Global Market Comments for September 26, 2008

1) The government seized WAMU and sold it to JP Morgan without even telling WAMU's senior management because they were all on a plane to meet with a potential buyer. Common, preferred, and debt holders were all wiped out. Morgan immediately wrote off $31 billion of WAMU's debt, about 20% of the total.

2) From 2002 to 2007, $100 billion poured into BRIC country stock markets. In the last three months $25 billion has come out, taking these markets down 39%-58%.

3) The five largest sovereign wealth funds are the United Arab Emirates (Dubai) $625 billion, Norway $322 billion, Singapore $215 billion, Kuwait $213 billion, and China $200 billion.

4) The trailing ten year return on the S&P 500 is the lowest since 1974. This signals that the market is in the process of forming a major multi decade bottom. It has made this low only four other times in history.

5) It?s looking like China's economic slowdown is more than just a post Olympic hangover. The US Christmas selling season is expected to be a disaster this year and that will make a big dent in Chinese exports, the main driver of the economy. Home prices in Southwest China are down 20% and may enter a US style meltdown. The Shanghai and Hong Kong stock markets are already reflecting as much, down 68% and 45% respectively. Economic growth may fall from an 11% annualized rate earlier this year to under 8%. If it falls to zero, there will be a revolution. Expect bulk commodity prices to fall further.

TRADE OF THE DAY

Time to come out of the bull cylinder I recommended yesterday. The congressional talks are obviously in trouble, and with the WAMU failure there is a real chance of a crash on Monday. And there is already a big profit in the position. Time to say 'thank you very much Mr. Market', take the gift and retreat to the sidelines. If your friends make a killing on a giant up move on Monday, just let them pay for dinner next time. Capital preservation is key here. The October mini S&P 1100 puts you sold yesterday for $13 you can now buy back for $10 because the market is taking the weekend's time decay out in advance and short dated volatility has come in a bit. The Dec mini S&P 1300 calls you bought for $18 you can now sell for $25 because of a 200 point move up in the market and because longer dated volatility is holding up. The overnight net profit on the position is $15, or $750,000. Just trying to show you how I operate. Take the money and run.

Global Market Comments for September 25, 2008

1) Those who work in the financial industry see the world ending on their screens, then walk outside and see people and cars on the street, shops doing business, the sun shining, and everything appearing normal. It's surreal. Many businesses and banks are months away from shutting down from the lack of operating cash and no one realizes it. It's like an atomic bomb has been dropped, but hasn't hit the ground yet. Even if the bail out package passes, home prices are still going down and we are still falling into a recession. 30 day T-bills were trading at 0.40% today, which means that banks are parking their money with the government instead of lending it.?? Phone calls to congressmen from constituents were running 300:1 against the package. The Wall Street Bail out is a misnomer. The money is going to thousands of banks around the country, not Wall Street. And it is a restructuring more than a bail out.

2) August new home building permits in California plunged by 58% YOY, the largest fall since the Great Depression. San Joaquin County (Stockton) was the worst, down 65%. Solano County was best off, showing a 3.3% rise.

3) Weekly jobless claims skyrocked to 493,000, a seven year high.

TRADE RECOMMENDATION

Position your self for a post bail out rally. Sell 100 X October S&P mini 1100 puts for $13, taking in $650,000 in premium and use these proceeds to buy 100 X December 1300 calls at $18 for $900,000. The net cost of the entire position is $5, or $250,000. Run the October puts into expiration, keeping the entire premium, and sell the December calls on any rally. This is profitable on any rise in the market and any decline in implied volatilities from sky high levels in the mid thirties a rally would bring, while protecting your long volatility position from time decay with a long dated option. The technical term for this position is a 'short dated bull cylinder'.

Global Market Comments for September 24, 2008

1) Congress plays the fiddle while the economy burns. Bernanke is warning that the US may enter a decade of sub par growth, as Japan endured during the nineties.

2) Bill Gross at Pimco, the country's largest bond fund manager, has calculated that the government could make a $56 billion profit on the $700 billion bail out package. He assumes that the government borrows at 5%, buys distressed assets at 65% of face value, and sees a 20% default rate on a 40% decline in home prices, all conservative assumptions. Pimco has offered to manage the entire plan for the government for free. You won't see a better deal than that.

3) There is a huge legal mess brewing in England where it appears that Lehman was engaging in the practice of rehypothecation, which was made illegal after the Barings collapse. This involves the relending of securities held in customer accounts to third parties to raise cash. This is why Lehman's prime broker has been unable to return securities held in segregated customer accounts. At this stage the bulk of Lehman's unclaimed assets are in Europe. In this enviroment, possession is nine tenths of the law.

