Having shorted the puts at $10 I would have stopped out at $20. But I almost certainly would have taken a hit on a short position in 30 year Treasury bonds as it powered its way up through my cost at 124, though a stop out at 125 for a loss of a point, and eventually to an unbelievable high of 130. All in just an hour! And how much would I have nibbled on my favorite stocks on the way down this week, like Goldman Sachs, as it went from $63 to $49, and Google (GOOG) on the way from $325 to $260? I have always worked with risking controlling hedges and tight stop losses, which always cost me a lot of money in bull markets, but left me still standing after bear markets. Trading the Japanese stock market from ??3,000 to ??39,000, and then back down to ??7,000, and the yen from ??360 to ??79, and then back to ??160, no other philosophy could evolve over a 35 year career. It’s all about risk control, something the major investment banks apparently forgot to do, and was one of the reasons I left Morgan Stanley 19 years ago.

November 20, 2008

Global Market Comments for November 20, 2008
Featured trades: (VNO), (MSW), (SPG), (GM)

1) Weekly jobless claims soared by 27,000 to 542,000, the highest since 1992. Unemployment appears to be going parabolic. It is clear that the consumer rolled over and died in October, and talk is now rife of deflation. All Treasury instruments exploded to the upside, and are at maximum crisis levels. The ten year Treasury yield hit a 50 year low of 3.11%, and the 30 year yield melted to 3.60%. Now that congress has taken an auto industry bail out off the table, the bankruptcy of GM appears imminent. When we broke through the 2002 low, trap door, stop loss selling ensued. Citicorp plunged 25%. The Dow got off cheap, only down 444. Next stop, 7,000 very quickly. You can always tell when the stock market hits a new low because the CNBC anchormen look like they have just been kicked in the balls. Think of GE stock cratering. Brace yourself for tomorrow!

2) Yesterday, they really took the REIT’s behind the woodshed and beat them senseless with the ugly stick. Two commercial real estate CDO’s defaulted, and credit spreads blew out on all fronts. Vornado Realty Trust (VNO) dropped from $55 to $45, Mission West Properties (MSW) slid from $7.50 to $6.20, and Simon Property Group (SPG) tumbled from $50 to $40. The fear is that if GM goes under, there will be massive dumping of commercial real estate on the market by the dealer network. There is more pain expected in this sector, which until now has been largely spared. New lows were set today.

3) Everyone is now a Keynesian, with supply siders in total disarray. Congressmen are competing with each other to see how much they can spend to cure the economy. To see where this can lead, look at Zimbabwe, which currently has the highest inflation rate in history, and where prices are doubling every 1.3 days. Weimar Germany only saw prices double every 3.7 days during the early 1920s. Most shops in the capital, Harare, will only accept US dollars or South African rands, spurning Zimbabwean dollars.

4) I attended a book signing for Ted Turner yesterday, which was an absolute riot. To describe him as a larger than life figure is an understatement. The secrets to business success are to ‘rise early, work like hell, and always advertise’, and ‘he who has the most friends, wins’. He quit taking his anti anxiety drugs because his psychiatrist was a ‘quack’. The AOL-Time Warner merger was the worst in history, and personally cost him $8 billion. I sent him a resume in 1980 when he was setting up CNN and never got a response because?? I ‘didn’t try hard enough.’ I met him as a Morgan Stanley client a few years later when he was fresh from his America’s Cup win. Some 25 years later he has mellowed, but not by much. His chief passions now are his new buffalo restaurant chain, and chasing his three girlfriends.

5) The Bay Area Council says that 40% of local companies plan to lay off staff, while only 13% plan to hire. Two thirds of companies say that the credit crisis is affecting their business. The little hiring that is going on is in the health care and alternative energy areas.

6) Wholesale gasoline futures crashed to $1.03/gallon today, meaning that the local retail price could fall under $1.50/gallon by early next year!

7) If the auto industry does get a bail out, the first $60,000 will cover the cost of the private jets the CEO’s chartered to go to Washington to beg, wearing their custom made suits, tin cups in hand. What dodos! Later we learn that the GM retirees health care organization is the world’s largest buyer of Viagra.

