TKG weBLOG

1 ) Q4 GDP came in at -3.8%, the worst in 26 years. The only buyer right now is the Federal government. What private spending there is can be found online. Amazon (AMZN) announced December sales up 18% YOY, sparking a 14% jump in the stock. This also shows the consumer preference for discount buying. The mice certainly roared for Jeff Bezos. The stock market just suffered its worst January in history.

2 ) If the Chinese think they are going to get 8% growth in 2009, then they are totally unaware of the ton of bricks that is about to land on them in the form of the extinct American consumer. China has spent 30 years building a giant export machine, for which there are currently no buyers. Take a look at Japan’s statistics, which are far more reliable than China’s, which show exports falling off a cliff, machine tool orders evaporating, and once a half century losses for leading exporters like Toyota. These are numbers far worse than we saw during the depths of their lost decade. Of course, China has the money, and certainly the need, for a massive domestic infrastructure build out that can offset the disappearing exports. But this is not an economy that can exactly turn on a dime, and the transition will be painful. China can always report 8% GDP growth this year. One of the advantages of a centrally planned totalitarian economy is that if you don’t like the economic numbers you are getting, just make up some better ones. Personally, I think 5% growth is more realistic, but then you have always known me as a shrinking, subdued, conservative kind of guy. If I wanted headlines I would be shouting 2% growth, or perish the thought, negative growth, from the rooftops, as some China watchers are. The implications for the global economy are huge.

3 ) Every night the evening news in Japan refers to the “Great American Depression”. Do they know something we don’t? I hear largely inaccurate comparisons to our current economic debacle to Japan’s lost decade on an almost daily basis. But there is one thing both have in common. Nobody believes for a second the securities the banks own are worth what they say they are worth. That’s what bank hoarding of capital is telling you. The question here remains, how quickly can the banks be forced to face the music?

4 ) The Pope activated his MySpace page today. How many friends do you think he has, and are they all of the earthly kind?

5) Pundits have suggested calling the aggregator bad bank that would buy up illiquid assets “Crappie Mae”. I like it. The ticker symbol can be “CRAP”.

6) With gold surging $50 today to a six month high, and 30 year Treasury bonds down a whopping six points in two days, there is little doubt what’s driving this market. Russian selling of bullion reserves to finance last ditch support of the Ruble knocked gold down to $875 this week. But when they didn’t show at the Thursday morning fix, it was off to the races. Here is yet another bullish argument for you gold bugs out there. In 1974 the yellow metal peaked at four times the S&P 500, and in 1980 it peaked at six times. On Wednesday they were equal at $876. Technical analysts are getting excited that gold’s 200 day moving average will soon start sloping upward. Two more gold stocks to watch are Rangold Resources (GOLD) in West Africa and Canada’s Agnico-Eagle Mines (AEM).

QUOTE OF THE DAY

“A year ago there would be 30 people looking for one airplane. Today, there are 30 airplanes looking for one buyer,” said Jay Mesinger, an airplane broker in Carlsbad, California. Congressional chastising of big three execs who flew to Washington in their corporate jets put a dagger through the heart of this business. A Gulfstream V, which cost $48 million a year ago, can now be had for only $25 million.

This is not a solicitation to buy or sell securities.

If you enjoyed this post, make sure you subscribe to my RSS feed!

1 ) December new home sales fell to a stunning 331,000, 100,000 less than the most dire forecasts. Average monthly home sales for 2008 were the worst since 1982. Homebuilders are getting absolutely killed by competition from foreclosures. Every real estate indicator is in free fall, and in fact, seem to be accelerating. Expect house prices to continue their relentless downward march. Brace yourself for tomorrow, when the Q4 GDP to be announced may be the worst in 30 years.

2 ) One month into the new year, my best call clearly has been to buy the Lehman High Yield Bond Fund (TBT), which offers investors a 200% short bet that long Treasuries are going down. A move in the long bond futures contract from 142 to 126 has taken the TBT up 35%, from $35 to $47. My purchase of corporate junk bonds has done similarly well, with the PowerShares Corporate High Yield Bond Fund (PHB), and the iShares iBoxx Fund (HYG) up large. Treasury/junk spreads are shrinking at a tremendous pace, indicating that a healing of the credit markets is underway, although the stock market and the real economy can’t see it yet. In December, junk bonds were priced at levels anticipating a default ratio worse than seen during the Great Depression. This trade probably has more to run, but the easy money has been made. It does show that there are great money making opportunities out there, even while the newspaper headlines are awful.

