October 20, 2008

Global Market Comments for October 20, 2008

1) China’s third quarter GDP slowed by 12% to 9%, the slowest since 2003. Copper imports, a reliable leading indicator, have almost completely halted. Stocks rose 413 to 9,265. The November S&P 500 1,000 calls I strongly recommended at $22 last week hit $60 today.

2) US job creation for the past eight years was nearly zero, while the Federal deficit doubled from $5 to $10 trillion. That is $10,000,000,000,000. ??Since January 900,000 jobs have been lost, raising the unemployment rate by 1.2%. It is the worst record since the Great Depression.

3) The route in the bond market over the past two weeks has been mind boggling, as investors considering the inflationary impact of the bail out. The 30 year Treasury plunged from 124 to 112, while spreads on junks bonds have widened to a precipitous 1,500 basis points. Investment grade ‘Baa’ paper is yielding 9.5%. This is despite seeing the most deflationary, rapid and bond friendly collapse in commodity prices in history. Such is the price of running the global printing presses 24 hours a day. Please recall my recommendation for a core short in the 30 year Treasury bond.

4) There is a futures market where you can bet on the outcome of the election. Right now Obama is ahead on McCain by 84% to 16%. I am a buyer at 84%.

5) Another screaming buy here is the Russian stock market (RTS), which has dropped 74% from 2,500 to 667 since in three months. Half of the index is in energy stocks. It is a way to buy crude through the back door at $20/barrel.

QUOTE OF THE DAY

‘If you want to live like a republican you should vote democratic because they are best at managing the economy’, Bill Clinton.

JOKE OF THE DAY

What is the difference between a big hedge fund manager and a pigeon? A pigeon can still put a deposit down on a new Ferrari!

October 17, 2008

Global Market Comments for October 17, 2008

1) September housing starts dropped by -6.3% to an annualized rate of only 817,000, the biggest drop in 17 years. This is the third consecutive monthly steep drop. Demographic demand is 1.2 million units/year, so this will help cut into the industry’s 11 month inventory. More falling off a cliff type economic data.

2) The Baltic Dry Shipping Index ($BDI) has dropped 87% from 12,000 to 1,600 in three months, and is now pricing in Armageddon. September industrial production fell 2.4%, the sharpest drop since 1974, indicating that the US economy is falling off a cliff. China announces quarterly GDP on Monday, so look out belooooow! Pray they fake the numbers to the upside, as usual.

3) Google (GOOG) announced $1.34 billion in net profits on $4 billion in revenues for Q3, up 34%. The stock hit $310 yesterday, down 58% from its $740 high. This is a company that will see earnings grow 20% next year, is selling for 14 X earnings, has no debt, monstrous cash flow, and a near global monopoly in the search business. The internet search business may turn out to be recession proof because times of economic distress generate more searches. It is a screaming buy here.

4) The Chicago Board of Options Exchange (CBOE) filed a petition to start trading the 100% and 110% strikes in the VIX index. Yesterday it peaked at 81% and traded today at 68%. A similar filing by the New York Mercantile Exchange (NYMEX) in July to list the $200 strike in crude marked the top in that market.

QUOTE OF THE DAY

‘Be fearful when others are greedy, and be greedy when others are fearful’, Warren Buffet of Berkshire Hathaway, the greatest investor in history.

October 17, 2008

Global Market Comments for October 17, 2008

1) September housing starts dropped by -6.3% to an annualized rate of only 817,000, the biggest drop in 17 years. This is the third consecutive monthly steep drop. Demographic demand is 1.2 million units/year, so this will help cut into the industry’s 11 month inventory. More falling off a cliff type economic data.

2) The Baltic Dry Shipping Index ($BDI) has dropped 87% from 12,000 to 1,600 in three months, and is now pricing in Armageddon. September industrial production fell 2.4%, the sharpest drop since 1974, indicating that the US economy is falling off a cliff. China announces quarterly GDP on Monday, so look out belooooow! Pray they fake the numbers to the upside, as usual.