8) PC Magazine, which I have been reading for 20 years, will stop publishing its print edition in February. This is just the latest example of a business wholly migrating its business entirely to online.

QUOTE OF THE DAY

‘There is no asset class that too much money can’t spoil’, said Barton Biggs of Traxis Partners, a global hedge fund.

November 20, 2008

Global Market Comments for November 20, 2008
Featured trades: (VNO), (MSW), (SPG), (GM)

1) Weekly jobless claims soared by 27,000 to 542,000, the highest since 1992. Unemployment appears to be going parabolic. It is clear that the consumer rolled over and died in October, and talk is now rife of deflation. All Treasury instruments exploded to the upside, and are at maximum crisis levels. The ten year Treasury yield hit a 50 year low of 3.11%, and the 30 year yield melted to 3.60%. Now that congress has taken an auto industry bail out off the table, the bankruptcy of GM appears imminent. When we broke through the 2002 low, trap door, stop loss selling ensued. Citicorp plunged 25%. The Dow got off cheap, only down 444. Next stop, 7,000 very quickly. You can always tell when the stock market hits a new low because the CNBC anchormen look like they have just been kicked in the balls. Think of GE stock cratering. Brace yourself for tomorrow!

2) Yesterday, they really took the REIT’s behind the woodshed and beat them senseless with the ugly stick. Two commercial real estate CDO’s defaulted, and credit spreads blew out on all fronts. Vornado Realty Trust (VNO) dropped from $55 to $45, Mission West Properties (MSW) slid from $7.50 to $6.20, and Simon Property Group (SPG) tumbled from $50 to $40. The fear is that if GM goes under, there will be massive dumping of commercial real estate on the market by the dealer network. There is more pain expected in this sector, which until now has been largely spared. New lows were set today.

3) Everyone is now a Keynesian, with supply siders in total disarray. Congressmen are competing with each other to see how much they can spend to cure the economy. To see where this can lead, look at Zimbabwe, which currently has the highest inflation rate in history, and where prices are doubling every 1.3 days. Weimar Germany only saw prices double every 3.7 days during the early 1920s. Most shops in the capital, Harare, will only accept US dollars or South African rands, spurning Zimbabwean dollars.

4) I attended a book signing for Ted Turner yesterday, which was an absolute riot. To describe him as a larger than life figure is an understatement. The secrets to business success are to ‘rise early, work like hell, and always advertise’, and ‘he who has the most friends, wins’. He quit taking his anti anxiety drugs because his psychiatrist was a ‘quack’. The AOL-Time Warner merger was the worst in history, and personally cost him $8 billion. I sent him a resume in 1980 when he was setting up CNN and never got a response because?? I ‘didn’t try hard enough.’ I met him as a Morgan Stanley client a few years later when he was fresh from his America’s Cup win. Some 25 years later he has mellowed, but not by much. His chief passions now are his new buffalo restaurant chain, and chasing his three girlfriends.

5) The Bay Area Council says that 40% of local companies plan to lay off staff, while only 13% plan to hire. Two thirds of companies say that the credit crisis is affecting their business. The little hiring that is going on is in the health care and alternative energy areas.

6) Wholesale gasoline futures crashed to $1.03/gallon today, meaning that the local retail price could fall under $1.50/gallon by early next year!

7) If the auto industry does get a bail out, the first $60,000 will cover the cost of the private jets the CEO’s chartered to go to Washington to beg, wearing their custom made suits, tin cups in hand. What dodos! Later we learn that the GM retirees health care organization is the world’s largest buyer of Viagra.

8) PC Magazine, which I have been reading for 20 years, will stop publishing its print edition in February. This is just the latest example of a business wholly migrating its business entirely to online.

QUOTE OF THE DAY

‘There is no asset class that too much money can’t spoil’, said Barton Biggs of Traxis Partners, a global hedge fund.

November 19, 2008

Global Market Comments for November 19, 2008
Featured trades: (MSFT), (ORCL), (SY), (INTU), (PLD)

1) October housing starts came in at a shocking minus -4.5%, a 791,000 annualized rate, 409,000 below the replacement rate. Huge disruptions in the classical economic data by the credit freeze are ongoing, and will continue for the next couple of months. October CPI fell to 3.7% YOY, the biggest drop since WWII.

