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1 ) Welcome to the worst case scenario, with Q4 GDP revised down from -3.8% to -6.2%. Q4 will be just as bad, if not worse, then we will find a bottom. Technical analysts were ringing their hands as the Dow hit a new 12 year low and the S&P 500 broke key support at 740. Thank God I don’t believe in that mumbo jumbo. Natural gas hit a new six year low at $3.90, and even gold backed off to $928. Citigroup (C) is now so cheap at $1.40 that you could launch a hostile takeover with your American Express card. It really had the flavor of a “throw up your hands and sell everything” day.

2 ) Thomas Ricks, author of the best selling The Gamble: General David Petraeus and the American Military Adventure in Iraq, 2006-2008, says that we are only half way through the war, and our unfortunate involvement there could run as long as another 16 years. The surge has failed, our casualties are rising, and U.S. credibility with Iraqis is zero. Bush blew a cozy set up that worked for a decade where Saddam was contained at minimal cost. Talking is more worthwhile than fighting, and it is cheaper to hire someone than to kill him. General Petraeus figured this out, so we now have 100,000 enemy fighters on the payroll costing $30 million a month. It was easy to walk away from Vietnam and leave a few million locals in re-education camps. Iraq won’t be so easy, because it sits atop, or adjacent to the world’s largest oil supply. Eventually, Iraq will evolve into another Lebanon where you have multiple competing armed groups. The big winner in all of this is Iran, which has seen its prestige grow in the Middle East at our expense. Iraq will continue to be a huge financial drain on the U.S. for decades, no matter what Obama says. All very sobering thoughts, with big implications for the markets.

3 ) With gold bugs, survivalists, and garden variety hedge funds running victory laps over the yellow metal’s recent breach of $1,000, it is easy to miss the move in silver that has been twice as impressive. Silver has run 30% this year to $14.60 an ounce, despite the steady deterioration in industrial demand. Silver ETF buying has exploded by 1,676 tons to bring its total to 9,929 tons. Sales of silver American eagle coins have doubled to four million ounces so far this year. The metal may have more to run. Hedge fund longs, which peaked last year at 50,000 futures contracts, have so far reached only 23,100 contracts in this round, but risk managers are going to have to keep an extra sharp eye on silver positions. A turnaround by the Dow or the yen against the dollar could suddenly take the air out of this bubble.

4 ) Anyone with any illusions about the Canadian tar sands business should take a look at the March issue of National Geographic, (not normally a prime source of financial and economic news for me). I’m not normally a big time environmentalist, but just looking at the glossy, eye opening pictures tells you that this is this an ecodisaster of biblical proportions. A $50 billion investment by several firms over the last decade is now producing 750,000 barrels/day, and another $100 billion was headed north before prices crashed last year. You have to cut down a whole forest, remove two tons of peat, then another two tons of sand, and burn 100 barrels of oil equivalent to heat rivers of water to steam, just to produce a single barrel of oil. This gives you the world’s highest production cost, thought to be $80-$100/barrel. There are now 50 square miles of sludge ponds in Northern Alberta leaching a witch’s brew of poisons into the water supply, which has caused the local cancer rate to explode tenfold. We’re not just talking about a few sick ducks and fish here. Canada is the largest foreign supplier of oil to the US, accounting for 19% of the total, and half of that is coming from tar sands.
One can only assume that the whole industry was built as a hedge against some Third World War, Armageddon type total-cut-off-of all-foreign-crude-supplies that would drive prices to $500/barrel, making all of this hugely profitable. Maybe the owners think they can get away with this because it is in the middle of nowhere. An army of lawyers about to hit these projects with a tidal wave of litigation think otherwise. After looking at these pictures and analyzing the numbers, you have to ask if it is really worth it, just so I can drive my Hummer to Walmart.

QUOTE OF THE DAY

“You cannot motivate the best people with money. Money is just a way to keep score. The best people in any field are motivated by passion,” said open source advocate Eric S. Raymond.

