Global Market Comments for August 26, 2008

1) Crude pops $6 and natural gas leaps 42 cents to $8.25 as hurricane Gustav turns towards the oil and gas producing facilities in the Gulf of Mexico. One mathematical model has a category four hurricane hitting New Orleans in 3-4 days.

2) The S&P case-Shiller home price index for June fell 15.4% YOY. San Francisco came in at -23.7% YOY. Even though homebuilders have cut back construction dramatically, foreclosures keep dumping more properties on the market, driving prices down.

3) The ten year return on the S&P 500 has been a meager 3%. Add in dividends and it rises to 23%.

4) The top 1% of taxpayers in the US earn 20% of the income, but pay 40% of the taxes. Obama plans to raise the capital gains tax from 15% back to the Reagan level of 28%.

5) Since gas prices spiked people are driving less and driving slower, causing the accident rate to drop precipitously. Highway deaths are now running at an annualized rate of 33,000, the lowest since 1961. Car insurance rates will fall. US crude consumption has declined by one million barrels/day in the past year which is equivalent to 42% of our yearly imports from the Persian Gulf.

6) Natural gas (NG) hit my short term target of $7.75, down 42% from its $13.50 high two months ago. If you think this is an unusual move just look at a six year chart for NG. It is the third such move. Welcome to the natural gas market, where the ante is a pair of balls of steel. Stand aside for now. Storage is now above the five year moving average. If there are no more hurricanes after Gustav this season, and crude visits the eighties, you could see NG break below $7. Worse, the crude/NG ratio is now at an all time high of 14.7.

7) The commercial real estate debt market will be pushed closer to the brink on September 1. That is when an interest payment is due to Deutsch Bank on a $225 million loan to Riverton, a 1,232 apartment complex in Harlem. The owners used aggressive financing to overpay for a complex in 2005 where 93% of the units were subject to New York rent control. With market values now half of what they paid, the owners may find it expedient just to default and walk away from the project. The move could trigger a panic in the market for the securities backing similarly leveraged commercial deals, shut the window on new developments, and open the next chapter of the credit crisis. Terms have already dramatically tightened. In the past year commercial loan to value has dropped from 95% to 65%, spreads have widened from 75 basis points over Treasuries to 300 bp, and the volume of deals fallen from $3 billion in 2007 to only $1.5 billion so far this year.

Global Market Comments for August 21, 2008

1) Crude (USO) spiked $10 to $122 when it realized that 1% of the world's production passes through a pipeline in Georgia where the Russian invasion shows no sign of ending soon. Tropical storm Fay also brought out fears of a Gulf hurricane back to the surface. Panic buying spread across a wide range of commodities contracts, from rice to gold to natural gas.

2) The tiny island nation of Singapore, which has never won a medal in the Olympics, has offered to pay a $735,000 bounty to anyone who brings home the gold. Malaysia is offering a $300,000 prize, Greece $220,000, and the Philippines $200,000. The US pays a relatively chintzy $25,000 to its medal winners. NBC thought it died and went to heaven when it rained during the women's volleyball gold medal final. Suddenly it became an Olympic wet T-shirt contest!

3) Weekly jobless claims moderated to 432,000, down 13,000. Just noise.

4) Last week the Treasury called Credit Suisse and asked them not to cut off short term credit lines to Lehman (LEH) to head off a run on the bank. The stock tanked down to $12.50, and the stock will soon be trading at a hat size. The Treasury doesn't do this for companies that are in the pink of health. What do they know? When did they know it? What are they not telling us?

5) You only want to buy when there is blood in the streets, and Russia's invasion of Georgia is presenting us with an opportunity to do so by the bucket load. Russia's recent seizure of assets owned by BP (BP) and Royal Dutch Shell (RDS-B) has also sent a shiver down investors' backs. But the rising Russian middle class story is still alive. The Market Vectors Russia ETF (RSX) is down 36% from its June high of $59. Lukoil (LUKOY), the country's most independent oil producer, is now selling for five times earnings compared to seven times for ExxonMobile (XOM) and Chevron (CVX) and ten ties for Petrobras (PBR). Companies enjoying government political protection include Gazprom (OGZPY) and savings bank Sberbank (SBRBF). The best non energy play is wireless operator Vimpelcom (VIP). Mechel Steel Group (MTL) is down a gut wrenching 70% on fears of a tax investigation. If you really want to go out on a limb there is JSC Bank of Georgia (BGEO).

6) Rim (RIMM) launched its next generation Blackberry Bold in Canada today. The 3G smart phone designed for high end business users is thinner, faster, carries a two megapixel camera, and can use a wide range of third party financial and market tracking software. Sign me up. The phone will only be available through AT&T in the US.

Global Market Comments for August 20, 2008

1) Weekly crude inventories soared by a record 9.4 million barrels as demand destruction accelerates, knocking the price down $5 to $12.50. The world is clearly producing more crude than it is using, but there is still no margin for error on the supply side. Several big hedge funds are now targeting a move to $86 before year end.

2) Maudie Hopkins, one of the last surviving confederate army widows, died at 93. In 1934, at age 19, she married an 86 year old veteran of the Civil War who died shortly thereafter. She has been collecting a government pension ever since. The Veterans Administration is still paying pensions to a half dozen similar widows from both sides of the civil war, which ended 143 years ago. One is collecting a pension from a late Civil War veteran and a WWII veteran.

3) The US share of world GDP has fallen from 50% at the end of WWII to 21% today, and is expected to fall to only 18% in the next ten years. It won't be the end of the world. Holland's world GDP share peaked in 1617, and things are not so bad there.