3 ) There is one sector of the business condominium market that is doing well, while the rest of the industry languishes. Demand remains healthy for medical condominiums being snapped up by doctors looking for an equity participation in their places of business. Medical condos in Manhattan in the 2,200 to 5,700 sq ft range are selling out at prices ranging from $1,075 to $1,350 /sq ft. This market caters to a trend of doctors moving from the old neighborhood small private 1,000 sq ft offices into larger 8,000 medical groups. This enables them to profit from economies of scale and to deal more efficiently with the byzantine new ways they are being reimbursed by providers. This is one area where financing is still easy to get because lenders see doctors as recession proof, offering constant cash flows and historically minimal default rates. People always get sick, don’t they?

4 ) One way to play the current crude glut is to buy San Antonio, Texas based NuStar Energy (NS). A spinoff of Valero Energy’s asphalt division, the company boasts 58.5 million barrels of storage facilities around the Gulf. The stock has already doubled since crude prices collapsed big time in October. The company has also been buying up asphalt production from other companies like CITCO, and may offer an additional infrastructure play, once Obama’s $30 billion road rebuilding program starts in earnest. NuStar pays a hefty 8.6% dividend at an attractive PE multiple of 11x.

5 ) The 170 room Pleasanton Sheraton, next door to the Stoneridge mall, has defaulted on its $12.2 million mortgage. Despite spending $3.5 million on renovations and upgrades last year, owners said that business travel to the Tri-Valley had “virtually vanished.” The former Washington Mutual is emptying out 1,200 former employees from a nearby office complex, and remaining local firms like Chevron, AT&T, and Safeway have drastically cut back on travel to cut costs.

QUOTE OF THE DAY

“With gas at $2 a gallon, I have fuel efficient cars parked as far as the eye can see”, said Mike Jackson, CEO of AutoNation, the country’s biggest car retailer.

This is not a solicitation to buy or sell securities.

If you enjoyed this post, make sure you subscribe to my RSS feed!

1 ) Today was the day of the Microsoft shock, with disappointing earnings and a layoff of 5,000. Too bad their principal product, Vista, never worked. There was a slew of economic data today, all bad. Weekly jobless claims exploded upward by 62,000 to 589,000, taking continuing claims up to 4.6 million, a 26 year high. Lagging indicator economists are relentlessly ratcheting up their worse case unemployment forecasts from 8% to 9%, 10%, and 11% on up. Housing starts collapsed to 550,000, half the replacement rate, while permits fell 50% YOY to 549,000. Massive inventories continue to plague homebuilders. The median San Francisco Bay Area home price fell 43% YOY. That great sucking sound you hear is your home equity disappearing.

2 ) Weekly crude inventories showed a build of six million barrels, vastly greater than expected. Demand is collapsing faster than suppliers can cut it off. All storage facilities at the delivery point for west Texas Intermediate Crude are full, and buyers are agitating to take delivery elsewhere. At least 50 vessels are thought to be storing crude at sea, and countless others are slow steaming from the Middle East, hoping for a spot price revival in the meantime. Crude is the bellwether price to watch right now, and will be the first to turn on any improvement in the economy.

3 ) Now that we are basking in the afterglow of Obama’s inauguration, it is time to face some harsh realities. There is very little the new president can do that has any immediate impact. Public works is an inherently slow process that will take even longer in a new era of greater transparency. Competitive open bidding, design, contracting, permits, zoning, and the marshalling of equipment and materials can take a year, even on a fast track basis. Shovel ready projects won’t start hiring for six months. The best Obama can do is to fund immediate and massive grants to states and municipalities to prevent them from shutting down local services, throwing more people out of work. He can also fund and extend soon to dry up unemployment benefits. In the meantime, he can only make inspirational, forward looking speeches, and watch as the economic data continues to worsen at a dramatic pace.

4 ) Eastern Europe has the world’s worst performing stock markets so far this year. After a year when investors thought things couldn’t get worse, they did, with shares in Poland, the Czech Republic, and Hungary down 15%. Soaring current account deficits have knocked their currencies down another 12%. Companies from the old East Bloc are more leveraged than most, and those that borrowed in dollars or Swiss Francs are in especially bad shape.

