September 17, 2008

Global Market Comments for September 17, 2008

Note: If world ends, there will be no comment for September 18.

1) The government nationalized AIG, taking 79.9% of the stock in exchange for an $85 billion bridge loan. The trillion dollar company provides 18% of the life insurance in the US. This is a steal for the government, which will make tens of billions of dollars on the deal. AIG has huge exposure in California, taking in $3.7 billion in premiums last year. It insures 1.6 million cars and motorcycles, 12 million home mortgages, $750 million in workers compensation insurance, and one out of four aircraft. Some of the better known subsidiary names are American Home Insurance, 21st Century auto insurance, and National Union Fire Insurance.

2) Housing starts for August fell a precipitous -6.2% to an 895,000 annualized rate, a 17 year low. Builders are obviously not interested in adding to already bloated inventories.

3) Lumber (LB) ($LUMBER) has been the worst performing commodity over the last three years, thanks to the collapse in the housing market, taking the CME contract from $400 down to $185. With a year’s worth of new home inventory sitting out there, there are not a lot of buyers of wood these days. Industry capacity utilization is now down to 75% of its 77.35 billion board feet capacity. While plant closings and mothballing has provided some respite in recent months, there is a new threat looming. The collapse of the Canadian dollar against the greenback from $1.10 down to 93 cents is enabling imports to undercut US producers for the first time in years. This contract may provide the first hint to the recovery in house prices. Lumber closed at $2.14 today.

Lumber2.png picture by sbronte

4) It’s time to look at the wreckage of the BRIC markets to grasp the opportunities out there. Brazil’s Bovespa ($BVSP) has vaporized 39%, from 75,000 to 46,000. Russia has melted 58%, from 2,500 to 1,038. India’s Sensex ($BSE) has plunged 43%, from 21,000 to 12,000. My preferred China vehicle is the Hang Seng, and it has really been beaten with the ugly stick, down 45% from 32,000 to 17,500. (The Shanghai market, which foreigners can’t buy, is down and astounding 68%, from 6,000 to 1,930). I always thought of these as ‘roach motel’ markets. You can check in, but you can’t check out. Liquidity only exists on the upside. But going forward from these levels, these markets will generate far and away the highest equity returns.

QUOTE OF THE DAY

‘People are saying these banks are too big to fail. That may mean they are also too big to manage.’ Warren Buffet.

September 17, 2008

Global Market Comments for September 17, 2008

Note: If world ends, there will be no comment for September 18.

1) The government nationalized AIG, taking 79.9% of the stock in exchange for an $85 billion bridge loan. The trillion dollar company provides 18% of the life insurance in the US. This is a steal for the government, which will make tens of billions of dollars on the deal. AIG has huge exposure in California, taking in $3.7 billion in premiums last year. It insures 1.6 million cars and motorcycles, 12 million home mortgages, $750 million in workers compensation insurance, and one out of four aircraft. Some of the better known subsidiary names are American Home Insurance, 21st Century auto insurance, and National Union Fire Insurance.

2) Housing starts for August fell a precipitous -6.2% to an 895,000 annualized rate, a 17 year low. Builders are obviously not interested in adding to already bloated inventories.

3) Lumber (LB) ($LUMBER) has been the worst performing commodity over the last three years, thanks to the collapse in the housing market, taking the CME contract from $400 down to $185. With a year’s worth of new home inventory sitting out there, there are not a lot of buyers of wood these days. Industry capacity utilization is now down to 75% of its 77.35 billion board feet capacity. While plant closings and mothballing has provided some respite in recent months, there is a new threat looming. The collapse of the Canadian dollar against the greenback from $1.10 down to 93 cents is enabling imports to undercut US producers for the first time in years. This contract may provide the first hint to the recovery in house prices. Lumber closed at $2.14 today.

Lumber2.png picture by sbronte

4) It’s time to look at the wreckage of the BRIC markets to grasp the opportunities out there. Brazil’s Bovespa ($BVSP) has vaporized 39%, from 75,000 to 46,000. Russia has melted 58%, from 2,500 to 1,038. India’s Sensex ($BSE) has plunged 43%, from 21,000 to 12,000. My preferred China vehicle is the Hang Seng, and it has really been beaten with the ugly stick, down 45% from 32,000 to 17,500. (The Shanghai market, which foreigners can’t buy, is down and astounding 68%, from 6,000 to 1,930). I always thought of these as ‘roach motel’ markets. You can check in, but you can’t check out. Liquidity only exists on the upside. But going forward from these levels, these markets will generate far and away the highest equity returns.