4) Lehman (LEH) stock collapsed again, by 15% yesterday to $12 as the incredible shrinking Lehman story continues. One report predicted that LEH will soon write off another $4 billion in assets. If they sell their $40 billion real estate?? portfolio and their money management division, the firm will be back where it was strategically in 1995, a much smaller, less profitable entity. Most senior staff have seen the value of their stock options wiped out and are expected to bail soon, including CEO Richard Fuld.

5) Fears that the next wave of defaults will come from the commercial real estate sector have driven the share prices of listed developers down to absurd levels. Stocks are now discounting a doomsday scenario which may or may not happen.?? Best of breed here are the Westfield Group (HQR.BE), developer of malls in the US, Australia, and New Zealand, and Japan's Mistubishi Estate (8802.TO), the largest owner of prime office space in Tokyo's Marunouchi business district.

6) Fannie Mae (FNM) and Freddie Mac (FRE) hit new lows on concerns that a Fed bailout may not come. With FNM at $4 and FRE at $3 they are now trading at the value of a perpetual option with a zero strike price and an incredibly low implied volatility. Cheap. The two together own half the mortgages sold in the US. If they do go under, China and Russia will declare war on the US because they hold so much of their paper.?? If these two don't go bankrupt, they will generate stock returns of several hundred percent. These look like the airline stocks that I recommended two months ago that brought in an immediate fourfold return.

Global Market Comments for August 19, 2008

1) The producer price index, the real inflation rate, rocketed by 1.2% in July to 9.8% YOY. The stock market barfed 200 points. Lehman (LEH), AIG Int. (AIG), Fannie Mae (FNM) and Freddie Mac (FRE) did coordinated swan dives in true Olympic fashion.

2) According to Dataquick, home prices in Southern California have fallen 31% in July YOY, but sales volume is up 14%. More than half of the sales are foreclosures.

3) Chinese families can legally have only one child, and the overwhelming majority prefer to have a boy. Pregnant women are using cheap ultrasounds to discover the sex of their child, and are getting abortions if their child turns out to have the wrong sex. Because of this sad practice, there are expected to be 40 million more men than women in China in ten years, a demographic development that could lead to political instability.

4) China's per capita income has soared from $160/person in 1978, when Premier Deng Xiaoping (who I interviewed at the time) initiated modern economic reforms, to $2,000 today. But 16% still earn less than $1 a day. Per capita incomes could rise a further tenfold to $20,000 by 2025. China has had the world's worst performing stock market this year, with the Shanghai index down 65% from 6,600 to 2,300.

5) The Democrats hold their convention in Denver next week, and Obama's big announcement will be his choice of a running mate. Expect a Southern or Midwestern middle of the road white guy. The front runner is Senator Joe Biden of Delaware, chairman of the senate foreign relations committee, and two time loser of presidential campaigns. Also rumored are Senator Evan Bayh of Indiana and governor Tim Kaine of Virginia. Expect leaks this weekend so there is no competition with the Olympics for air time. The market won't care who he chooses.

6) US television networks will cease analogue broadcasting next February and go purely digital. Google (GOOG) is lobbying the FCC for the newly freed up bandwidth frequencies to be used to launch WIFI 2.0, a high speed wireless broadband network. The system would be used to service the burgeoning smart cell phone market, would have a 50 mile range, and could penetrate buildings, mountains, and dense foliage, something existing cell phone networks are unable to do.

Global Market Comments for August 18, 2008

1) With the euro at $1.46 on its way to the $1.30's, and commodities in free fall, it is becoming screamingly obvious that the inflation trade is temporarily dead. Long bond yields are approaching new lows for the year, with the ten year at 3.80%.

2) Nine million jobs are expected to leave the US for China and India over the next ten years, manufacturing to China, and back office and support to India. China's GDP is expected to exceed that of the US by 2035. Hopefully I will be dead by then.

3) If China had not implemented its 'one family, one child' policy in 1979, the population would have shot up to 1.7 billion today instead of the current 1.3 billion. The 400 million difference equals the entire population of North America now.

4) If Michael Phelps were a country he would rank 5^th in the Olympic gold medal rankings. The cost of feeding him his 12,000 calories/day has risen from $19.95 a day to $38.57 over the last three years, according to his mother. That is $14,000/year just for food. But by earning an expected $5 million in endorsements this year, I think he can afford it. By comparison, Mark Spitz earned $1 million from his famous poster with him wearing all seven of his gold medals, but that was in 1972 dollars.

5) If the flap between the US and Russia worsens, it could be bad news for the bond market. Russia owns $216 billion in US debt, including $150 billion in Freddie Mac and Fannie Mae paper. If the Russians dump, bond yields would soar, at least temporarily.

6) MF Global (MF) at 15 times earnings at $7 bears some watching. The stock has been unfairly beaten down from its $30 high a year ago by rogue trader stories and tarred by the poor performance brush of other listed hedge funds. There is an easy double here.

7) Firewood prices in the Northeastern US have doubled over the last three years to $300/cord. Consumers are rushing to head off a 25% leap in home heating costs this winter. Sales of wood stoves are also booming. This is not good for global warming.

8) Q2 disclosures show that Warren Buffet has been adding to his positions in NRG Energy (NRG), Ingersoll Rand (IR), and drug company Sanofi-Aventis (SNY). The Gates Foundation has been buying ugly shoe company Crocs (CROX), AIG International (AIG), and Eastman Kodak (EK).