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1 ) So nationalize the banks already! Get it over with! Call it whatever you want: partial nationalization, temporary nationalization, socialization, liverwurst, or rutabaga. Just get it over with! This tortuous slow drip of on again, off again, stop gap measures is going to cost us more than if we executed the politically incorrect “N” word. Of course, a government takeover is the worst nightmare for many Republicans. But now that former Fed governor Alan Greenspan and many fiscal conservatives are on board, this shouldn’t amount to political suicide for Obama. The FDIC’s Sheila Bair already does this on an almost daily basis with smaller regional banks, like Washington Mutual, but for some reason the top nine “too big to fail” banks are sacrosanct. Their deposits have been effectively nationalized with government guarantees since last fall. The market is already selling us that many of these once hallowed institutions are now worthless. This is what Citigroup (C) at $1 and Bank of America (BAC) at $2 are telling us. Just wipe out the pitifully little the common shareholders have left, clean them up, and resell them in five years after the credit markets are restored. Every government that ever did this, like the UK in the eighties and Hong Kong in 1998, made a fortune. Serious coin was made by the sellers and the buyers. Not to drive a stake through the hearts of these de facto “zombie” banks really would risk a Great Depression II and an “L” shaped lost decade. The markets would love decisive and surgical action like this and rocket.

2 ) Looks like the San Francisco Chronicle may be about to join the dustbin of history. The industry rag, Editor and Publisher, says that the privately owned Hearst Corporation has given the venerable paper an ultimatum to cut costs or close. The 150 year old Chronicle lost $50 million last year. Of course, this may all be a ploy just to beat up one of the last surviving unions, but they have made a similar threat to their paper in Seattle. Ironically, Hearst acquired the Chronicle and dumped the San Francisco Examiner in 2000, which was then put on a crash diet and made profitable by its new owners. If the Chronicle goes it will join the Philadelphia Enquirer which went under last week, and the soon to be shut Christian Science Monitor. Google has been eating their lunch for years. It is tough to chop down a forest to make paper, get a union to print it, and manually distribute your product, and then compete against a one man email blast on costs. If the Chronicle goes, it will be survived by a much smaller SFGate.com, one of the most successful web based newspaper portals out there. There could be a ninth inning save by a surprise buyer, but moguls willing to lose money just to promote a political view are a dying breed. Rupert Murdoch has been the only recent buyer of newspapers, and something tells me that a match with the Chronicle would not exactly be one made in Heaven. It’s sad to see newspapers go, but you can’t exactly sit like Denmark’s old King Canute and order the tide to stop rising.

3 ) Joe Biden’s chief economist Jared Bernstein made an interesting comment today. He implied that Obama had a tough time crafting a stimulus and recovery plan because so many government data releases last year were massaged, distorted, obfuscated and misrepresented to hide how serious the unfolding economic crisis really was.

4 ) Expatriates have been bailing on Dubai so fast that there are now 3,000 abandoned luxury cars parked at the airport. Those with multiyear leases who don’t want to pay early return penalties are just abandoning their vehicles with the keys left in the ignition, some with apology notes taped to the windshield. In the UAE, failure to pay debts can get one locked up in a local prison.

QUOTE OF THE DAY

“Do not allow our newspapers to degenerate into propagandist organs,” said the late press baron, William Randolph Hearst.

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1 ) The Senate Banking Committee holds hearings while Rome burns. The S&P Case-Shiller Home Price Index showed a Q4 fall of -18.2%, the sharpest decline in its 21 year history. Prices in San Francisco fell by 31.2%. We got within 100 points of a 6,000 handle on the Dow this morning, and a print there would have sparked a global stampede to the restroom. But Bernanke managed to assuage fears today, prompting a 234 point rally in the Dow. All ears are on Obama tonight.

2 ) Gold finally hit a wall just above $1,000, and instantly melted $50. For many traders who got in just above $700 three months ago, it’s time to say thank you very much to Mr. Market and either wait for a substantial pull back, or go on to the next trade. It was taking increasingly larger purchases of physical gold by ETF’s and coins by individuals to push the price up. CME statistics showed the speculators’ position soared to a net long of 215,661 contracts ($21.5 billion). The SPDR Gold Trust ETF (GLD) added five tons of the barbaric relic to 1,029 tons in just one day. The turnaround neatly sets up a double top on the long term charts with the high set last year. It may take a couple of more runs, and more bad news, which seems in abundant supply, to get the yellow metal to a true new high.