5) John Colson, CEO of Houston based Quanta Services (PWR), a leading builder of energy infrastructure, sees wind rising from 1.5% to 15% of our power supply during the Obama administration, but no more. Wind can beat clean coal, natural gas, solar, and new nuclear on cost, but never old nuclear, dirty coal, and most recently crude. Rapidly developing technology is pushing us towards a rare, level playing field for several different power sources at once.

HISTORICAL FACT OF THE DAY

Casting about for ways to end the Great Depression, FDR met with Nobel Prize winning economist John Maynard Keynes in 1932. Decades later historians studied the notes of the meeting by the two men, neither of whom was impressed with the other. Keynes wrote “he doesn’t understand a single word I said.” FDR penned “you can’t get something for nothing.”

This is not a solicitation to buy or sell securities.

If you enjoyed this post, make sure you subscribe to my RSS feed!

1 ) We are now officially on Obama’s watch. Like a young child crying out for attention, the stock market delivered its worst ever inauguration day performance, with the Dow down 332. Here’s what he is facing:

1 collapsed financial system
2 wars
11 million unemployed
46 million without health care
66 million living on social security
$1.2 trillion budget deficit
$11 trillion Federal deficit
And one hell of a recession!

2 ) Obama is only the latest left handed president, and I am not only referring to his political persuasion. Of the last 12 presidents, half have been lefties, compared to 10% for the general population. This is more than just a statistical anomaly. What is it they have? Better people skills, organizational skills, a talent for public speaking, or the ability to listen? Who knows?

3 ) New York University economics professor Nouriel Roubini, who has been dead right on his dire economic forecasts, sees losses from the credit crisis reaching $3.6 trillion. He believes that banking systems of the US and Europe are effectively bankrupt, and with the big banks all down 20-30% today, the market thinks he is right. thinks the recession will pull commodities down another 20%. Just thought you’d like to know the worst case scenario.

4 ) Chrysler gave away 35% of its equity to Fiat over the weekend for access to the Italian car maker’s European dealer network. No cash will change hands. Leave it to these guys to buy the last ticket on the Titanic. What was Chrysler thinking? Do they believe it will be easier to get a bailout from Washington if a third of their shares are owned in the Land of Columbus? In the meantime they are offering 0% financing for their 11 slowest selling models.

5 ) Cars.com reports that its Internet traffic data presages an upsurge in car buying. During the first week of January, visits to its site jumped 19% YOY. Visits to its mobile device site, which are usually initiated from dealer’s lots to compare prices and specs, were up 30% since December. Expect the data for the next six months to morph from all bad, to some good-some bad, giving a frustratingly contradictory picture of what is really happening in the economy.

6 ) As the crude February contract expired today, the contango ballooned to a mind-boggling $27. While February 2009 was trading at $33, you could sell March 2010 for $60. This offers a non leveraged guaranteed return of 82% p.a. Even Morgan Stanley is now trying to acquire a tanker to make this play. Buy a used ULCC now, fill it with crude, and resell it a year forward, and you get to keep the ship for free, worth $65 million.

7 ) Citicorp (C) is planning to sell its Japanese brokerage subsidiary, Nikko Cordial, which it bought only a year ago for $17.7 billion. This is the remnant of Nikko Securities, the former second largest brokerage house in Japan, which went under during the nineties Japanese stock market crash. Citicorp’s total market cap is now only $19 billion. Another fire sale of a crown jewel for a huge loss. Brokerage houses are not fetching a lot these days. The problem with C is that none of its businesses are making money now, except for the Smith Barney brokerage business, which it is selling to Morgan Stanley. Where is the future in this picture? That is what a C share price of under $3, and a dividend cut to a penny a share, is telling you today.