3) Google (GOOG) announced $1.34 billion in net profits on $4 billion in revenues for Q3, up 34%. The stock hit $310 yesterday, down 58% from its $740 high. This is a company that will see earnings grow 20% next year, is selling for 14 X earnings, has no debt, monstrous cash flow, and a near global monopoly in the search business. The internet search business may turn out to be recession proof because times of economic distress generate more searches. It is a screaming buy here.

4) The Chicago Board of Options Exchange (CBOE) filed a petition to start trading the 100% and 110% strikes in the VIX index. Yesterday it peaked at 81% and traded today at 68%. A similar filing by the New York Mercantile Exchange (NYMEX) in July to list the $200 strike in crude marked the top in that market.

QUOTE OF THE DAY

‘Be fearful when others are greedy, and be greedy when others are fearful’, Warren Buffet of Berkshire Hathaway, the greatest investor in history.

October 16, 2008

Global Market Comments for October 16, 2008

1) Rumors of the country’s biggest hedge funds closing down savaged the market again, knocking it down 400 at the opening, only to be followed by a 700 point rally. The volatility index (VIX) hit an all time high of 81%. If you feel depressed, go buy a tank of gas, now that crude is at $68, down 54% in three months. Look for $2 gasoline by next year.

2) Dozens of technical, mathematical and fundamental models are converging on 800 in the S&P 500, or 7,600 in the Dow, as the final line in the sand for the stock market. This level very neatly gives you a double bottom on charts going all the way back to 2002, a rare occurrence. If you chop corporate earnings forecasts from $95 to $60 to account for a severe recession, that gets you a market PE multiple of 13, book value of under 2 X, with Fed funds at 1.5% and gas at $2/gallon. Looking at the total package it is a 35 year low.

3) ??The credit markets led us into this crisis and has already started to lead us out. The stock market doesn’t know this yet. Among the panoply of measures rolled out this week is a Treasury offer to insure all bond issues by banks for three years for a fee of 75 basis points. This effectively means that all American bank bond issues are now government guaranteed. All bank deposits are now FDIC insured for unlimited amounts, wiping out the old $100,000 limitation. PIMCO is taking over the Fed’s commercial paper program at the end of the month, guaranteeing liquidity in that sector. One month CP rates have already dropped 170 bp to 1.85%. This much liquidity should break the lock on LIBOR, now the main impediment to global liquidity.

4) There is $65 billion in hedge fund capital trapped in the Lehman bankruptcy in London where they were being held by the prime broker. Inability to tap these funds to meet margin calls accelerated the selling of stocks yesterday. Hedge funds suffered $43 billion in redemptions in September, and are down an average of 17% this year.

5) I thought McCain did an amazingly good job in last night’s debate for a 72 year old, but it’s too little too late. One poll this morning has Obama ahead 59% to 41%. From an actuarial point of view, McCain only has a 50% chance of living 4 ?? years. A vote for McCain now is really a vote for president Palin.

6) Reality check: Google (GOOG) hit $310 today, down 58% from its $740 high. This is a company that will see earnings grow 20% next year, is selling for 14 X earnings, has no debt, monstrous cash flow, and a near global monopoly in the search business. It is a screaming buy here.

October 16, 2008

Global Market Comments for October 16, 2008

1) Rumors of the country’s biggest hedge funds closing down savaged the market again, knocking it down 400 at the opening, only to be followed by a 700 point rally. The volatility index (VIX) hit an all time high of 81%. If you feel depressed, go buy a tank of gas, now that crude is at $68, down 54% in three months. Look for $2 gasoline by next year.

2) Dozens of technical, mathematical and fundamental models are converging on 800 in the S&P 500, or 7,600 in the Dow, as the final line in the sand for the stock market. This level very neatly gives you a double bottom on charts going all the way back to 2002, a rare occurrence. If you chop corporate earnings forecasts from $95 to $60 to account for a severe recession, that gets you a market PE multiple of 13, book value of under 2 X, with Fed funds at 1.5% and gas at $2/gallon. Looking at the total package it is a 35 year low.

