February 6, 2009
Global Market Comments for February 6, 2009
Featured Trades: (BAC), (TM), (TBT)
1) The dreaded January nonfarm payroll came in at minus 598,000, the third monthly figure over a half million, taking the unemployment rate up to 7.6%. It was the worst monthly reading since 1974. We'll probably see 9% by June. Notice how the numbers always come in worse than expected, with big revisions upward in the back months. Three million jobs were lost in 2008, and 3.6 million since the recession began in Q4, 2007, taking the national total up to 11.2 million. Only the health care and education sectors gained jobs. Because the lion's share of job losses are in male dominated industries, like auto manufacturing and construction, and hiring is taking place in female staffed industries, women will soon account for more than 50% of the U.S. work force.
2) Yesterday, Bank of America (BAC) stock hit a low of $3.60. The preferred is now paying 25%, a yield you normally see only in the lowest grade of junk bonds, those in default. Unbelievable! One leading bank analyst is still keeping his earnings forecast for BAC at $5/share, giving you a multiple of 0.7 X. We learned that during its last year of trading, the bank's new Merrill Lynch subsidiary increased its long position in collateralized debt obligation s from $4 billion to $60 billion. More unbelievable! Where was the risk control? What is the market telling us that we don't know? If this company isn't going bankrupt, it is certainly doing a great imitation.
3) There is a new proposal making the rounds for solving the financial crisis known as 'desecuritization.' There are $1.4 trillion in CDO's outstanding backed by Alt-A and subprime loans in the form of 3,700 individual securitizations. Over 68% of the loans backing these bonds are current.?? Mark to market rules are forcing the banks to carry this paper on their balance sheets at 50% discount. This is where the $700 billion figure for the first TARP comes from. The problem is that mark to market is a meaningless accounting fiction when there is no market. If you break up these securities and place the underlying loans back on the banks' balance sheets, the good mortgages can be valued at 100% of face, and those behind in their payments can be discounted to maybe 70% because they are still secured by the value of the underlying homes. This would boost the value of the entire asset class assets from 50 cents to 90 cents on the dollar. Restored balance sheets would enable banks to resume lending. It sounds like a workable plan, and therefore is unlikely to ever see the light of day.
4) Japanese analysts were stunned when Toyota Motors (TM) announced that it expects to lose $3.8 billion in the current fiscal year, its first loss since 1950. The company is getting decimated by the strong yen, which raises the cost of production in Japan, while shrinking foreign earnings when brought back to Japan. Moody's cut its rating of TM debt from AAA to AA+. The forecast was three times worse than one made only two months ago. The company expects sales to fall from 9.3 million cars in 2008 to only 7.2 million this year. Every assembly line in Japan has been shut down except one. Management does not expect sales to recover until year end, and that, I'm sure, is just a hopeful guess. This is a once in a lifetime opportunity to buy one of the world's greatest companies on the cheap, down 60% from its 2008 high.
5) My top pick of the year, the Lehman Power Shares Ultrashort 20 Year Plus short ETF (TBT), which gives you a 200% short play on long government bonds. It has been absolutely roaring, hitting a high of $49.5, up 37% from my recommended buy a month ago. With a $900 billion stimulus package, and a $2 trillion 'bad bank,' piled on top of a $700 billion TARP, it is clear to everyone that the government is about to flood the debt markets with paper. The US money supply M2 is now growing at a breakneck 20% rate and is accelerating. This trade has further to run.
OBITUARY OF THE DAY
Herbert Hamrol, the last survivor of the 1906 San Francisco earthquake, died yesterday, aged 106. Hamrol was three when his mother hustled him out of a collapsing building during the great earthquake, which killed 3,000. Hamrol, who worked at stocking supermarket shelves until he retired last month, said the secret to a long life was 'wild women and good liquor.'
QUOTE OF THE DAY