NEW ECONOMIC THEORY OF THE DAY

High economic growth rates and a soaring stock market during the eighties were driven by the enormous productivity gains made possible by the personal computer. The nineties boom was driven by the miracle of the Internet. A big chunk of the growth this decade sprang from artificial and ephemeral real estate gains, which have since gone, poof! There is nothing to replace it until we invent something new. Make energy a national defense issue. After all, the PC (or the microprocessor that drove it) and the Net (or Darpanet, as it was then known) were both the stepchildren of taxpayer funded defense research. Launching a Manhattan Project for alternative energy and transportation could well give us the next decade’s driver we are searching for. The building of a cleantech industry and a smart transmission grid could deliver the millions of jobs the new president has been promising. That would move the engine of US growth out of poorly managed Detroit, foreign crude dependent Houston, and Heaven help us, bureaucratic and connection ridden Washington, to entrepreneurial Silicon Valley. It certainly would be a better use of money than rescuing bad stock and bond investments. Obama says that energy is a priority, but will he make it the top priority? He needs to take the great leap to make us a carbon free economy. I hope someone close is telling him this.

This is not a solicitation to buy or sell securities.

If you enjoyed this post, make sure you subscribe to my RSS feed!

1 ) By the time Bank of America (BAC) waded through the incredibly opaque balance sheet of newly acquired Merrill Lynch, they had turned green around the gills. The toxic assets they stumbled upon put the Love Canal to shame. Only more TARP money on top of the $25 billion they have already taken can repair the damage. The news gave shareholders the willies, which dumped the stock 20% today. Implied volatility on the company’s stock options leapt from 130% to 200% overnight. Did BAC buy a pig in a poke? Did they overpay at $50 billion? I’m sure Merrill shareholders are laughing all the way to the bank. Give former Merrill CEO John Thain a Nobel Prize for salesmanship. The only certainty in all of this is that BAC’s 12% dividend is toast. Even so, they are still the leper with the most fingers.

2 ) The 30 year fixed mortgage interest rates hit a new all time low of 4.96%. Looking at the tidal wave of government cash going into this sector, I think it could eventually go below 4%. It will soon be cheaper to buy than to rent.

3 ) The US trade deficit for November fell to a five year low of only $40 billion. Imports plummeted by 12%, while exports declined by 6%. Cashed starved Americans are just not buying anything anymore. Another major factor has been the $400 billion in the US bill for foreign oil, which is falling in both price and volume. It is the “J-curve” effect in reverse. This has all been a driving force behind the strong dollar, and will continue for the foreseeable future.

4 ) Americans’ new found thrift is happening at China’s expense. Ten million workers have been laid off since the financial crisis began, and a wave of bankruptcies by retailers and small manufacturers going into the Chinese New Year (the year of the ox) is expected to toss more out on the street. Long term watchers of the Middle Kingdom worry that riots and civil strife is not far off.

5 ) European Central Bank President Jeane-Claude Trichet finally cut interest rates by 0.5%. The euro didn’t care and dove to a one month low. Trichet is seriously behind the curve and the market smells blood.

6 ) I never ceased to be amazed by what the Internet throws at me. Take a look at this brilliant, professionally produced guerilla marketing effort by JC Penneys’ jewelry department. It is a riot! It shows you the lengths to which companies are struggling to discover new advertising and business models. Husbands and boyfriends beware!

This is not a solicitation to buy or sell securities.

If you enjoyed this post, make sure you subscribe to my RSS feed!

1 ) If you had any doubt where the next equity play is going to be, take a look at this article in The Economist. It shows that by the end of this year, 80% of GDP growth will be generated by emerging economies, while only 20% will come from developed ones. Time to brush up on your Portuguese, Russian, Hindi, Mandarin or Cantonese, and for good measure, Korean. Forgetting you know where Wall Street is might also help.

2 ) Hennessee Group says that hedge funds lost an average 18.9% in 2008, the worst year ever. Despite all of the moaning, I think this is pretty good for a year when all known asset classes, except Treasuries, dropped by half. And the jungle telegraph tells me that there are thousands of disciplined, risk-controlled, low-leveraged traders out there who used the volatility to generate great years, but who are keeping a low profile. Making tons of money has suddenly gone out of fashion.

3 ) War sure has changed in the Internet age. Israelis are coming home from work, setting up lawn chairs outside and making videos of incoming missiles. They then post these on YouTube to be viewed by cheering supporters in the US. The closest explosions are getting the most views.

4 ) Many economists believe that the Great Depression was only ended by the massive spending brought on by WWII, which cost $4 trillion in today’s dollars. So when Obama says that we are looking at trillion dollar deficits as far as the eye can see, he is not off the mark.