2) To give you an idea of how much liquidity is out there, excess banking reserves held by the Federal Reserve are now at $400 billion, and are expected to rise to $600 billion by year end. The normal figure is zero to $2 billion. No typo here. In October, a massive $143 billion in net capital flows came into the US as investors bailed on their foreign investments, especially in their BRIC, euro, and sterling holdings.

3) When the market turns there is going to be a huge movement of cash into technology stocks, the only debt free, fast growing sector of the economy. Buy software names first, because they see the most rapid improvement in profitability in any recovery, and because they have nothing to physically make, no assembly lines to restart. Think Microsoft (MSFT), Oracle (ORCL), Sybase (SY), and Intuit (INTU).

4) The City of San Francisco is raising the minimum wage in 2009 from $9.36 to $9.79/ hour. It looks like I am getting a raise.

5) Watch the market slide whenever there is congressional testimony. When investors see the stupidity of the people voting on crucial economic and financial matters that affect our country, which they clearly will never understand, they just want to throw up their hands in despair and go away.

6) Q4 will almost certainly be the bottom of this recession, and October the worst month. Watch the economic data get less worse after that. If you can make it through the next six months, you have made it.

7) I’ll make a gentlemen’s bet with you. I think oil will trade at over $100 sometime next year, nearly double the current price. The loser pays for lunch at either the Olympic Club or the Marines’ Memorial Association. Semper Fi.

8) Prologis (PLD), the world’s largest developer of commercial warehouse space, and a leading manager of REIT’s, has seen its shares collapse 94% from $65 to a low of $3.62. It is effectively trading as if the company has already gone bankrupt. The Denver based company employs 1,500, managing 2,898 properties, totaling 548 million square feet in 115 countries. It had been a highly leveraged call on the growth of international trade, which is now imploding with unprecedented speed. PLD listed $40.8 billion in assets on its balance sheet, and until recently, was one of the largest listed REIT’s. CEO Jeffrey Schwartz, a 14 year veteran at the company who spearheaded its growth into China, where it now has 3.3 million square feet, resigned on November 12 and will be replaced by CFO Walter Rakowich. Thus, the keys to PLD have been handed over from the visionary risk taker to the bean counter. On November 4, the company announced a Q4 dividend of 52 cents, giving the shares now trading at $3.78/share an effective annualized yield of 55%! The company refused to issue a forecast for 2009, which didn’t exactly inspire shareholders. PLD’s 5 5/8% bonds due in 2016 are trading at just 43 cents on the dollar, giving it a low grade junk yield of 16.7% over Treasuries. PLD is now clearly in survival mode. It has suspended development of the $8.4 billion of projects in the pipeline. It is dependent on rolling over $353 million of company debt and $1.46 billion of fund debt in 2009 in credit markets, which are now effectively closed. It hopes to carry out distressed sales of $2 billion of assets by next year to deleverage its balance sheet. On November 13 it told shareholders it would save $290 million by slashing its future dividends, and another $100 million in cutting administrative costs. The stock has clearly been pulled down by the general distress in the sector in an environment where leverage has become a dirty word. The default rate on commercial properties is expected to soar from this year’s 1% to as high as 5% next year. 18 publicly traded REIT’s have cut or suspended dividends so far this year. PLD was badly hurt by a deal with Lehman Brothers struck in July, 2007, at the absolute peak of the market, where it bought a $1.85 billion national portfolio of warehouses from Dermody Properties and the California State Teachers Retirement System. Lehman was unable to repackage and resell the debt. There are dozens of stocks like this out there now where share prices have fallen to the level of an undated, highly leveraged call option. It is a bet that we have a ‘V’ type recession, not a ‘U’, and that credit markets recover rapidly next year. I give it a 50:50 chance of survival. But the risk/reward ratio is good. If you are wrong, you lose $3.75. If you are right, the stock could very quickly make it back up to $20, giving you a return of 533%. If you were running a portfolio, you would be buying these all day long, where the mathematics of venture capital applies. If four out of five go bankrupt, you breakeven. If only three out of five go under, you double your money. You need to buy five PLD’s, not just one.