QUOTE OF THE DAY

‘People are saying these banks are too big to fail. That may mean they are also too big to manage.’ Warren Buffet.

September 16, 2008

Global Market Comments for September 16, 2008

1) The fallout is still reverberating from the Lehman (LEH) bankruptcy. Wells Fargo (WFC) announced it took a $109 million hit on LEH preferred. Their initial investment was certainly a lot more than that. George Soros also took a hit. Banks all over Asia announced $100 million plus losses in LEH preferred, loans, derivatives, and open trades. LEH had a big options and derivatives operation in Hong Kong, and they have defaulted on everything.

2) Ken Lewis, CEO of Bank of America (BAC), does not see a real recovery in the economy until the first half of 2010. He should know, as he now owns a large part of the US financial system. He expects there will be many more bank failures over the next year, especially among smaller banks concentrated in commercial real estate.

3) New York City has just been thrown into a commercial real estate crisis. The end of Bear Stearns and Lehman Brothers will destroy 40,000 financial jobs this year and dump 10 million square feet of class ?A? and trophy office space on the market. The tax bases of New York and New Jersey are going to wither dramatically.

4) Crude hit $90.55 today, 56 cents away from my short term target, as rolling margin calls force hedge fund long liquidations. Each $1 drop in the price of crude is equivalent to a $1 billion tax cut for consumers. Right now Cash Is King!

TRADE OF THE MONTH

Goldman Sachs September $75 puts traded today at $1 and they expire at the Friday close, in three days. These were $40, or 35% out of the money. Sell 150,000 of these at $1 each and make an easy $150,000 when they expire worthless. If Goldman Sachs falls below $75 by Friday, it will only be because there has been a nuclear war and we are all dead, so we won’t care if we lost money on the trade.

September 16, 2008

Global Market Comments for September 16, 2008

1) The fallout is still reverberating from the Lehman (LEH) bankruptcy. Wells Fargo (WFC) announced it took a $109 million hit on LEH preferred. Their initial investment was certainly a lot more than that. George Soros also took a hit. Banks all over Asia announced $100 million plus losses in LEH preferred, loans, derivatives, and open trades. LEH had a big options and derivatives operation in Hong Kong, and they have defaulted on everything.

2) Ken Lewis, CEO of Bank of America (BAC), does not see a real recovery in the economy until the first half of 2010. He should know, as he now owns a large part of the US financial system. He expects there will be many more bank failures over the next year, especially among smaller banks concentrated in commercial real estate.

3) New York City has just been thrown into a commercial real estate crisis. The end of Bear Stearns and Lehman Brothers will destroy 40,000 financial jobs this year and dump 10 million square feet of class ?A? and trophy office space on the market. The tax bases of New York and New Jersey are going to wither dramatically.

4) Crude hit $90.55 today, 56 cents away from my short term target, as rolling margin calls force hedge fund long liquidations. Each $1 drop in the price of crude is equivalent to a $1 billion tax cut for consumers. Right now Cash Is King!

TRADE OF THE MONTH

Goldman Sachs September $75 puts traded today at $1 and they expire at the Friday close, in three days. These were $40, or 35% out of the money. Sell 150,000 of these at $1 each and make an easy $150,000 when they expire worthless. If Goldman Sachs falls below $75 by Friday, it will only be because there has been a nuclear war and we are all dead, so we won’t care if we lost money on the trade.

September 15, 2008

Global Market Comments for September 15, 2008

1) In last Friday’s newsletter I predicted that Merrill Lynch (MER) would be the next target for the cloud of locusts. I had no idea that it would be gone in a few hours! The scary thing is that Bank of America (BAC) was willing to pay $50 billion for MER, but not $1 for all of Lehman. A year ago, people were laughing at BAC as a bunch of stupid, boring bankers who didn’t ‘get’ complicated things like CDO’s , mark to model, derivatives, and credit default swaps. News of the deal knocked BAC’s stock down $5 to $28. Don’t expect anything more from BAC as they will be choking on both the MER and Countrywide acquisitions for a couple of years. Do expect raging bull statues and posters to start appearing at Bank of America branches everywhere. The Dow was down 500 points on the day, but could have been down 1,000 without this transaction.