3) ??The credit markets led us into this crisis and has already started to lead us out. The stock market doesn’t know this yet. Among the panoply of measures rolled out this week is a Treasury offer to insure all bond issues by banks for three years for a fee of 75 basis points. This effectively means that all American bank bond issues are now government guaranteed. All bank deposits are now FDIC insured for unlimited amounts, wiping out the old $100,000 limitation. PIMCO is taking over the Fed’s commercial paper program at the end of the month, guaranteeing liquidity in that sector. One month CP rates have already dropped 170 bp to 1.85%. This much liquidity should break the lock on LIBOR, now the main impediment to global liquidity.

4) There is $65 billion in hedge fund capital trapped in the Lehman bankruptcy in London where they were being held by the prime broker. Inability to tap these funds to meet margin calls accelerated the selling of stocks yesterday. Hedge funds suffered $43 billion in redemptions in September, and are down an average of 17% this year.

5) I thought McCain did an amazingly good job in last night’s debate for a 72 year old, but it’s too little too late. One poll this morning has Obama ahead 59% to 41%. From an actuarial point of view, McCain only has a 50% chance of living 4 ?? years. A vote for McCain now is really a vote for president Palin.

6) Reality check: Google (GOOG) hit $310 today, down 58% from its $740 high. This is a company that will see earnings grow 20% next year, is selling for 14 X earnings, has no debt, monstrous cash flow, and a near global monopoly in the search business. It is a screaming buy here.

October 15, 2008

Global Market Comments for October 15, 2008

1) The Dow cratered 7.9% today, the greatest one day loss since 1987. Sell programs from distressed hedge funds hammered the market right into the close. LIBOR is coming down, but not fast enough. The Treasury/Eurodollar interest rate spread (TED) is now 300 basis points, compared to 75 basis points before the Lehman bankruptcy and 10 basis points 18 months ago. With crude down to $74, oil companies led the downturn. Exxon (XOM) is now down to a 7 X earnings multiple. Traders are sitting in front of their screens with their mouths agape.

2) Wells Fargo and JP Morgan announced decent earnings today. Their stocks are unchanged YOY. Going long these two and shorting the rest of the financial sector would have been the mother of all pairs trades. You would have made 80% on a non leveraged, market neutral position.

3) Equity mutual fund redemptions for the first two weeks of October came to a staggering $55.8 billion, a multiple of the previous record. This is another classic sign of the market hitting bottom. On Friday 97% of all stocks were below their 200 day moving average.

4) Earnings. Remember those? Intel reported Q3 revenues of $12 billion and a net of $3 billion, giving a gross margin of 58.9%. They don’t borrow, financing 100% of their spending from a massive cash flow. It is still an amazingly profitable business. Did I mention that the stock has plunged by half from $28 to $14 this year?

5) A New York Times/CBS poll today showed Obama ahead 53% to 39%. I guess voters looked at their 401k statements over the weekend and threw up.

6) September PPI fell 0.4%, retail sales plunged 1.2%, and August inventories rose by 0.3%, all good recessionary numbers.

TRADE IDEA

Use this run to retest the 7,700 low in the Dow to load up on November S&P 500 1000 calls on the cheap. Today they closed at $22. You can count on a 1,000 to 2,000 Dow rally going into and after the election. The technical indicators show us at 1929, 1973, 1982, and 2001 lows. Because of a fluke in the calendar, November equity options have an unusually long maturity this month.

October 15, 2008

Global Market Comments for October 15, 2008

1) The Dow cratered 7.9% today, the greatest one day loss since 1987. Sell programs from distressed hedge funds hammered the market right into the close. LIBOR is coming down, but not fast enough. The Treasury/Eurodollar interest rate spread (TED) is now 300 basis points, compared to 75 basis points before the Lehman bankruptcy and 10 basis points 18 months ago. With crude down to $74, oil companies led the downturn. Exxon (XOM) is now down to a 7 X earnings multiple. Traders are sitting in front of their screens with their mouths agape.

2) Wells Fargo and JP Morgan announced decent earnings today. Their stocks are unchanged YOY. Going long these two and shorting the rest of the financial sector would have been the mother of all pairs trades. You would have made 80% on a non leveraged, market neutral position.

