September 12, 2008

Global Market Comments for September 12, 2008

1) Lehman is a dead man walking. Expectations are now so high that if Lehman (LEH) is not sold by Sunday the market will be down big on Monday. The cloud of locusts is already looking for its next victim. At the top of the list? Merrill Lynch (MER) who’s stock has plummeted from $90 to $17. Citibank put out a report today saying that MER’s breakup value is in fact $40/share, dividing into $16 for the asset management division, $15 for investment banking, and $9 for its holding in private equity firm BlackRock, Inc. (BLK).

2) The August Producer Price Index came in at -0.9%, the biggest drop in two years, as the collapsing cost of commodities, especially gasoline, fed through the system. Crude briefly touched $99.90 today. Have we flipped from inflation to deflation in just one month?

3) Almost all commodities have given up enormous gains this year and are now showing substantial losses. But this is just a dip in a long term up trend underpinned by very strong fundamentals. Over the next 40 years the world population will increase from 6.5 billion to 9 billion, the US populations from 300 million to 400 million, and California from 30 million to 60 million. All of these people are going to need to eat, travel, and have a place to live. But we may have to wait for this global recession to end before the bull market in commodities resumes.

4) MacDonald’s (MCD) announced an impressive 4.5% increase n US sales in July, and a 10% jump in Asian sales, pumped up by its Olympic sponsorship. I am impressed by how much of US spending is going into discount providers like MCD, Walmart (WMT), Target (TGT), and the Dollar Store, all great performers this year. I wonder if the same thing is going on in the wine industry. Two buck Chuck anyone?

5) The top ten banks in the world need $500 billion in equity over the next year to meet tier one capital requirements. The world is equitizing. Many banks are only rolling over debt at half the original principal, demanding the balance be put up in equity by the borrower.


‘At this stage of the game Lehman is reduced to burning furniture to keep the office warm.’ Bill Ackman of hedge fund Pershing Square, L.P.