3 ) The forecasting firm Macroeconomic Advisors says that we are going through the “epicenter” of the recession right now. They see Q4 GDP being revised down from -3.8% to -6.0%, and that Q1 will come in at -5%. These numbers fall somewhere in between the 1974 recession and the Great Depression in terms of their severity, and are double the worst case scenario offered only three months ago. A tsunami of infrastructure spending, stimulus, and newly recapitalized bank lending will bring positive growth of 2% in the second half. Lower interest rates are slowing down the home foreclosure rate. Many states and municipalities, like Denver, started shovel ready projects the very second that Obama signed the stimulus bill, but it will take months to see the impact on the data. In layman’s terms, thing are about to get a lot worse, then a lot better pretty quickly, giving us a classic “V” type bottom for the economy.

4 ) With many analysts expecting commercial real estate to be the next shoe to drop in the financial crisis, there is already maneuvering to get a bail out in place before the sushi hits the fan. “Ghost malls” now widespread around Michigan are spreading to the coasts like a highly contagious plague. Simon Properties (SPG) and Westfield have gone to the extremes of shortening hours to save money on staffing costs and electricity. The trigger will be impending failed rollovers of the debt of a couple of big REITs, of which over a $1 trillion are coming due. The Treasury’s TALF program will be expanded from CDO’s backed by student loans, car loans, and credit cards to include commercial real estate loans, giving the industry the safety net, and the breather it needs.

QUOTE OF THE DAY

“There is only one side to the stock market, and it is not the bull side or the bear side, but the right side,” said Jesse Livermore, the famed stock speculator of the 1920’s.

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1 ) The Treasury moved to raise its stake in Citigroup (C) by up to 40% by converting preferred into common, yet another step down the road to creeping nationalism. With C trading as low as $1.20 on Friday, taking its market cap down to a mere $10 billion, does anyone care? The markets have already delivered their own judgment. Does this mean my ATM is going to start working with the same frustrating inefficiency of Amtrak, another poorly run government entity? The market cap for all 24 banks in the S&P 500 subsector has shrunk to $269 billion, less than the capitalization of Exxon (XOM) at $354 billion. The stock market hated all of this and fell 251 to a new 12 year low at 7,114.

2 ) On Friday General Motors (GM) hit a low of $1.60/share, taking its market cap below $1 billion. CEO Rick Wagoner says he “doesn’t know” if the company will need additional bail out money at the end of March if its $18 billion February request gets funded. The lowest market cap the company saw during the Great Depression was $4 billion. This company is toast.

3 ) Stephen Roche, chairman of Morgan Stanley Asia, says that the current US bubble is four times larger than Japan’s, whose market is still down 80% from its 1989 high (no typos here). The American consumer, who at the peak accounted for 72% of GDP, has been left for dead. Japan’s bubble was caused by a collapse in capital spending, which never accounted for more than 17% of GDP. If we make China our whipping boy, as the Democratic Congress is historically inclined to do, they could come back to bite us. Treasury Secretary Geithner’s recent comment that China is a “currency manipulator” hasn’t helped. Our financial markets are now desperately dependent on the Middle Kingdom recycling their trade surplus into our bond market. A Chinese boycott would trigger a collapse in the dollar, and send US interest rates sky high.

4 ) Which online businesses are currently booming? According to the data firm ComScore, in a total online audience of 190 million in January, traffic to employment sites like CareerBuilder.com, Monster.com, and Yahoo’s Hot Job Searches, leapt by 46% to 26.7 million, driven by the collapse of the job market. Visits to tax sites like IRS.gov, CA.gov, and H & R Block were up 176% MOM to 24.7 million, as weary taxpayers seek assistance on this unpleasant annual chore. Consumers looking for travel bargains for the spring triggered a stampede to sites like VacationstoGo.com, Disney Travel, and Expedia.com, which were up 46% to 13 million clicks. Concerns about salmonella poisoning drove a lot of traffic to a range of government websites. Facebook finally broke into the top ten, with 57.2 million visits.

5 ) I finally got my hug from the terrorist and ex-bomber who used to pal around with Obama during his reckless youth. Yesterday I donned my only tie died T-shirt and went to Berkeley to meet University of Illinois professor Bill Ayers, who was raising money for a Middle Eastern children’s charity. It was fascinating to listen to this echo from the sixties, and to see political radicalism in its modern incarnation. It’s no longer about mass demonstrations and civil disobedience (and bombing). It’s about online networking and organization, which the Democratic campaign proved so effective at in the last election. Closet socialists on the left and hardliners on the right, who thought Obama was pretending to be a moderate just to win the votes, will be sorely disappointed. He really is a moderate! Ayers was joined by his wife, former Weather Underground activist Bernardine Dohrn, a former resident of the FBI’s ten most wanted list. After having been told by the government that this was one of the most dangerous people in America, who should be hunted down at any cost, I was pleasantly surprised by the demure, but eloquent grey haired little old lady who appeared on stage. It occurred to me that Obama could be one of the greatest “black swans” ever. Who gave odds that this guy would win a year ago? Now he is President, and his impact on the markets, and on history will be momentous.