November 18, 2008

Global Market Comments for November 18, 2008

Special Russia Edition

Highlighted Trades: ($RTSI), (YHOO), (BUD)

1) October retail sales came in at -2.8%, the biggest decline on record. The Producer Price Index plunged by 2.8%, up 5.2% YOY. Inflation is doing a disappearing act. The market was ready for another swan dive, but then was spared by Hewlett Packard (HP) surprisingly announcing a very strong Q4, and raising guidance for next year. I thought the words ‘raise’, ‘up’, and ‘improve’ had become extinct species.

2) Belgian Inbev’s takeover of Budweiser (BUD) closed today. The old Bud shareholders get $50 billion in cash. What a great time to get cash!

3) Google Earth will soon offer users a new option when clicking on aerial views of Rome. You can now get a satellite view of Rome for 320 AD. Even the shadows are astronomically correct for April 1 that year. The only thing missing are the Romans and their chariots, which you can see in today’s view.

4) BRIC Internet usage can be a good guide to future economic growth. In Brazil it is currently 26.1%, followed by Russia at 23.2%, China at 19%, and India at only 5.2%. Spreading Internet usage will enable companies in these countries to become more profitable and efficient and be great for stock markets. When US Internet usage was last at 5%, the Dow was at 3,000 on it’s way to 14,000. The BRICS are all long term buys here.

5) The financial sector in New York City is expected to lose 112,000 jobs this year. Bad for Connecticut, and worse for New Jersey.

6) I bet Obama is carefully reading all of Franklin Delano Roosevelt’s 1933 speeches. He set sales hungry publishers a twitter during his ’60 Minutes’ interview when he mentioned he was reading a book about FDR’s first 100 days. In fact three such books have recently come out. Which one? The winner is Jonathan Alter’s ‘The Defining Moment: FDR’s Hundred Days and the Triumph of Hope’. I predicted an FDR boom. Should I order a copy from Amazon? Renew the lease on the Potomac!

7) Many analysts are now ranking Jerry Yang’s spurning of a $33 bid from Microsoft in February as the single worst decision in the history of American business. $30 billion is a lot to pay for hubris. Head Yahoo? Give me a break, Jerry!

8) It is a good time to update you on the Russian stock market ($RTSI), which has fallen 77% from 2600 to 600 since July. One of its lead energy stocks, Lukoil (LUKOY) has collapsed from $120 to $30. At least 70% of the trading in this market is by foreign investors, so much of the boom and bust has been caused by foreign hedge funds pouring money in, and then pulling it right back out.?? Russia is the world’s second largest oil exporter after Saudi Arabia, and a $1 drop in the price of crude shaves $3 billion off of the country’s exports. This is why plunging crude has knocked 15% off of the value of the Ruble, and another 15% fall is in store. Four of Russia’s top 30 banks have failed. A residential real estate bubble has collapsed, where up to 70% of all transactions were accounted for by speculators. But Russia is going into this crisis in much better shape than it has in the past. It has $485 billion in reserves, the third largest in the world. It has a national plan to raise the per capita standard of living from $12,000 to $30,000 by 2020, and to spend $6.4 trillion on infrastructure by 2030. It is the perfect combination of a country in desperate need of a modern build out which has the money to do it. Russia should be at the core of any long equity portfolio, once the markets turn.

November 19, 2008

Global Market Comments for November 19, 2008
Featured trades: (MSFT), (ORCL), (SY), (INTU), (PLD)

1) October housing starts came in at a shocking minus -4.5%, a 791,000 annualized rate, 409,000 below the replacement rate. Huge disruptions in the classical economic data by the credit freeze are ongoing, and will continue for the next couple of months. October CPI fell to 3.7% YOY, the biggest drop since WWII.

2) To give you an idea of how much liquidity is out there, excess banking reserves held by the Federal Reserve are now at $400 billion, and are expected to rise to $600 billion by year end. The normal figure is zero to $2 billion. No typo here. In October, a massive $143 billion in net capital flows came into the US as investors bailed on their foreign investments, especially in their BRIC, euro, and sterling holdings.