5 ) I continue to like buying key oil infrastructure stocks here at throw away prices as cheap undated calls on the future resurgence of crude prices. Flowserve (FLS) is a global supplier of pumps, valves, seals, automation, and services to the power, oil, gas, and chemical industries. After a 75% drop in the stock, it now sells at a PE multiple of 7x, giving you a return on equity of 33%. It’s a perfect case of a baby being thrown out with the bath water. You are getting free leverage on multiple fronts with no expiration date.

6 ) Some 23% of the population of California does not speak English, compared to 14.5% for the entire US. Interestingly, these numbers have gone up since Homeland Security closed the border with Mexico.

This is not a solicitation to buy or sell securities.

If you enjoyed this post, make sure you subscribe to my RSS feed!

1 ) The December nonfarm payroll came in at 524,000, taking the unemployment rate up to a 26 year high of 7.2%. At least the Labor Deptartment didn’t post a job loss of a million, as the Cassandras had predicted. More than 11 million Americans are now out of work. Some 2.6 million lost jobs in 2008, including 1.9 million in just the last four months. That is almost a whole recession’s worth. Seasonal hiring for Christmas by retailers never happened. Only education and health care are still hiring workers. If you throw in those workers who have given up looking for jobs, and those whose unemployment benefits have run out, the real unemployment rate is probably closer to 15%.

2 ) Dan Dimicco, CEO of Nucor (NUE), the best run steel company in the US, says that only $1 billion in infrastructure spending can create 35,000 jobs. We need seven million jobs to put the unemployed back to work, along with new workers joining the labor force from natural population growth and immigration. So only $200 billion of well placed public works projects should do the trick. The only question is, can you turn stock brokers and mortgage brokers into ditch diggers?

3 ) As before, I really like Greek Shipping giant Dry Shipping (DRYS), which I recommended in November at $3. It is up 500% off the back of a healthy recovery in the Baltic Dry Shipping market ($BDI). This is yet another indication that the world is not ending.

4 ) “Abandon Hope All Ye Who Enter.” So says Dante in his description of the Gates of Hell. This is how retailers must feel after enduring their worst December on record. Yesterday, Walmart (WMT), viewed by many as the only safe hideout in the sector, announced a sales shortfall, taking the stock down 7%. It turns out that WMT has the highest percentage of sales to customers who are getting laid off, maxing out credit cards, and losing homes in foreclosure. It is also believed that the new Obama administration will make it easier for WMT’s workers to finally unionize, never a good development for a listed company. Think GM.

5 ) One of the few safe havens in the financial sectors is online brokers, who dodged the bullet, because they are pure fee collectors, don’t have proprietary trading desks, don’t take risk, and didn’t use leverage to invest dubious high-yield paper to artificially boost earnings. This approach was highlighted yesterday by TD Ameritrade’s (AMTD) takeover of competitor Thinkorswim Group (SWIM) for $600 million. The move gives AMTD access to a first class online trading platform in options and an expanded customer base. Another good pick in this area is Charles Schwab (SCHW).

6 ) Governor Blagojevich was impeached, the vote coming in at 114-1. Thank you, thank you, People of Illinois, for making California no longer appear to be the worst run state in the country!

This is not a solicitation to buy or sell securities.

If you enjoyed this post, make sure you subscribe to my RSS feed!

1 ) The market came back to Earth today with the Dow suffering the first down day of 2009. The guilty characters could populate one of those Agatha Christie mysteries where everyone did it except the butler. Take your pick: an ADP report showing 693,000 job losses, stunning crude inventory figures, bad Alcoa (AA) earnings, or spectacular budget deficit forecasts for this year. And on Friday economists are predicting Armageddon for the nonfarm payroll announcement. Of course, we knew all this was coming, but reality is still bites!

2 ) While the crash in global commodity prices, including crude, has been catastrophic for expensive alternative energy plans, it does have a silver lining. Spot prices for the polysilicon used in photovoltaic solar panels has dived from $500/lb to $50/lb since June, taking the cost of solar produced electricity down from $5/watt to $3/watt. This makes solar more competitive in high power cost states like California and Hawaii. Obama’s yet to be announced solar initiative is expected to grow global solar power production from 3 gigawatts to 15 gigawatts by 2012. I like Phoenix, AZ based First Solar (FSLR) at the current distressed price after its 75% plunge.

