December 24, 2008

Global Market Comments for December 24, 2008
Featured trades: (PLD), (WTIC)

1) Consumers slashed spending 0.6% in November, despite rapidly falling prices. Unemployment claims jumped 30,000 to 586,000, a 14 year high. National savings rates are soaring from zero to 5%, as baby boomers rush to rebuild seriously depleted nest eggs going into a feared Depression. . It seems that they are getting the religion of thrift and frugality late in life. Maybe too late.

2) Energy traders are stunned by the fact that during one of the worst nationwide cold freezes in memory, crude prices have gone down for nine consecutive days. Demand is falling faster than production can be cut. Russia can’t cut output in Siberia because idle wells freeze in winter, and have to be redrilled. The $10 forecast targets are now coming out of the woodwork. There are 25 ultra large tankers at sea storing Texas tea, and that number is growing daily. I think the reality is that we are in the late stages of an overshoot to the downside, and that we will get a decent recovery in prices next year, one credit becomes available. Then prices will stabilize around the $50 range. This is still too low for high cost producers like Iran and Venezuela, which may see governments fall. Expensive deep offshore, tar sands, and most alternative sources are also in deep sushi. Smart consumers are locking in as many long term supplies as they can at these prices.

3) REIT Prologis (PLD) was the top performing stock in the market today, up 31% to $13. You sure can pick em!


I think the long bond is a screaming short here. It might well see a peak next week with the year end book closing, where everyone is piling government securities on to their balance sheets in a race to look the most conservative. At a 2.50% yield for 30 years, there is no way that investors are being compensated for their risk, especially with current government reflationary efforts guaranteed to bring a resurgence of inflation. I think the futures contract will go from 140 now to 70 over next three years, once the hyperinflation hits. With a futures contract offering 20:1 leverage that gives you a return of 2,000%! However, this is not a riskless trade. There have already been several rounds of stop loss buying by traders who jumped into this strategy too early, as the unimaginable buying kicked in at 120, 125, 131, and 136. In Japan the ten year bond eventually hit a low of 0.46%, making our ten year at 2.1% look incredibly generous. That works out to a futures price of 200 or more. Of course we are not Japan. The Treasury has done more to repair things in three months than Japan did in ten years, and Japan has still not adopted full mark to mark accounting. Some 18 years after their bubble burst, the country is still seeing subpar growth, and ten year yields have made it back up to only a measly 1.25%. There are also constant games going on in the futures markets like expiration plays, engineered short squeezes in the underlying, and bogus news leaks. PIMCO, the Newport Beach based Pacific Investment Management Company, the world’s largest private bond investor, plays this market like a violin.


‘Rudolph the Red Nose Reindeer’ was created by former retailer Montgomery Ward as a one off Christmas advertising promotion in 1939.


Going to buy a Christmas tree with my dad was always the most exciting day of the year when I was growing up in Los Angles in the fifties. With its semi desert climate, Southern California offered pine trees that were scraggly at best. So the Southern Pacific Railroad made a big deal out of bringing trees down from much better endowed Oregon to supply revelers. But you had to go down to the freight yard at Union Station on Alameda Street to pick it up. I remember a Santa standing in a box car with trees piled high to the ceiling, pungent with seasonal evergreen smells, handing them out to crowds of eager, grinning buyers for a buck apiece. There were still a lot of steam engines in use those days, and watching these great lumbering machines as big as houses, whistling and belching smoke, was the thrill of a lifetime. We took our prize home to be decorated by seven kids hyped on adrenalin, chugging eggnog. A half century later I remember it like it was yesterday. What a great guy my dad was!