3) When the market turns there is going to be a huge movement of cash into technology stocks, the only debt free, fast growing sector of the economy. Buy software names first, because they see the most rapid improvement in profitability in any recovery, and because they have nothing to physically make, no assembly lines to restart. Think Microsoft (MSFT), Oracle (ORCL), Sybase (SY), and Intuit (INTU).

4) The City of San Francisco is raising the minimum wage in 2009 from $9.36 to $9.79/ hour. It looks like I am getting a raise.

5) Watch the market slide whenever there is congressional testimony. When investors see the stupidity of the people voting on crucial economic and financial matters that affect our country, which they clearly will never understand, they just want to throw up their hands in despair and go away.

6) Q4 will almost certainly be the bottom of this recession, and October the worst month. Watch the economic data get less worse after that. If you can make it through the next six months, you have made it.

7) I’ll make a gentlemen’s bet with you. I think oil will trade at over $100 sometime next year, nearly double the current price. The loser pays for lunch at either the Olympic Club or the Marines’ Memorial Association. Semper Fi.

8) Prologis (PLD), the world’s largest developer of commercial warehouse space, and a leading manager of REIT’s, has seen its shares collapse 94% from $65 to a low of $3.62. It is effectively trading as if the company has already gone bankrupt. The Denver based company employs 1,500, managing 2,898 properties, totaling 548 million square feet in 115 countries. It had been a highly leveraged call on the growth of international trade, which is now imploding with unprecedented speed. PLD listed $40.8 billion in assets on its balance sheet, and until recently, was one of the largest listed REIT’s. CEO Jeffrey Schwartz, a 14 year veteran at the company who spearheaded its growth into China, where it now has 3.3 million square feet, resigned on November 12 and will be replaced by CFO Walter Rakowich. Thus, the keys to PLD have been handed over from the visionary risk taker to the bean counter. On November 4, the company announced a Q4 dividend of 52 cents, giving the shares now trading at $3.78/share an effective annualized yield of 55%! The company refused to issue a forecast for 2009, which didn’t exactly inspire shareholders. PLD’s 5 5/8% bonds due in 2016 are trading at just 43 cents on the dollar, giving it a low grade junk yield of 16.7% over Treasuries. PLD is now clearly in survival mode. It has suspended development of the $8.4 billion of projects in the pipeline. It is dependent on rolling over $353 million of company debt and $1.46 billion of fund debt in 2009 in credit markets, which are now effectively closed. It hopes to carry out distressed sales of $2 billion of assets by next year to deleverage its balance sheet. On November 13 it told shareholders it would save $290 million by slashing its future dividends, and another $100 million in cutting administrative costs. The stock has clearly been pulled down by the general distress in the sector in an environment where leverage has become a dirty word. The default rate on commercial properties is expected to soar from this year’s 1% to as high as 5% next year. 18 publicly traded REIT’s have cut or suspended dividends so far this year. PLD was badly hurt by a deal with Lehman Brothers struck in July, 2007, at the absolute peak of the market, where it bought a $1.85 billion national portfolio of warehouses from Dermody Properties and the California State Teachers Retirement System. Lehman was unable to repackage and resell the debt. There are dozens of stocks like this out there now where share prices have fallen to the level of an undated, highly leveraged call option. It is a bet that we have a ‘V’ type recession, not a ‘U’, and that credit markets recover rapidly next year. I give it a 50:50 chance of survival. But the risk/reward ratio is good. If you are wrong, you lose $3.75. If you are right, the stock could very quickly make it back up to $20, giving you a return of 533%. If you were running a portfolio, you would be buying these all day long, where the mathematics of venture capital applies. If four out of five go bankrupt, you breakeven. If only three out of five go under, you double your money. You need to buy five PLD’s, not just one.

November 18, 2008

Global Market Comments for November 18, 2008

Special Russia Edition

Highlighted Trades: ($RTSI), (YHOO), (BUD)

1) October retail sales came in at -2.8%, the biggest decline on record. The Producer Price Index plunged by 2.8%, up 5.2% YOY. Inflation is doing a disappearing act. The market was ready for another swan dive, but then was spared by Hewlett Packard (HP) surprisingly announcing a very strong Q4, and raising guidance for next year. I thought the words ‘raise’, ‘up’, and ‘improve’ had become extinct species.