3 ) President Bush had lunch with Obama and former presidents Clinton and Bush senior today. Wish I had been a fly on the wall at that repast.

4 ) The Dept. of Energy’s weekly inventory figures showed gigantic increases in every product, with crude up 6.7 million barrels and gasoline up 3.3 million barrels, causing crude to fall 15% to $42.90 at one point. To see these kinds of numbers in the dead of winter, when demand is normally strong, shows the true extent of demand destruction. The financial crisis is spreading among oil producing countries, especially in the Middle East, and this will soon escalate into a political crisis. Heads will roll, literally. The real estate crash in Dubai is starting to rival our own. It couldn’t happen to a nicer bunch of people.

5 ) Obama announced that he is inheriting a staggering $1.2 trillion budget deficit for 2008 from the Bush administration, almost double the previous record. So much for Republican fiscal conservatism. Bush was unable to deliver guns or butter. This further reinforces his standing as the worst president in history. Sell long dated Treasuries. The printing presses are running overtime.

This is not a solicitation to buy or sell securities.

If you enjoyed this post, make sure you subscribe to my RSS feed!

1 ) The markets are signaling that the credit crisis is over, and that it is now safe to come out of your bunker. The 30 year Treasury has collapsed ten points in the last week, taking yields from 2.60% back over 3.15%. Corporate bonds of every grade and maturity have rallied hard, narrowing spreads across the board. Other risk-taking indicators are dramatically improving, with the yen backing off from ¥88 to ¥94, euro yen moving from ¥118 to ¥126, and the VIX breaking below 40% and staying there, down from 89%. Crude is signaling a short recession, making it all the way back up to $50 today, 40% up from the lows. Now that we are in the New Year, the dynamic in the credit markets will flip from bankers not willing to lend, to borrowers not willing to borrow. This should greatly ease terms for those few hardy souls willing to play at the deep end of the recession. Expect your banker to pick up the check the next time you go out to lunch.

2 ) President Bush’s archives are threatening to overwhelm the Library of Congress with 100 terabytes of data, 50 times what President Clinton bequeathed. That is 100,000 gigabytes. Those YouTube videos take up a lot of space.

3 ) The Warren Buffet of Germany, Adolph Merkle, committed suicide today by jumping in front of a train. He had suffered massive losses from the Porsche induced short squeeze of Volkswagen, and which made VW the world’s most valuable company for a day. Expect this crisis to trigger more high-profile suicides.

4 ) Upstream and downstream integrated US Steel (X) has been the whipping boy in chief in the global commodity bust, Its shares vaporizing from $200 to $20 in a mere four months. US steel production has plummeted from two million tons/week to only one million tons, and prices have more than halved, chopping revenues by 80%. But it is about to become a major beneficiary of the Obama reflationary program, in which the US joins China and India in the global infrastructure build out story. Congress is expected to add a “Buy America” clause to any public works projects the new president hopes to target. In any case, X now produces the best quality steel in the world at the lowest prices. Another play here is mini mill operator Nucor (NUE), which can pull off a quicker restart with electric arc furnaces than a blast furnace operation like X. In the meantime, expect a continuing rapid industry consolidation until the government checks start hitting the bank.

5 ) Traders are bracing themselves for the December nonfarm payroll, which was to be announced at 5:30 AM West Coast time. The number is expected to be in the 600,000-700,000 range, one of the worst numbers in history, and the unemployment rate is expected to leap above 7%.

6 ) Walmart (WMT) and McDonalds (MCD) were the only two Dow stocks up in 2008. It tells you a lot about where consumer buying is going these days. Supersize that?

QUOTE OF THE DAY

“I think we’re looking at a period of time going forward where the market will value simplicity,” says Ken Griffin, CEO of Chicago based hedge fund Citadel, which took a 50% hit last year.

This is not a solicitation to buy or sell securities.

If you enjoyed this post, make sure you subscribe to my RSS feed!

After the annus horriblus of 2008, I thought it would be a good time to review the major asset classes and suggest reallocations.