QUOTE OF THE DAY

“You cannot multiply wealth by dividing it,” said the late Dr. Adrian Rogers, past president of the Southern Baptist Convention.

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1 ) Obama’s mortgage bailout package is out, and the market didn’t care, hitting new six year lows. After wading through pages of arcane, mind scrambling detail, it appears that $75 billion will be made available to distressed homeowners to cut mortgage payments to 31% of their income. It allows cram downs, where bankruptcy judges can reset loan principal amounts. The plan only applies to conforming loans of $625,000 or less, which account for 50% of the $12 trillion in debt outstanding. This means that only 4-5 million homeowners will qualify, who own less than 7% of the US housing stock. Homeowners with jumbo loans in CA, NV, NY, AZ, and FL, who are now seeing default rates of 9%, need not apply. At best, the plan is merely a “feel good,” political measure that will do nothing to halt the downward spiral in home prices.

2 ) An increasing number of companies are claiming that the current financial crisis entitles them to trigger “force majeure” clauses to get out of contracts. Hoosier Energy successfully did so to get a stay on $120 million in loan repayments to John Hancock. Now Dow Chemical is attempting the same to void their $15.4 billion takeover of Rohm & Haas, as is Donald Trump in evading a $40 million loan guarantee for a condo tower in Chicago financed by Deutsche Bank. At the very least, the threat of litigation is forcing counterparties to the table to reconsider terms.

3 ) George Soros, who is now approaching 80, is about to publish another book entitled The Crash of 2008 and What It Means. Conditions are now worse than during the Great Depression, when total credit peaked at 160% of GNP. It was at 365% a year ago, and may reach 500% before we turn a corner. Obama’s fiscal stimulus package is great, but is just a down payment. A new mortgage system has to be built out of the ashes of the old, where originators have to absorb the first 10% of any ensuing loss. The banking system needs to be recapitalized, with bad assets diverted into a government financed “side pocket’, much like the large, illiquid hedge funds are doing. The government needs to use taxation to guarantee a $70 floor for oil prices to spur an alternative energy industry. The international financial system needs to be remade through the creation of new, American sponsored “Standard Drawing Rights” (SDR’s) which the IMF can use to support weaker emerging economies. It is all well thought out. This summary will save you from having to wade through George’s normally dry, turgid prose.

4 ) With 50 million barrels of crude in storage at sea, tanker companies have the buffer they need to weather the first globally synchronized recession. As long has crude for delivery in a year trades at a $10-$15 premium to the spot price, known as contango, this fleet will grow. Slow steaming, or cutting cruise speeds from 15 to 13.5 knots to reduce fuel consumption, is having the effect of taking another 35 million tons of tanker capacity off the market. With a 10% yield, Nordic American Tanker Shipping (NAT) is now the highest dividend paying stock listed on the NYSE, and gives you a pretty safe way to play this anomaly. The stock has no debt, $500 million in unused credit lines, and a bargain PE multiple of 9 X.

5 ) Some 20% of US electricity comes from nuclear power. Half of that is powered by fuel made out of reprocessed Russian nuclear weapons which we bought from the old Soviet Union. I didn’t know that. Talk about pounding swords into plowshares!

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1 ) In three short weeks we have gone from an administration that had a political interest in portraying the economy as not as bad as it really was, to one that paints the economy as worse than it really is. The markets don’t like it. It says a lot that the Dow is taking a run at a new six-year low, and is perilously close to a 12-year low, the day Obama signs his stimulus package.

2 ) Gold continues to move from strength to strength, hitting a new high for the year of $972 today, up 22% from my recommended entry point. In January, gold ETF’s bought a record 104 tons of the yellow metal. Last week alone, purchases soared to an astonishing 110 tons. There has also been huge buying of December, 2009 1,000 calls, suggesting that some players are hoping for a melt up if we break the old highs at $1,050. Looks like we have found our new bubble. Let the games begin!