2) I have no doubt that creditors of the bankruptcy estate will get most, if not all, of their money back. The Lehman bankruptcy is solely the result of mark to market accounting rules, where the markets ceased to exist. Fully current securities originally sold to investors at 100 were marked down to 20 or even zero, when their true value is probably closer to 60 or 80. The bankruptcy court will allow a quiet, ??orderly liquidation over a long period of time in private placement form, allowing realizations to get closer to their true values. The sale of Neuberger Berman and the European real estate division could raise $15 billion as early as next week. Barclay’s Bank, having passed on buying the whole company yesterday, is still trying to buy just the investment banking division on the cheap. However, creditors may have to wait years before they see their final checks.

3) The next domino to fall may be WAMU (WM), which may disappear by the end of the week. JP Morgan (JPM) is considering a take over bid. The stock traded down to $2 this morning, down 96% from last year’s peak.

4) AIG is now taking its turn on the ropes, its stock down 80% in a week. The company’s ten year bonds crashed from 95 to 60. It is trying to sell its car finance operation, its aircraft leasing unit, obtain equity capital from private equity firms or Warren Buffet, and procure a bridge loan from the Fed. The state of New York has offered $20 billion in short term loans.

5) China cut interest rates for the first time in six years. The government is having trouble restarting the economy after the Olympic shut down in the face of the new global recession.

6) Crude got as low as $94 today as the global recession spilled into the oil trade. Traders are using every tropical storm as a selling opportunity. Since crude hit $148, my short term downside target for crude has been the $60 handle, now not so far away.

September 15, 2008

Global Market Comments for September 15, 2008

1) In last Friday’s newsletter I predicted that Merrill Lynch (MER) would be the next target for the cloud of locusts. I had no idea that it would be gone in a few hours! The scary thing is that Bank of America (BAC) was willing to pay $50 billion for MER, but not $1 for all of Lehman. A year ago, people were laughing at BAC as a bunch of stupid, boring bankers who didn’t ‘get’ complicated things like CDO’s , mark to model, derivatives, and credit default swaps. News of the deal knocked BAC’s stock down $5 to $28. Don’t expect anything more from BAC as they will be choking on both the MER and Countrywide acquisitions for a couple of years. Do expect raging bull statues and posters to start appearing at Bank of America branches everywhere. The Dow was down 500 points on the day, but could have been down 1,000 without this transaction.

2) I have no doubt that creditors of the bankruptcy estate will get most, if not all, of their money back. The Lehman bankruptcy is solely the result of mark to market accounting rules, where the markets ceased to exist. Fully current securities originally sold to investors at 100 were marked down to 20 or even zero, when their true value is probably closer to 60 or 80. The bankruptcy court will allow a quiet, ??orderly liquidation over a long period of time in private placement form, allowing realizations to get closer to their true values. The sale of Neuberger Berman and the European real estate division could raise $15 billion as early as next week. Barclay’s Bank, having passed on buying the whole company yesterday, is still trying to buy just the investment banking division on the cheap. However, creditors may have to wait years before they see their final checks.

3) The next domino to fall may be WAMU (WM), which may disappear by the end of the week. JP Morgan (JPM) is considering a take over bid. The stock traded down to $2 this morning, down 96% from last year’s peak.

4) AIG is now taking its turn on the ropes, its stock down 80% in a week. The company’s ten year bonds crashed from 95 to 60. It is trying to sell its car finance operation, its aircraft leasing unit, obtain equity capital from private equity firms or Warren Buffet, and procure a bridge loan from the Fed. The state of New York has offered $20 billion in short term loans.

5) China cut interest rates for the first time in six years. The government is having trouble restarting the economy after the Olympic shut down in the face of the new global recession.

6) Crude got as low as $94 today as the global recession spilled into the oil trade. Traders are using every tropical storm as a selling opportunity. Since crude hit $148, my short term downside target for crude has been the $60 handle, now not so far away.

