April 15, 2008

Market Comments for April 15, 2008

1) Crude hit an all time high today of $114 on the back of a storm which closed oil export ports in Mexico, a report of falling oil production in Russia and an exploding oil pipeline in Nigeria. There was big buying today of the August $140 calls!

2) March PPI came in at a hot 6.9% YOY. We are heading into a period of prolonged high inflation. Normally bonds would collapse on this news but they still have a flight to quality bid supporting them. I believe that once that is gone, long bond futures will drop from 120 to 80. If I am wrong they will rise first to 123, then collapse. This is becoming a core long term trade for every large hedge fund.

3) One aspect of the shortfall in GE's earnings last week was weakness in their medical divisions. Non profit hospitals finance much of their operations in short term money markets, which have effectively shut down. To meet payrolls they have shelved all capital expenditure programs. With machines like MRI's and CAT scans costing up to $10 million each, this can add up to a big impact on suppliers like GE.

4) The Northwest-Delta merger, which I predicted three months ago, finally came off, creating the world's largest airline. The combined entity will have $35 billion in revenues and employ 75,000 people. There is no equity trade here because the combined entity could still go bankrupt if crude prices keep rising, or if the recession is longer than expected. The airline industry has lost $40 billion over the last five years. Five carriers have declared bankruptcy over the last four weeks. Next is United-Continental and American-Alaska.

5) Fact of the day: The top 20% of income earners in the US account for 40% of consumer spending.

6) The European and Japanese economies are starting to slow down sharply as the recessionary spill over from the US begins in earnest. This could bring forward a 25% rebound in the dollar. The euro may go up to $1.62 first, then fall back to $1.20.

6) Median home prices in Los Angeles have dropped 24% YOY. In California one out of every 204 homes are in foreclosure.

7) Intel (INTC) reported earnings somewhat better than expected. The Dow will rally on this tomorrow.