Equities: Up

The collapse of the volatility index (VIX) is telling us that the horrific, gut churning, 10% daily moves are over. Equities, however, are no longer a US play. Extracting the insane leverage of the last decade means chopping the US growth rate down from a booming 5% to an anemic 2%. This is not a strong argument to buy American companies, which is why most analysts only see the indices recovering 10%-20% this year. You might just get tedious range trading after the late 2008 dead cat bounce. The real action will be in the BRIC countries, which will see upside returns double what you will get with the S&P 500. Buy Brazil’s Bovespa ($BVSP), Russia’s RSX (RSX), India’s Bombay Sensex ($BSE), and China’s FXI (FXI) or Hang Seng. And it may be time to spell BRIC with a “K” by throwing in the Korean Kospi ($KOSPI) as a sweetener.

Bonds: Treasuries Down, Private Debt Up.

As I have been arguing for months, US Treasury bonds are witnessing the final stages of an overinflated bubble, and you don’t want to be anywhere near this asset class when it bursts. Take out the flight to quality and year end balance sheet window dressing attempts, and you have an accident begging to happen. Take in the long term inflationary impact of Obama’s plans, and you have a 30 year contract which peaked at 142 last week that is really only worth 70. It’s just a matter of time before massive government issuance buries largely foreign buyers. Throw in the 50:1 leverage offered by a long bond futures contract, and the profit potential of a short position is so enormous, there are not enough zeros on my calculator to total it up. Buy the Lehman 20 year plus ultrashort bond ETF (TBT). Unfreezing of the debt markets will move the prices for every other type of debt off of their current throw away levels. Buy corporates of every grade with a heavy weighting in junk, or fixed income securities backed by REIT’s, emerging markets, credit cards, student loans, or subprime loans. A convenient way to do this is to buy the ETF’s for the Lehman High Yield Bond Fund (JNK), the PS Corporate High Yield Bond Fund (PHB), and the iShares iBoxx Fund (HYG).

Commodities: Up

After giving up almost all of their 21st century gains, virtually all commodities, including grains, softs, energies, and metals, are due for a recovery. A good part of the sell off resulted from the disappearance of financing, which is now slowly working its way back into the market. Now that newbie investors like pension funds, who never should have been involved, have bailed on this asset class, conditions are set for some serious base building. Commodities will be the principal beneficiaries of an epochal trend away from paper assets towards hard assets that will be the dominant investment theme for the next decade. China and Indian still want to raise their standard of living faster than these substances can be grown or ripped or pumped out of the ground. Now Obama is adding America to the infrastructure build-out story. A safe way to play this is through beaten-down, dividend-yielding, producing equities like Freeport McMoran (FCX) for copper, Chesapeake Energy (CHK) for natural gas, and US Steel (X) for steel and iron ore. But don’t expect huge gains until we see signs of a global economic recovery by the middle of the year. Then watch out.

Currencies: Dollar and Yen Down, Everything Else Up

Since we are smack dab in the middle of a six year trading range, I don’t really have a handle on what the buck is going to do short term. Could we see $1.20 or $1.00 for the greenback in an event-driven, overshoot short term? You betcha! But longer term, the trend is still down. Obama’s highly inflationary reflationary policies will eventually lead to an utter collapse in the dollar. If they are successful, the economy will recover, bringing Americans back to their old low-saving, high-consumption, high-importing ways, adding fuel to the fire. Don’t bet against the 45 year trend. Expect to pay $2.00 for a Euro in the years ahead. Take that European vacation now!

Real Estate: Down

With markets still deleveraging, and the son of subprime, the Alt-A loans, on our doorstep, real estate is dead money at best. Although the cost of carry for home ownership is rapidly approaching equivalent rental costs on an after-tax basis, fewer and fewer buyers are qualifying for loans. Add 1.2 million unsold homes from builders to three million existing homes already on the market and you have a staggering 4.2 million homes for sale in the US. This is 7% of the total American housing stock. Probably 20% of US homeowners are underwater on their mortgages, and they’re not buying anything anytime soon. We also have an impending crisis in commercial real estate generating lots of mall bankruptcies and empty retail space. Remember, “debt” is a four letter word. I don’t see a meaningful recovery in residential real estate for five years, and then it will be a slow claw back at best.

Full disclosure: This is not a solicitation to buy or sell securities.

If you enjoyed this post, make sure you subscribe to my RSS feed!