September 12, 2008

Global Market Comments for September 12, 2008

1) Lehman is a dead man walking. Expectations are now so high that if Lehman (LEH) is not sold by Sunday the market will be down big on Monday. The cloud of locusts is already looking for its next victim. At the top of the list? Merrill Lynch (MER) who’s stock has plummeted from $90 to $17. Citibank put out a report today saying that MER’s breakup value is in fact $40/share, dividing into $16 for the asset management division, $15 for investment banking, and $9 for its holding in private equity firm BlackRock, Inc. (BLK).

2) The August Producer Price Index came in at -0.9%, the biggest drop in two years, as the collapsing cost of commodities, especially gasoline, fed through the system. Crude briefly touched $99.90 today. Have we flipped from inflation to deflation in just one month?

3) Almost all commodities have given up enormous gains this year and are now showing substantial losses. But this is just a dip in a long term up trend underpinned by very strong fundamentals. Over the next 40 years the world population will increase from 6.5 billion to 9 billion, the US populations from 300 million to 400 million, and California from 30 million to 60 million. All of these people are going to need to eat, travel, and have a place to live. But we may have to wait for this global recession to end before the bull market in commodities resumes.

4) MacDonald’s (MCD) announced an impressive 4.5% increase n US sales in July, and a 10% jump in Asian sales, pumped up by its Olympic sponsorship. I am impressed by how much of US spending is going into discount providers like MCD, Walmart (WMT), Target (TGT), and the Dollar Store, all great performers this year. I wonder if the same thing is going on in the wine industry. Two buck Chuck anyone?

5) The top ten banks in the world need $500 billion in equity over the next year to meet tier one capital requirements. The world is equitizing. Many banks are only rolling over debt at half the original principal, demanding the balance be put up in equity by the borrower.

QUOTE OF THE DAY

‘At this stage of the game Lehman is reduced to burning furniture to keep the office warm.’ Bill Ackman of hedge fund Pershing Square, L.P.

September 12, 2008

Global Market Comments for September 12, 2008

1) Lehman is a dead man walking. Expectations are now so high that if Lehman (LEH) is not sold by Sunday the market will be down big on Monday. The cloud of locusts is already looking for its next victim. At the top of the list? Merrill Lynch (MER) who’s stock has plummeted from $90 to $17. Citibank put out a report today saying that MER’s breakup value is in fact $40/share, dividing into $16 for the asset management division, $15 for investment banking, and $9 for its holding in private equity firm BlackRock, Inc. (BLK).

2) The August Producer Price Index came in at -0.9%, the biggest drop in two years, as the collapsing cost of commodities, especially gasoline, fed through the system. Crude briefly touched $99.90 today. Have we flipped from inflation to deflation in just one month?

3) Almost all commodities have given up enormous gains this year and are now showing substantial losses. But this is just a dip in a long term up trend underpinned by very strong fundamentals. Over the next 40 years the world population will increase from 6.5 billion to 9 billion, the US populations from 300 million to 400 million, and California from 30 million to 60 million. All of these people are going to need to eat, travel, and have a place to live. But we may have to wait for this global recession to end before the bull market in commodities resumes.

4) MacDonald’s (MCD) announced an impressive 4.5% increase n US sales in July, and a 10% jump in Asian sales, pumped up by its Olympic sponsorship. I am impressed by how much of US spending is going into discount providers like MCD, Walmart (WMT), Target (TGT), and the Dollar Store, all great performers this year. I wonder if the same thing is going on in the wine industry. Two buck Chuck anyone?

5) The top ten banks in the world need $500 billion in equity over the next year to meet tier one capital requirements. The world is equitizing. Many banks are only rolling over debt at half the original principal, demanding the balance be put up in equity by the borrower.

QUOTE OF THE DAY

‘At this stage of the game Lehman is reduced to burning furniture to keep the office warm.’ Bill Ackman of hedge fund Pershing Square, L.P.

September 11, 2008

Global Market Comments for September 11, 2008

1) The Great Unwind of 2008 continues. Gold down from $1,100 to $740. Crude from $148 to $100.25, Natural Gas from $13.50 to $7, Silver from $21 to $10.40. The Russian stock market, with the ruble depreciation has plunged 50% since July. The best of breed commodity stocks are all down 50%, like Freeport McMoran Copper & Gold (FCX), US Steel (X), Potash (POT), Chesapeake Energy (CHK), and Joy Global (JOYG). The euro has retraced one third of a seven year up move in only eight weeks, and has hit my short term target of $1.38. Please see my earlier recommendation to short the euro at $1.58. Watch out for the snap back on all of these. They have moved too far too fast.