3 ) Nobel Prize winning economist Paul Krugman published a blistering editorial in the New York Times yesterday where he makes the shocking observation that there has been no increase in Americans’ net worth since 2001. The entire surge in asset prices this century was nothing more than a Madoff-style illusion. This is what we should have been expecting all along, since as a nation, we have been spending more than we have been saving for a decade. Krugman uses the just-released Federal Reserve Survey of Consumer Finances to support his position. Housing has another 10-15% to drop, and the fall is unstoppable. The just-passed $787 billion stimulus package is only one quarter the size of the reflationary program that ended the Great Depression known as WWII. All this is sobering food for thought. Now we have to restart the century all over again!

4 ) According to the New York Stock Exchange, the five largest shorts in the market are: Ford Motor (F), Citigroup (C), General Electric (GE), American International Group (AIG), and Wells Fargo (WFC).

5 ) Japan’s Q3 GDP shrank 3.3%, worse than expected, and the current quarter may show a greater decline. Exports fell a stunning 45%. The country’s finance minister, Shoichi Nakagawa, appeared drunk at a press conference, then resigned. The Tokyo stock exchange is off 14% YTD, making it the world’s worst performer. Toyota has chopped the price of a new Prius to $20,000, with 0% financing, to clear an enormous backlog of unsold vehicles to make way for the launch of the new plug-in version at the end of this year.

6 ) One of the few mustard seeds out there continues to be the Shanghai stock market, up 32% YTD, and the best performing stock market in the world. Pundits with short memories are rehabilitating the “decoupling” theory again, which so far has only “decoupled” investors from their money. While the Middle Kingdom’s growth rate has backed off from a torrid 13% to probably 5%, it is the only major economy that is actually growing. The bet is that their stimulus package, which has a much higher component of infrastructure as opposed to social spending and tax cuts, will work better than ours. Betting against China has been a loser for 30 years now.

QUOTE OF THE DAY

“Stocks have reached a permanently high plateau,” said Irving Fisher in 1929, one of the founders of the science of economometrics. Fisher lost a $10 million personal fortune in the 96% collapse in the market that ensued.

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1 ) Those who believe that the wine and spirits business is recession proof should take a look at UK based Diageo (DEO). Its shares just hit a new low for the year of $50, down 42%. Although the giant purveyor of alcoholic beverages posted profits up 18% in the recent half, CEO Paul Walsh says that a consumer in retreat is forcing him to scale back expectations for this year. The UK firm is hoping to limit the damage by restructuring to cut costs. There is no doubt they have buyer’s remorse for the many wine labels it acquired at premium prices in recent years, including Rosenblum, Blossom Hill, Sterling, Acacia, and Chalone. The economic collapse has been so rapid and so severe, that old, trusted models for predicting consumer behavior are now useless. Shoppers are trading down to less expensive labels, and it is harder to realize higher prices on everything. People are going out to drink less, but taking beverages home for consumption more. Shoppers are more inclined to buy well known brands, and less prone to risk limited disposable income on experimenting with unproven new brands. Of course the world’s largest owner of alcohol brands would say this, talking his own book.

2 ) In excessively focusing on our own problems here in the US, it is easy to miss the economic collapse of biblical proportions in Japan. Fourth quarter GDP is coming out next week, and the median forecast is -12%, with more dire numbers of -15% out there. This is four times the rate of decline we saw in the US. The global economic shutdown is heavily concentrated in the auto industry, of which Japan is the largest exporter. IMF managing director Eisuke Sakakibara, known as “Mr. Yen”, does not see a recovery for two more years. The country has no ability to convert from an export-led to a domestic-demand economy in the short term. Bubbles are long in building, and long in deflating. As Vice Minister of Finance in Japan during the lost decade of the nineties, he should know.

3 ) Why don’t we accept the wisdom of crowds and accept the market’s judgment that the big banks are worthless? Let them all go bankrupt. With Bank of America (BAC) and Citigroup (C) down 95% from their peaks, shareholders have already been wiped out. All we are arguing about here is whether they should be allowed to come back in the next economic recovery. The Geithner bailout plan missed a golden opportunity to shock us all to our senses. Whatever happened to creative destruction? Let the weak banks go, and they will be replaced by stronger, better managed ones without any government involvement at all. Let the natural Darwinian survival of the fittest run its course. I watched with chagrin while Japanese banks pretended they were solvent for 15 years. Everyone in the country suffered as a result, and a whole generation’s worth of economic growth was lost.