2) Belgian Inbev’s takeover of Budweiser (BUD) closed today. The old Bud shareholders get $50 billion in cash. What a great time to get cash!

3) Google Earth will soon offer users a new option when clicking on aerial views of Rome. You can now get a satellite view of Rome for 320 AD. Even the shadows are astronomically correct for April 1 that year. The only thing missing are the Romans and their chariots, which you can see in today’s view.

4) BRIC Internet usage can be a good guide to future economic growth. In Brazil it is currently 26.1%, followed by Russia at 23.2%, China at 19%, and India at only 5.2%. Spreading Internet usage will enable companies in these countries to become more profitable and efficient and be great for stock markets. When US Internet usage was last at 5%, the Dow was at 3,000 on it’s way to 14,000. The BRICS are all long term buys here.

5) The financial sector in New York City is expected to lose 112,000 jobs this year. Bad for Connecticut, and worse for New Jersey.

6) I bet Obama is carefully reading all of Franklin Delano Roosevelt’s 1933 speeches. He set sales hungry publishers a twitter during his ’60 Minutes’ interview when he mentioned he was reading a book about FDR’s first 100 days. In fact three such books have recently come out. Which one? The winner is Jonathan Alter’s ‘The Defining Moment: FDR’s Hundred Days and the Triumph of Hope’. I predicted an FDR boom. Should I order a copy from Amazon? Renew the lease on the Potomac!

7) Many analysts are now ranking Jerry Yang’s spurning of a $33 bid from Microsoft in February as the single worst decision in the history of American business. $30 billion is a lot to pay for hubris. Head Yahoo? Give me a break, Jerry!

8) It is a good time to update you on the Russian stock market ($RTSI), which has fallen 77% from 2600 to 600 since July. One of its lead energy stocks, Lukoil (LUKOY) has collapsed from $120 to $30. At least 70% of the trading in this market is by foreign investors, so much of the boom and bust has been caused by foreign hedge funds pouring money in, and then pulling it right back out.?? Russia is the world’s second largest oil exporter after Saudi Arabia, and a $1 drop in the price of crude shaves $3 billion off of the country’s exports. This is why plunging crude has knocked 15% off of the value of the Ruble, and another 15% fall is in store. Four of Russia’s top 30 banks have failed. A residential real estate bubble has collapsed, where up to 70% of all transactions were accounted for by speculators. But Russia is going into this crisis in much better shape than it has in the past. It has $485 billion in reserves, the third largest in the world. It has a national plan to raise the per capita standard of living from $12,000 to $30,000 by 2020, and to spend $6.4 trillion on infrastructure by 2030. It is the perfect combination of a country in desperate need of a modern build out which has the money to do it. Russia should be at the core of any long equity portfolio, once the markets turn.

November 17, 2008

Global Market Comments for November 17, 2008
Special wine edition. 5 page issue today.

Highlighted Trades: (GM), (STZ), (FO), (DEO), (SPX)

1) Expect to hear a lot of hand ringing about the auto industry this week. Its representatives want us to believe that 10% of all the jobs, and 20% of retail sales are somehow car related, and the destruction of the industry would bring the onset of a nuclear winter. I have to tell you that as an analyst of the Japanese car industry for 35 years I have watched Detroit self destruct. Over the last ten years GM has invested $310 billion in its business, which is now effectively worth zero. Depreciation during this time was $128 billion, meaning that the company has vaporized $182 billion of capital. I have heard every excuse: high fuel prices, foreign competition, greedy unions, and excessive regulation. But during this same period Japanese car makers moved from strength to strength, and have taken over one third of the US car market. The bottom line is that Detroit can’t make a decent, profitable product people want to buy, and hasn’t for decades. If you are going to throw these people a life preserver, make sure it is made out of lead.

2) One of the first signs of the economy turning next year will be a spate of hostile takeover bids. According to Sullivan & Cromwell, the leading M & A law firm in New York, so many great companies are selling so cheaply they are bound to attract deep pocketed suitors.

