December 17, 2008

Global Market Comments for December 17, 2008
Featured trades: ($BSE), (TBT), (BAC), WFC), (AMGN), (XOM), (MS), (COF), (VLO), (DRYS)

1) The big trade to make in 2009 will be to dump your safe assets, and pour into risky ones. That is what zero interest rates are telling you to do. Throw in the fact that global shipping is now essentially free, and fuel is free compared to where it was six months ago. Dump the stocks that saved your bacon this year like Bank of America (BAC), Wells Fargo, (WFC), Amgen (AMGN), and Exxon (XOM), and buy shares that have been destroyed, like Morgan Stanley (MS), Capital One (COF), Valero Energy (VLO), and Dry Ships (DRYS).

2) OPEC announced production cuts of 2.2 million barrels/day, and crude responded by dumping 5% to $43. Ninety nine cents a gallon here we come! I told you to buy that Hummer six months ago!

3) Zero interest rates triggered the largest one day drop in history of the dollar against the euro, from $1.36 to $1.43. Watch out for the unintended consequences of the ZIRP policy. There is no free lunch.

4) An estimated $400 billion is now frozen in hedge fund redemptions, most in those funds with bond oriented strategies.

5) In case you missed it, Barron's convened a panel of top portfolio managers a year ago to ascertain their market outlooks for the end of 2008. The consensus view was that the S&P 500 would reach 1,650, and earnings would climb to $100/share. Today the Index is at 900, having just visited 760, and earnings are headed for $50/share. I am thinking of cancelling my subscription.

6) Investors are ecstatic over the Fed's new zero interest rate policy (ZIRP), driving the prices of 30 Treasury bonds up 25% just since Monday. But the inevitable long term result has to be hyperinflation. Once the Fed puts hard dollars out there it is hard to call them back. In order to deal with one bubble, they are creating another, in Treasury bonds. In fact, the fuel for such inflation has been building up since the beginning of the first Bush administration, which more than doubled the national debt to $10 trillion in a mere eight years. The chart below shows that while Roosevelt's New Deal was derided by Republican's as wastefully excessive at the time, it was actually quite small in modern terms. Once the bond markets fully reflect the new interest rate regime, and complete their once in a century spike up, the long bond will be a screaming short. You can short long bond futures outright, which give you 20:1 leverage, or short the US Lehman 20 year plus ultra short ETF, (TBT), which offers a 200% short position in the sector.