4 ) Notice how the campaign against hedge fund short sellers has quietly slithered back into the hole from which it came. It turns out that many of these banks were worthless after all. Hedge funds have in fact been one of the few sectors of the financial system that has not taken government bailout money. For this they got hit with the ill conceived short sale ban, which cost many players big money.

QUOTE OF THE DAY

“Perfect can’t be the enemy of the necessary,” said President Obama about the just passed stimulus bill.

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1 ) Treasury Secretary Tim Geithner announced his bailout plan and the market gave him a big raspberry. Long on platitudes and short on specifics. The Dow plummeted 381, Bank of America (BAC), dropped 18%, and Citigroup (C) pared 16%. The “End of the World” trade is back on again. A number of technical models had gotten traders long, and you could see the stop losses being triggered all the way down. Ouch! The market is betting these banks will run out of money before the economy has a chance to recover. One analyst said that up to 1,000 banks could go under over the next 3-5 years. Listening to the House financial committee hearings, it is clear that Geithner has become the whipping boy for Hank Paulson’s sins. In the meantime, Obama wheedled a Senate majority for his stimulus package by getting the Republican Senator from Maine, Susan Collins, to switch sides. I predict that a rash of new bridges, freeways, and roadside rests is about to break out in the Pine Tree State.

2 ) Nassim Taleb, author of The Black Swan, made a great point today. He argued that the financial crisis was caused by a complete failure of risk control. Investors focused only on large short term gains, and ignored possible, but highly improbable events that can have a huge, even cataclysmic impact on your performance. Who does the opposite of this? The Pentagon, which spends all of its time preparing for infinitesimally possible events, like nuclear war. Taleb applauds the US military’s risk control as a model for all professional investors.
3 ) I loved the piece in the New York Times yesterday informing us that at the last market top in 2007, 95% of broker analysts had “buy” recommendations on their stocks. Today it is still 60%. A worse lagging indicator there never was. These people are nothing more than shills for their investment banking departments. The surest way to the poor house is to listen to your broker. Remember, “When EF Hutton speaks, others listen?” RIP.

4 ) If you wondered where the gold rally went, take a look at this chart of the yellow metal priced in Euros at a multi year high of €720. Safe haven buying of bars and coins is accelerating, with demand for $50 American Eagles up four times from a year ago. Flows into gold ETF’s in January soared by 105 tonnes to a record 1,370 tonnes ($1.23 billion). Much of the buying has been by high net worth individuals who are stashing large bars in bank vaults.

5 ) Here is a nice early spring mustard seed. Intel (INTC) announced they plan to invest $7 billion in new factories in Arizona, New Mexico, and Oregon, hiring 7,000 workers. The company in the past has said that high costs, over regulation, and unreliable power supplies will prevent it from ever again building a major manufacturing facility in California. The plants will build low energy chips using the next generation 32 nanometer technology. At least this round is not going to China. Only the big cap tech companies have the cash to pull this off.

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1 ) This week it is all about Washington. CNBC has turned into CSPAN. Democrats coming off an eight year starvation diet are loading the stimulus plan with more pork than a bacon factory, and sending Obama the bill. There is also a personal element of payback going on here by the former minority party for eight years of administration abuse. The Republicans are retaliating by painting Nancy Pelosi as Karl Marx 2.0. It all makes for great theater. Apolitical traders are thankful for any rally to sell into.

2 ) More than $1 billion of the stimulus package will be spent in the San Francisco Bay Area, creating 27,000 jobs. The shovel ready projects include the reconstruction of Doyle Drive, the San Jose BART extension, a parking structure for the Oakland Airport, a terminal extension at the San Francisco International Airport, and a fourth tunnel through the mountains on Highway 24 from Oakland to Walnut Creek.

3 ) The American Securitization Forum is meeting in Las Vegas today. How appropriate. I bet they got great deals on their rooms. I didn’t know this, but there has never been a standardized definition for “full documentation.” The hotter the market became the more dilutive the definition became, until a “full doc” loan had minimal requirements. A classic example of “definition creep.” There also has never been a requirement to notify a first mortgage holder about the extension of a second mortgage. What an eye opener! Until these questions are resolved there will be $2 trillion in lending capacity missing in the US.