2) The details were released today by the promoters of the California bullet train, which will see $9.95 billion in bond issues on the November ballot. The $32 billion, 800 mile project will whisk passengers from Los Angeles to San Francisco in 2 ?? hours for $55 at a blazing 220 miles/hour, starting in 2018. The measure is expected to pass handily, as Californians always enjoy splurging on this sort of luxury.

3) Update on the foreclosure capital of the world, Stockton, California, where one out of 25 homes are in foreclosure. Prices are down 50% from the top, but unit sales are now up 300% as the scavengers pour in. Many trying to buy distressed properties find the local lenders are too overwhelmed to deal with them. The new problem: squatters and thieves who are stripping the copper wiring, copper pipes, and resalable fixtures out of abandoned houses, causing hundreds of thousands of dollars in damage, and wiping out bank equity. Solar panels, which resell on the black market for $1,000 to crooked contractors, are especially popular. Realtors are now carrying pepper spray because they don’t know who they will find on the other side of the door of houses they are showing to prospective buyers.

4) Walt Disney (DIS) has had every possible thing thrown at it this year, including high gas prices, a recession, and terrorist threats, and the lines are as long as ever. All of this has only knocked the stock down 25% from $35 to $26. CEO Robert Iger is doing a tremendous job. This is a rare chance to buy one of the world’s great brands and franchises at a discount price for a long term hold. And with the Fannie Mae bail out in place, Snow White gets to keep her castle.


QUOTE OF THE DAY

One US senator in response to today’s sex scandal among Interior Dept. staff who handled oil leases: ‘It is not possible to have an arms length relationship with someone you are having sex with.’

September 11, 2008

Global Market Comments for September 11, 2008

1) The Great Unwind of 2008 continues. Gold down from $1,100 to $740. Crude from $148 to $100.25, Natural Gas from $13.50 to $7, Silver from $21 to $10.40. The Russian stock market, with the ruble depreciation has plunged 50% since July. The best of breed commodity stocks are all down 50%, like Freeport McMoran Copper & Gold (FCX), US Steel (X), Potash (POT), Chesapeake Energy (CHK), and Joy Global (JOYG). The euro has retraced one third of a seven year up move in only eight weeks, and has hit my short term target of $1.38. Please see my earlier recommendation to short the euro at $1.58. Watch out for the snap back on all of these. They have moved too far too fast.

2) The details were released today by the promoters of the California bullet train, which will see $9.95 billion in bond issues on the November ballot. The $32 billion, 800 mile project will whisk passengers from Los Angeles to San Francisco in 2 ?? hours for $55 at a blazing 220 miles/hour, starting in 2018. The measure is expected to pass handily, as Californians always enjoy splurging on this sort of luxury.

3) Update on the foreclosure capital of the world, Stockton, California, where one out of 25 homes are in foreclosure. Prices are down 50% from the top, but unit sales are now up 300% as the scavengers pour in. Many trying to buy distressed properties find the local lenders are too overwhelmed to deal with them. The new problem: squatters and thieves who are stripping the copper wiring, copper pipes, and resalable fixtures out of abandoned houses, causing hundreds of thousands of dollars in damage, and wiping out bank equity. Solar panels, which resell on the black market for $1,000 to crooked contractors, are especially popular. Realtors are now carrying pepper spray because they don’t know who they will find on the other side of the door of houses they are showing to prospective buyers.

4) Walt Disney (DIS) has had every possible thing thrown at it this year, including high gas prices, a recession, and terrorist threats, and the lines are as long as ever. All of this has only knocked the stock down 25% from $35 to $26. CEO Robert Iger is doing a tremendous job. This is a rare chance to buy one of the world’s great brands and franchises at a discount price for a long term hold. And with the Fannie Mae bail out in place, Snow White gets to keep her castle.


QUOTE OF THE DAY

One US senator in response to today’s sex scandal among Interior Dept. staff who handled oil leases: ‘It is not possible to have an arms length relationship with someone you are having sex with.’