3) Equity mutual fund redemptions for the first two weeks of October came to a staggering $55.8 billion, a multiple of the previous record. This is another classic sign of the market hitting bottom. On Friday 97% of all stocks were below their 200 day moving average.

4) Earnings. Remember those? Intel reported Q3 revenues of $12 billion and a net of $3 billion, giving a gross margin of 58.9%. They don’t borrow, financing 100% of their spending from a massive cash flow. It is still an amazingly profitable business. Did I mention that the stock has plunged by half from $28 to $14 this year?

5) A New York Times/CBS poll today showed Obama ahead 53% to 39%. I guess voters looked at their 401k statements over the weekend and threw up.

6) September PPI fell 0.4%, retail sales plunged 1.2%, and August inventories rose by 0.3%, all good recessionary numbers.

TRADE IDEA

Use this run to retest the 7,700 low in the Dow to load up on November S&P 500 1000 calls on the cheap. Today they closed at $22. You can count on a 1,000 to 2,000 Dow rally going into and after the election. The technical indicators show us at 1929, 1973, 1982, and 2001 lows. Because of a fluke in the calendar, November equity options have an unusually long maturity this month.

October 14, 2008

Global Market Comments for October 14, 2008

1) There is no doubt now that we hit the bottom in the stock market on Friday at 7,700. The question now is how long we will bounce along the bottom between 8,000 and 10,000 while the air bubble works its way through the economy. Many smaller banks are still going under despite government aid because they are beyond redemption. A lot of bodies are going to float to the surface after this one. The data releases, like non farm payroll and jobless claims, are for the next few months going to be nothing less than horrific, and could give us our double bottom in the stock market. Unemployment will jump from 6.1% now to at least 8% next year.

2) The Treasury is forcing 25 key banks, including GS, MS, C, JPM, BAC and WFC, to sell to the government preferred equity stakes yielding a 5% dividend for three years. The CEO’s are now subject to compensation caps. Global leverage peaked at 30:1 18 months ago and is 15:1 now. Asset sales will continue until it is 10:1, the normal leverage of a conservatively run bank. The banking business is now a low risk, low return public utility.

3) The latest poll of the Electoral College shows Obama winning 264 to 163. Checkmate. He is even ahead in Virginia where democrats have not won in 40 years. Jefferson Davis must be rolling over in his grave. We have our Depression now. The big question is, can Obama become a Franklin Delano Roosevelt? Will Depression II give us the New Deal II?

4) A friend bought gas over the weekend in Michigan at $2.59/gallon! She was so thrilled she took a picture of the sign. Some oil insiders are now predicting a drop in crude to $50. OPEC is now talking about production cutbacks to maintain prices. Oh well, I can’t qualify for the loan for that Prius anyway.

5) Mitsubishi Motors brought out its all electric ‘i Miev’ car in Japan for $55,000. The lithium-ion battery hatchback, similar in its technology to Silicon Valley?s Tesla, can drive 100 mph for 100 miles and then recharge in minutes with a quick charge device. The gasoline powered version of the car costs only $13,000. Being green is expensive. If history is any guide GM won’t bring out its competitor for two more years, and it will cost more, be slower with a shorter range, and will start to fall apart after the first 10,000 miles. That?s if they don?t go bust first.

QUOTE OF THE DAY

‘We have had a dark chapter in American history. I will never be forgiven for being right too early. ‘?’?.I’m a pussycat in real life. But give me 800 words and I start slashing:’ Nobel economics prize winner Paul Krugman.

October 14, 2008

Global Market Comments for October 14, 2008

1) There is no doubt now that we hit the bottom in the stock market on Friday at 7,700. The question now is how long we will bounce along the bottom between 8,000 and 10,000 while the air bubble works its way through the economy. Many smaller banks are still going under despite government aid because they are beyond redemption. A lot of bodies are going to float to the surface after this one. The data releases, like non farm payroll and jobless claims, are for the next few months going to be nothing less than horrific, and could give us our double bottom in the stock market. Unemployment will jump from 6.1% now to at least 8% next year.

