September 17, 2008

Global Market Comments for September 17, 2008

Note: If world ends, there will be no comment for September 18.

1) The government nationalized AIG, taking 79.9% of the stock in exchange for an $85 billion bridge loan. The trillion dollar company provides 18% of the life insurance in the US. This is a steal for the government, which will make tens of billions of dollars on the deal. AIG has huge exposure in California, taking in $3.7 billion in premiums last year. It insures 1.6 million cars and motorcycles, 12 million home mortgages, $750 million in workers compensation insurance, and one out of four aircraft. Some of the better known subsidiary names are American Home Insurance, 21st Century auto insurance, and National Union Fire Insurance.

2) Housing starts for August fell a precipitous -6.2% to an 895,000 annualized rate, a 17 year low. Builders are obviously not interested in adding to already bloated inventories.

3) Lumber (LB) ($LUMBER) has been the worst performing commodity over the last three years, thanks to the collapse in the housing market, taking the CME contract from $400 down to $185. With a year’s worth of new home inventory sitting out there, there are not a lot of buyers of wood these days. Industry capacity utilization is now down to 75% of its 77.35 billion board feet capacity. While plant closings and mothballing has provided some respite in recent months, there is a new threat looming. The collapse of the Canadian dollar against the greenback from $1.10 down to 93 cents is enabling imports to undercut US producers for the first time in years. This contract may provide the first hint to the recovery in house prices. Lumber closed at $2.14 today.

Lumber2.png picture by sbronte

4) It’s time to look at the wreckage of the BRIC markets to grasp the opportunities out there. Brazil’s Bovespa ($BVSP) has vaporized 39%, from 75,000 to 46,000. Russia has melted 58%, from 2,500 to 1,038. India’s Sensex ($BSE) has plunged 43%, from 21,000 to 12,000. My preferred China vehicle is the Hang Seng, and it has really been beaten with the ugly stick, down 45% from 32,000 to 17,500. (The Shanghai market, which foreigners can’t buy, is down and astounding 68%, from 6,000 to 1,930). I always thought of these as ‘roach motel’ markets. You can check in, but you can’t check out. Liquidity only exists on the upside. But going forward from these levels, these markets will generate far and away the highest equity returns.


‘People are saying these banks are too big to fail. That may mean they are also too big to manage.’ Warren Buffet.