Global Market Comments for November 5, 2008
Special Gold Issue
Featured Trades: ($GOLD)

1) Last year, South Africa suffered its steepest decline in gold production since 1901, falling 14%, to a mere 232 tons. It now ranks only third in global production of the yellow metal, after China and the US. Severe electricity rationing, a shortage of skilled workers, and more stringent mine safety regulations have been blamed. Choked off credit has frozen the development of new capital intensive deep mines, as it has for everybody else. Rising production costs have driven the global break even cost of new gold production up to $500 an ounce. In the meantime, the financial crisis has driven flight to safety demand for gold bars and coins to all time highs. Last year, the US Treasury ran out of one ounce $50 American Gold Eagle coins, now worth about $850. Competitive devaluations by almost every central bank, except Japan, mean that currencies are not performing as the hedge that many had hoped. It all has the makings of a serious gold shortage for the future. Could the downturn we have seen over the past ten months be just a blip in the eight year bull market? When the last hedge fund is forced to sell its last leveraged long position, watch out above!

2) If the share prices of the top five listed banks went to zero, it would take only 331 points off of the Dow, because it is a price averaged index. There is nothing left for hedge funds to short. Oh, how the mighty have fallen!

3) Philipp Hildebrand, vice chairman of the Swiss National Bank, indicated that Switzerland will pursue a Fed style zero interest rate policy to head off a depression. It plans to flood the Swiss monetary system with liquidity, and even buy corporate bonds to this end. The Swiss franc went into free fall. Long time Swiss economic observers were stunned.

4) Car theft has fallen nationally because the thieves can't sell their hot vehicles. Go short chop shops.

6) The official US government poverty level was set at three times the annual cost of food in 1963 during the Kennedy administration, where it has remained ever since. Today that works out to $21,200 for a family of four. Expect this figure to rise during the new administration.

QUOTE OF THE DAY

'The euro won't survive its first recession,' said Milton Friedman, when the currency was created a decade ago.

INTERESTING FACT OF THE DAY

Almost all of the gold ever mined in history is still in circulation, and would fill about two Olympic sized swimming pools. That includes ores found by the ancient Egyptians, the coins traded in Solomon's temple, those minted by the original King Croesus, and all those bars of Nazi gold stamped with German eagles I used to see in the vaults at Swiss Banks Corp. Only gold shipwrecked at the bottom of the ocean in Spanish galleons, or gold rush era steamers, or gold vaporized by atomic bomb blasts is no longer available.

Global Market Comments for November 4, 2008

1) It all comes down to the Senate today. If the Democrats win 60 seats they will have a supermajority that will give Obama a blank check. Less than that, the republicans can fight a bitter rear guard action with a filibuster. Our first read will come with the early results from battleground state Virginia that closes its polls 7:00 PM East coast time.

2) General Motors car sales dropped 45% in October YOY, the worst performance since WWII. Ford was down 30% and Toyota was down 23%. You know things are tough when even the Japanese can't sell cars. I drive over the Benicia Bridge once a week where cars imported from Japan are offloaded. The stockpile of cars there has doubled in the past month. Expect the economic data for October and November to be some of the worst in the economic history of the US. JP Morgan is predicting a decline in GDP of 3%. Next to come, an October non farm payroll on Friday of -200,000!

3) Wall Street has been foreclosed on and has taken a short term rental at 1600 Pennsylvania Avenue, Washington DC 20500, tel: 202-456-1111.

3) More unintended consequences. The price of recycled cardboard has plunged from $200 to only $30/ton since July. Recycling companies are scrambling to find warehouse space to accommodate rapidly spiraling stockpiles. Newspaper has dropped from $150 to $65/ton. Only a few months ago people were stealing newspapers out of my recycling bin.

Global Market Comments for November 3, 2008

1) First quiet day in the markets in two months. All is now on hold until after the election. An Obama win is already priced into the market, but the makeup of the House and Senate is not. McCain needs to pull an inside royal flush to win. LIBOR fell 45 bp last week and another 17 bp today down to 3.02%, meaning help is on the way. The spread still has 45 bp to go to hit the low for the year, which was 70 bp over Fed funds. Hang on!