4) I spent 1 ?? hours last night with Meg Whitman, the just retired CEO of Ebay. A classically trained Harvard MBA with stints at Disney and P&G, in ten years she built Ebay revenues from $4 million to $8 billion, and staff from 30 to 16,000. The company booked $50 billion in revenues last year and would rank as the country's 9^th largest retailer. More than 1.3 million people now make a full time living selling stuff on Ebay. Ebay packages account for 20% of shipments by the German post office, Ebay's second largest market. Over 1 million cars were sold on Ebay last year and are now the company's largest revenue item. (I bought one of the first cars sold on Ebay eight years ago and watched with amazement as maps were emailed to me daily tracking its progress from Texas to San Francisco). Whitman is now the co-chair of the McCain campaign and is evidence of the emergence of a new type of Republican; engaging, pragmatic, professional, and economically oriented, not an ideological religious fanatic.

QUOTE OF THE DAY

'Unattended real estate has the half life of a head of cabbage.' A hedge fund manager in reference to the possible government takeover of 1 million foreclosed homes.

Global Market Comments for September 23, 2008

1) Yesterday was a real 'Sell the US' day. Stocks, bonds, and the dollar all fell big, a very rare occurrence. It shows you that foreigners were making large scale withdrawals of capital from the US, not wanting to get caught up in the Fall of the Roman Empire. Congress is making sausage here and it is not very pretty. Traders are watching Paulson's original three page bail out bill grow to hundreds of pages of pork and are getting nervous. The Paulson plan would not be so hard to swallow if this administration didn't have such a long and proven track record of lying. I am still waiting for them to find the weapons of mass destruction in Iraq. And why are we hearing this proposal six weeks before a presidential election? If congress doesn't deliver this week, expect the Dow to drop below 10,000 very quickly.

2) If you take the US banking system back to the 1970s you have to take house prices back to 1970s valuations. That means borrowing only four times your annual income, putting 40% down for an expensive conventional 30 year fixed rate mortgage, and a FICO score of 700 or better to qualify for all of this. This will cause the destruction of several trillion dollars of purchasing power by the American home buyer. Home prices will fall for several more years, especially in high priced markets like California and Florida.

3) Lehman senior debt is currently trading at 20 cents on the dollar and may be a buy here. The low price reflects distress sales by institutional investors like pension funds who are not allowed to hold less than single 'A' paper. CreditSights, an independent London based research firm, anticipates a recovery value in 18 months of 50 cents on the dollar. Substantial funds will be raised through the sales of Lehman's asset management division, real estate division, and the US broker. Lehman listed $600 billion in assets on its balance sheet that will have to be liquidated. It may all come down to how much of Lehman's distressed CDO's can be sold to the Treasury at a decent price as part of its $700 billion bail out.

4) About 24% of all sub prime loans are now in foreclosure. The underlying securities are trading as if 80% are going into foreclosure and that there will be no recoveries on the foreclosed properties. As soon as the government restarts the market, enough private market will step in to keep it running.

5) Fear is still rampant in the credit markets. The TED spread (the spread of US three month LIBOR interest rates over US three month T-bills) peaked last week at a record 300 basis points, but is holding in at a stratospheric 225 basis points. So far this year the spread has traded around at an average of 70 basis points.

Global Market Comments for September 22, 2008

1) Prices on 30 year T-bonds have plunged an unprecedented 8 points in two days, taking the yield up from 3.90% to 4.6%. Please see my comment last Thursday that bonds were a screaming short at 124. With all of the bail outs, the national debt has effectively risen from $9 trillion to $18 trillion in a month. Iraq and a national health care system don't fit anywhere in this scenario.

2) Since nobody knows what financial instruments are worth, money has been pouring back into the commodity trade with a vengeance since Wednesday. Gold is up from $750 to $900, the euro from $1.38 to $1.47, crude from $90 to $120, and wheat is limit up. The derivative equities are up 30% or more. The highly inflationary aspects of the bail out are coming home to roost.

3) The Short selling ban list has come in for a lot of abuse since it came out on Friday. It included four companies that don't trade, a Nigerian aviation finance company, and a biotech company, but did not include General Electric (GE), one of the biggest players out there. It just shows the desperate, slapdash way in which it was put together. The whole issue is bogus, because hedge funds, in fact, were net buyers of financial stocks this quarter, cutting their short positions by 20%. You don't get rich selling stocks already down 90%.

4) Current shareholders in Goldman Sachs may do alright. GS currently sells for 7 X earnings with a leverage of 24 X. By converting into a bank leverage will have to drop to only 12X, but more stable earnings will justify a 14X multiple.