3) Banks extended $200 billion in new loans in October, more than in the previous eight months combined. Companies are drawing down their revolvers since the bond markets are closed, even when they don’t need the money. Banks are happy to do this because with these spreads, the business is now the most profitable in its history.

4) Santa Clara county’s measure ‘B’, which provides funding for the BART extension from Fremont to San Jose, and had been given up for dead, may actually pass. With 14,000 more absentee votes still to be counted, the measure only needs 360 more votes to pass out of a total of 607,698 cast. All other Bay Area transportation measures have passed.

5) According to Neil Kashkari, the bureaucrat responsible for administering the Treasury’s TARP program, there are 58 million mortgages in the US, and another 20 million homes are owned free and clear. The underwater capital of the US is Mountain Valley, CA, just east of Livermore, where 90% of homeowners owe the bank more than their property is worth.

6) I took a look at the three major listed wine producing companies to see how recession proof their stocks have actually been. The answer is not very much. These companies are so diversified that it is hard to get any read of how much the impact of profits from wine have really been. As a group, their shares have dropped more than the market as a whole. There is no doubt that the stocks have been dragged down by the general implosion of market multiples. Their diversification efforts, especially into highly cyclical housing and travel related sectors, seemed to have gotten them into more trouble than kept them out. And the largest wine producer in the US, Gallo, has stayed privately held, not looking like such a bad idea right now. See charts below:

UK Based Diageo (DEO) has seen its stock melt 42% from $90 to $52. It is the largest multinational beer, wine, and spirits company in the world with the purest play in this area. Its core holding is Guinness beer, and includes a presence in hotels (Grand Metropolitan, Intercontinental Hotel), and travel. Its best known brands include Johnnie Walker, Smirnoff, Captain Morgan rum, Jose Cuervo tequila, Sterling Vineyards, and of course Alameda’s Rosenblum.

Fortune Brands (FO) is the old American Tobacco Company and has seen its stock drop 61% from $82 to $32. It has a presence in golf (Titleist, Footjoy), homebuilding (Masterbrand Cabinets, Moen, and Master Lock), and spirits (Jim Beam, Laphroaig, Courvosier, Kamchatka vodka, Gibley’s gin, Ronrico rum). In 2007 it sold its wine operation (2.6 million cases/year of Clos du Bois and others) to Constellation Brands for $885 million.

Constellation Brands (STZ) watched it stock plunge 62% from $26 to $10. It is the largest public vineyard owner in the world, producing over 57 million cases/year, including Franciscan Oakville Estate, Simi Winery, Ravenswood, Arbor Mist, and Clos du Bois. In 2004 it bought Mondavi USA, and in 2006 it acquired Vincor International for $1.4 billion.

8) Here is the best forecast for GDP growth for the British economy that I have seen, which is lagging the US economy by about six months. It suggests that the US economy will bottom out soon. The market is discounting a ‘U’ recovery, but will get a ‘V’ because of the massive amount of liquidity hitting the system.

TRADE OF THE DAY

I turned on my screens this morning to find another free money trade staring me in the face. With the index at 850 you could sell the November S&P 500 780 puts for $10. These expire at the Friday opening in four trading days, and it a great opportunity to short once in a lifetime volatility at 69%. The time decay in these ultra high implied volatility options in at last few days is truly geometric. A short sale of 100 contracts would bring in $50,000. The S&P 500 would have to drop more than 80 points in four days, or the Dow 800 points from an already low level of 8,300, to lose money on this trade. Even if GM goes bankrupt this week, you probably won’t get a move of this magnitude. Another rich uncle type of trade.

November 17, 2008

Global Market Comments for November 17, 2008
Special wine edition. 5 page issue today.

Highlighted Trades: (GM), (STZ), (FO), (DEO), (SPX)

1) Expect to hear a lot of hand ringing about the auto industry this week. Its representatives want us to believe that 10% of all the jobs, and 20% of retail sales are somehow car related, and the destruction of the industry would bring the onset of a nuclear winter. I have to tell you that as an analyst of the Japanese car industry for 35 years I have watched Detroit self destruct. Over the last ten years GM has invested $310 billion in its business, which is now effectively worth zero. Depreciation during this time was $128 billion, meaning that the company has vaporized $182 billion of capital. I have heard every excuse: high fuel prices, foreign competition, greedy unions, and excessive regulation. But during this same period Japanese car makers moved from strength to strength, and have taken over one third of the US car market. The bottom line is that Detroit can’t make a decent, profitable product people want to buy, and hasn’t for decades. If you are going to throw these people a life preserver, make sure it is made out of lead.