2) With the election out of the way the next big date looming for the markets is November 15. The Bretton Woods II conference to reshape the international role of the dollar will be held. It is also the final day for notification for most hedge fund redemptions.

3) More than 20% of all US home mortgages are now under water. Goodbye to the home ATM! Conforming loans are now available at a 4.75% rate for 30 years, with 3% down, up to $720,000, with a FICO score of only 580!

4) The scariest costume I say on Halloween was a kid dressed up as a chart of the Down Jones Industrial Average. Amid the violence of October, it was easy to miss how momentous some of the moves were: the S&P 500 from 1,167 to 820, crude from $102 to $67, gold from $878 to $716, The euro from $1.42 to $1.22, Citibank (C) from $24 to $ 12, Hartford Insurance Group (HIG) from $45 to $10, and the emerging market ETF (EEM) from $36 to $ 18. Oh yes, the futures on a McCain win went from 45% to 15%.

5) If General Motors (GM) goes bankrupt, two million jobs will be lost by the time the ripple effects from suppliers and dealers are added in. If the merger with Chrysler goes through, only one million jobs will go. GM has become a giant HMO that makes cars as a sideline in its arts and crafts department. $8,000 of the cost of every GM car goes to health care costs. The equivalent figure at Toyota, which benefits from a national health care plan, is $180.

6) If you had any doubt that we are headed for a severe recession, look at the price of naphtha, cornerstone of the petrochemical industry, and the basic feedstock of plastics. The price has fallen 76% from $1,200 to $284/ton since July. Naphtha is now cheaper than crude for the first time ever, as panicky petrochemical companies dump inventories.

7) I stopped at an intersection on Sunday and found my car surrounded by an angry church group waving yellow 'Yes on 8' signs, the California anti gay marriage initiative. They screamed that if I voted 'no' on 8, I was raping my children. It's time for this election to end.

Global Market Comments for October 31, 2008

The Sell in May and Go Away Season is Now Officially Over!!

1) The 'sell at any price' mentality is now broken as the steady improvement in short term liquidity salves investors' nerves. The market is now pricing in a 'U' type recession with a prolonged recovery, not a quickie 'V' type recession. Day traders are looking for the Dow to trade in an 8,000 to 10,000 range for the foreseeable future as the glass flips back and forth from being half full to half empty. After this week's global bout of euphoria (Tokyo was up 26%!), investors still have some sobering demons to deal with. The election will sharply increase capital gains taxes, deleveraging continues, the hedge fund industry is imploding, and the crisis in Detroit is getting worse. Oh yes, did I mention the recession?

2) The average daily range in the Dow this month has been 4%, more than double the previous record. There were only three days when the market moved less than 100 points. These are all classic signs of uncertainty, the bane of businesses.

3) The next forced seller in the markets is going to be the US Treasury, which has to sell bonds along the entire maturity range to fund the trillions of dollars in promises it has made. Short 30 year Treasury bonds, and stay short for the rest of your life.

4) University of Michigan consumer sentiment for October collapsed from 70.3 to 57.6. This indicator normally moves a couple of points a month. Consumer spending fell 0.3%, the biggest drop in four years. Watch out for October car sales. They are expected to be the lowest in 20 years.

5) There is a growing view that this month's crash has permanently impaired equities as an asset class, and that we may lose an entire generation of investors. It didn't pay to be a contrarian on the Titanic. The end result will be a lower PE multiple ranges for many years. My grandfather never bought a stock in his life. His relatives that did ended up living in his basement for the duration of the Great Depression. During my career, I watched the PE multiple for Japanese stocks go from 10 to 100 and then back to 10, where they stayed for years in the face of zero interest rates.

6) US gun sales are up 10% this year. Demand from hunters is weak because of high gas prices and poor weather. But they are being more than offset by NRA members buying weapons for home defense in advance of an Obama win, who they believe will bring in tighter gun controls.