4 ) One of the rock stars at Davos was Professor Nouriel Roubini, the firebrand uber bear who forecasted the current recession three years ago. He believes that if the government does everything perfectly we will have a “U” shaped recession three times longer than usual, followed by only 1% growth in 2010. If they blow it, we will have a lost decade. The consumer is on the ropes. Credit losses will top out at $3.7 trillion. The “bad bank” plan won’t work because so many are insolvent zombie banks which will have to be nationalized Sweden style. The US economy that recovers will be substantially different, with less leverage, fewer MBA’s, and more engineers. Medium term, Dr. Doom sees globalization driving a healthy economic growth rate. Only 5% of the world are Americans, and the other 95% want to live like US.

5 ) Early reflationary plays were flashing the green light today. Copper was limit up in Shanghai to a two month high at $1.61/pound. Also, take a look at the Greek shipping firm Dry Shipping Inc. (DRYS), which I recommended in November at $3. It soared 460% to $17, fell back to $5, and is now up to $6.30 on news that they successfully rolled over $800 million in debt. It is another great time to make a second visit to the trough for (DRYS), in case you missed it the first time. This shows you that successful refinancings are going to have a huge positive impact on stock prices as we bump along the bottom here, and will be a major market play for the rest of the year.

6 ) Have you been to Left Bank lately? They have introduced a new “stimulus” menu where every entre is less than $10, and $5 for kids, so a family of four can have dinner for $30. Check it out. They have also cancelled their move from Pleasant Hill to Walnut Creek to cut costs.

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1 ) UBS was matched by Goldman Sachs in raising its 2009 target for gold ($GOLD) up to $1,000, triggering a $30 rally to $920.While jewelry demand from India and the Middle East remains weak, this is being more than offset by the ongoing financial crisis boosting safe haven buying in the US of coins, bars, and ETF’s. Deleveraging of long gold positions by hedge funds is now almost done. Buyers of gold are now spilling into other precious metals like silver ($SILVER), which is up 47% to $12.50/ounce from its October lows, and can offer investors double the upside volatility.

2 ) One of Warren Buffet’s key indicators for timing stock buys is the ratio of total equity assets to GNP. In 2007 stocks peaked at 190% of GNP, and have since fallen to 70%, a level only seen during the thirties and the early eighties. While the Sage of Omaha’s Berkshire Hathaway (BRK/A) has been hammered by 50% in the last four months, with too early purchases of Goldman Sachs (GS) and General Electric (GE), this indicator could be worth tracking.

3 ) In case you missed the business section of the San Francisco Chronicle today, there is a fabulous graphic illustrating the hard times for the city’s commercial real estate market. The epicenter of the melt down is Tishman Speyer’s 556,000 sq. ft. 555 Mission Street, which opened in late 2008 during the worst possible market conditions, and remains 70% empty. What is really impressive is how bad the implosion of the legal profession is hitting landlords. The dissolution of Heller Ehrman has emptied 350,000 sq. ft. 333 Bush Street, while 388,000 sq. ft. 101 Second Street has been vacated by the dissolution of Thelen LLP. Conditions will worsen as more new buildings started during better times come on the market.

4 ) The free online telephone and video conferencing service Skype has launched its version 4.0. The upgrade is faster, has better quality video streaming, and allows you to attach files, like photos, to your calls. It still only offers 1:1 communication though, not the group calls available at more expensive video conferencing competitors.

5 ) Hedge Fund Traders scouring the world for leading indicators hinting that it is safe to get back into the water currently have a laser like focus on Shanghai, which fell an amazing 72% from its October 2007 top. China’s once red hot largest domestic stock market, which is closed to direct investment by foreigners, peaked nine months before China’s own economic slide began in earnest after the Olympics. This has given the unregulated emerging market oracle like status among global market timers. This week, the Shanghai Composite ($SSEC) broke out of a six month trading range to the upside, possible entering a new uptrend. The move, along with the record 15% explosion upward yesterday by the Baltic Dry Shipping Index ($BDI), and turning noises being made by the dollar, is prompting some managers to quietly lift their global equity exposures.

QUOTE OF THE DAY
“If you’re gonna owe money, owe more than you can pay, then people can’t afford to foreclose,” said Clint Murchison, a famous Texas oil wildcatter during the thirties.

This is not a solicitation to buy or sell securities.

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