2) One of the first signs of the economy turning next year will be a spate of hostile takeover bids. According to Sullivan & Cromwell, the leading M & A law firm in New York, so many great companies are selling so cheaply they are bound to attract deep pocketed suitors.

3) Banks extended $200 billion in new loans in October, more than in the previous eight months combined. Companies are drawing down their revolvers since the bond markets are closed, even when they don’t need the money. Banks are happy to do this because with these spreads, the business is now the most profitable in its history.

4) Santa Clara county’s measure ‘B’, which provides funding for the BART extension from Fremont to San Jose, and had been given up for dead, may actually pass. With 14,000 more absentee votes still to be counted, the measure only needs 360 more votes to pass out of a total of 607,698 cast. All other Bay Area transportation measures have passed.

5) According to Neil Kashkari, the bureaucrat responsible for administering the Treasury’s TARP program, there are 58 million mortgages in the US, and another 20 million homes are owned free and clear. The underwater capital of the US is Mountain Valley, CA, just east of Livermore, where 90% of homeowners owe the bank more than their property is worth.

6) I took a look at the three major listed wine producing companies to see how recession proof their stocks have actually been. The answer is not very much. These companies are so diversified that it is hard to get any read of how much the impact of profits from wine have really been. As a group, their shares have dropped more than the market as a whole. There is no doubt that the stocks have been dragged down by the general implosion of market multiples. Their diversification efforts, especially into highly cyclical housing and travel related sectors, seemed to have gotten them into more trouble than kept them out. And the largest wine producer in the US, Gallo, has stayed privately held, not looking like such a bad idea right now. See charts below:

UK Based Diageo (DEO) has seen its stock melt 42% from $90 to $52. It is the largest multinational beer, wine, and spirits company in the world with the purest play in this area. Its core holding is Guinness beer, and includes a presence in hotels (Grand Metropolitan, Intercontinental Hotel), and travel. Its best known brands include Johnnie Walker, Smirnoff, Captain Morgan rum, Jose Cuervo tequila, Sterling Vineyards, and of course Alameda’s Rosenblum.

Fortune Brands (FO) is the old American Tobacco Company and has seen its stock drop 61% from $82 to $32. It has a presence in golf (Titleist, Footjoy), homebuilding (Masterbrand Cabinets, Moen, and Master Lock), and spirits (Jim Beam, Laphroaig, Courvosier, Kamchatka vodka, Gibley’s gin, Ronrico rum). In 2007 it sold its wine operation (2.6 million cases/year of Clos du Bois and others) to Constellation Brands for $885 million.

Constellation Brands (STZ) watched it stock plunge 62% from $26 to $10. It is the largest public vineyard owner in the world, producing over 57 million cases/year, including Franciscan Oakville Estate, Simi Winery, Ravenswood, Arbor Mist, and Clos du Bois. In 2004 it bought Mondavi USA, and in 2006 it acquired Vincor International for $1.4 billion.

8) Here is the best forecast for GDP growth for the British economy that I have seen, which is lagging the US economy by about six months. It suggests that the US economy will bottom out soon. The market is discounting a ‘U’ recovery, but will get a ‘V’ because of the massive amount of liquidity hitting the system.

TRADE OF THE DAY

I turned on my screens this morning to find another free money trade staring me in the face. With the index at 850 you could sell the November S&P 500 780 puts for $10. These expire at the Friday opening in four trading days, and it a great opportunity to short once in a lifetime volatility at 69%. The time decay in these ultra high implied volatility options in at last few days is truly geometric. A short sale of 100 contracts would bring in $50,000. The S&P 500 would have to drop more than 80 points in four days, or the Dow 800 points from an already low level of 8,300, to lose money on this trade. Even if GM goes bankrupt this week, you probably won’t get a move of this magnitude. Another rich uncle type of trade.