2) The Treasury is forcing 25 key banks, including GS, MS, C, JPM, BAC and WFC, to sell to the government preferred equity stakes yielding a 5% dividend for three years. The CEO’s are now subject to compensation caps. Global leverage peaked at 30:1 18 months ago and is 15:1 now. Asset sales will continue until it is 10:1, the normal leverage of a conservatively run bank. The banking business is now a low risk, low return public utility.

3) The latest poll of the Electoral College shows Obama winning 264 to 163. Checkmate. He is even ahead in Virginia where democrats have not won in 40 years. Jefferson Davis must be rolling over in his grave. We have our Depression now. The big question is, can Obama become a Franklin Delano Roosevelt? Will Depression II give us the New Deal II?

4) A friend bought gas over the weekend in Michigan at $2.59/gallon! She was so thrilled she took a picture of the sign. Some oil insiders are now predicting a drop in crude to $50. OPEC is now talking about production cutbacks to maintain prices. Oh well, I can’t qualify for the loan for that Prius anyway.

5) Mitsubishi Motors brought out its all electric ‘i Miev’ car in Japan for $55,000. The lithium-ion battery hatchback, similar in its technology to Silicon Valley?s Tesla, can drive 100 mph for 100 miles and then recharge in minutes with a quick charge device. The gasoline powered version of the car costs only $13,000. Being green is expensive. If history is any guide GM won’t bring out its competitor for two more years, and it will cost more, be slower with a shorter range, and will start to fall apart after the first 10,000 miles. That?s if they don?t go bust first.

QUOTE OF THE DAY

‘We have had a dark chapter in American history. I will never be forgiven for being right too early. ‘?’?.I’m a pussycat in real life. But give me 800 words and I start slashing:’ Nobel economics prize winner Paul Krugman.

October 13, 2008

Global Market Comments for October 13, 2008
Special Post Apocalypse Issue

1) I spent my weekend convincing people that we are not entering a thirties style Depression and not to sell their stocks. We are entering a recession that will be longer and deeper than previously forecast. The net decline in GDP has probably jumped from 1% to 5%, and the duration has extended from 18 to 24 months, finishing by early 2010. After that, we are facing several years of sub par growth with a real estate albatross hanging around our necks. But we will not see 12 years of soup lines that will only end with a World War (although we may have some investors jump out of windows). Things happen at warp speed in the internet driven world, and that counts for slowdowns as well as recovery. We also have the experiences of the Great Depression and the Japanese ‘lost decade’ to draw on.

2) The PE multiple for the stock market is now under 10 X, and the dividend yield at 3.8% is higher than the ten year bond yield. The last time stocks were this cheap was after the first oil shock in the late seventies, when short interest rates were at 12%, or during the mid thirties. This may be the only opportunity to buy stocks at Depression level valuations this century. Many technical indicators hit once in a century marks on Friday. The S&P hit 35% below its 200 day moving average, and over 60% of stocks hit new 52 week lows. Last week investors redeemed a staggering $47 billion of equity mutual funds.

3) Chesapeake Energy (CHK) CEO Aubrey McClendon disclosed on Friday that he?? sold virtually all of his 33.5 million shares in his company, making the $12 spike bottom in the stock, down from $75. He had built up a position on margin, which at the peak was worth $2.5 billion, and the 80% drop in only three months triggered a monster margin call that flushed him out at the bottom with a total loss. This is what happens when you drink your own Kool Aid. Looks like the Swift Boat Veterans for Truth is going to have to look elsewhere for funding. The Right Wing Conspiracy sheds a tear. The stock is an extremely strong buy here. It’s a way to buy gas for $2/btu when the market price is $6.70.

4) Just for the record books, the VIX volatility index hit 76.9% on Friday afternoon, almost double the previous record of 48%. Today it closed at 54%. At the market bottom on Friday, Morgan Stanley (MS) at $6.78/share had a market cap of only $7 billion. Amazing. It closed today at a $20 billion capitalization.

5) I wondered where Hank P5ulson got his $700 billion figure from. Turns out that it is enough to buy 49% of the entire US banking system and still have plenty of money left over. This may have been his plan all along.