Global Market Comments for October 22, 2008

1) Today global deflation trumped the continuing decline in LIBOR, knocking the Dow down 700 at one point. There was a five cent move in the euro today down to $1.27 as global funds poured into Treasuries. It turns out that a global recession is great for the dollar because it dramatically shrinks the trade and current account surplus. The drop in crude alone since July has cut our payments abroad from $700 billion to $400 billion/year, and that swing immediately hits the foreign currency market. The Euro is now gunning for the $1.22 level, where it will have given up exactly half of its appreciation from 2001-2008. All this in only four months! In an extreme, overshooting move we could see parity against the dollar of $1:???1, and we live in an age of extremes. The next big down leg in the long term dollar bear megatrend will start next year at first hint of a recovery in the US economy. Then we could go to $2.00/euro.

2) Global lending capacity is shrinking at a tremendous rate. Banks are deleveraging as quickly as they can, while others are going under. Healthy banks are using the Federal bail out money not to lend, but to deleverage, as they normally would at this point in the economic cycle. Big money center banks are going to take over weak regional banks and use the new deposit bases to deleverage further, leaving the government to pick up the tab in the form of loss carry forwards from write downs on newly acquired bad loan and securities portfolios. The number of banks in the US is about to take a quantum leap down. The global asset base is going to have to shrink to meet the new smaller loan capacity. Although virtually all commodities and emerging stock and bond markets have halved in the past three months, and industrialized stock markets have been cut in half in the past year, the loan capacity to asset gap is still probably in the $5-$10 trillion range. Where is most of the remaining fat? In real estate, which still has further to fall.

3) Asian markets got slammed last night as fears of a hard landing in China accelerate. Stock indexes were down 3-7%. China could slow from a 12% to a 5% growth rate as their foreign markets dry up. If growth falls under 5% you will have another revolution in the Middle Kingdom. Copper, an important leading economic indicator, crashed 9% today down to $1.83. The Baltic Dry Index ($BDI) hit a new low of 1,292, down 89% from its 12,000 high.

4) Dr. Allen Sinai of Decision Economics says that 20 of the world's top 47 economies accounting for 75% of world GDP are now at or in recession. This is the most coordinated, simultaneous global postwar recession in history, and it will be the longest, stretching well into 2010.

Global Market Comments for October 21, 2008

1) More light at the end of the credit tunnel. Three month T-bill yields made it back from 0.25% up to 1.27% vs., a normal range around 1.75%. LIBOR has dropped for seven consecutive days, pointing to a slow thaw of European lending. Now that most major banks have been nationalized, the interbank loan market is essentially an all government affair. The VIX has dropped from 81% to 53% in just three days, but is still at record levels.

2) It turns out that hedge funds were major sellers of credit default swaps on Lehman bonds. They had to absorb the bulk of the $350 billion payout which is due today. That explains why the best quality names like Chesapeake Energy (CHK), US Steel (X), Google (GOOG), and Freeport-McMoran (FCX), all hedge fund favorites, had the biggest falls, while the dross held up relatively well.

3) Hollywood is making a sequel to the classic film 'Wall Street'. It will focus on the evil machinations of 'greed is good' Gordon Gekko, once he is released from prison. He has to be either a hedge fund manager, a short seller, or a sub prime mortgage broker in the new film, or perhaps all three.

4) Several China experts have opined that the real Q3 GDP figure wasn't 9%, but was really 8% or even below 5%. The government publishes inflated figures to stifle criticism of its economic policies. Gee, do you think they do that here too?

5) Traders were stunned on learning that Kirk Kerkorian is selling his 6.09% stake in Ford Motors (F), which he purchased for around $7.50/share, and is now trading at just above $2. The only reason to sell here is if you think Ford is going to zero, or if you are going to die soon. The always combative Kerkorian, with a net worth at the beginning of the year of $18 billion, is 91. His response to all of this? ?I lived a year too long.? At least his sense of humor hasn?t withered.

6) Richard Del Bello of Conifer Securities, a prime broker and hedge fund hot house, predicts the number of hedge funds is about to see a dramatic decline, but then see a resurgence in 2010. Bonus deprived staff are bailing from existing funds to set up their own shops. Now is the best time in history to set up a new hedge fund.

JOKE OF THE DAY

The collapse of the US stock market is expected to trigger a massive restructuring of corporate America. Some of the mergers being mooted: FedEx and UPS amalgamate to create FedUp, and Victoria's Secret and Smith & Wesson combine to form Titty Titty Bang Bang.

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!

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.

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.